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The purpose of this chapter is to investigate what internal auditors see as a need for improvement regarding current business risk practices for controlling employee fraud. A survey of internal auditors compares perceptions of current versus desired situations in regard to six common practices of employee fraud risk management: training in fraud risk management, understanding how job procedures are designed to manage fraud risks, recognizing basic indicators of fraud, providing appropriate employee compensation incentives, reporting suspicions of fraud, and background verification of job applicants. Comparisons for each practice are made between the United States and Canada.The main finding is that the largest weakness in the employee fraud risk management practices relates to providing employees with training in their risk management programs. Seemingly related deficiencies are also indicated in both employee understanding of how their job procedures are designed to manage fraud risks and the ability of employees to recognize basic indicators of fraud. No measure of fraud prevention is more important than those involving the employees who actually conduct the affairs of an organization. The identification and ranking of gaps in employee fraud risk management practices can be used to make a case to deal with areas needing improvement.

Extant theory tends to treat Organizational Culture (OC) and fraud-related values as static, characterizing culture as synonymous with potential ethical values − but devoting less attention to how the culture and values arose and where they are headed. Buffer/conduit theory proposes that accountants learn to use a taxonomy containing three dynamic layers: collective fraud orientation, a buffer/conduit layer, and individual fraud orientation. The middle layer contains OC-related internal controls that buffer the orientation layers from spreading fraud-encouraging values, and serve as conduits transmitting fraud-deterring values − or, when controls do not function as intended, transmitting fraud-encouraging values. A factor analysis of 11 indicators of this three-layer taxonomy suggests that older generations of accounting practitioners apply the taxonomy, but millennials do not. Predisposition to commit fraud is especially salient to internally focused millennials, who uniquely perceive recruitment and training as compensating mechanisms and as collective buffers.

When FECS spins out of human intervention and regulatory control, then it can easily harm and constrain the markets as it happened on Black Friday of October 1929, resulting in the Great Depression, and the September–October 2008 Financial Crisis, when some 17 mega global investment banks ran out of control and lost close to trillion US dollars in market capitalization. This chapter defines, analyzes, classifies, and morally assesses occupational and corporate fraud, corruption and money-laundering, and their other evil forms. When we allow our choices to be driven by passion, choosing thereby to ignore or fail to investigate outcomes, the results are too often flawed and unintended, as the cases of Lehman Brothers, AIG, Freddie Mac, and Fannie May that collapsed around September–October 2008 would attest. While we should condemn abuses within the FECS, one can also seek to understand the origins and originating systems of fraud, corruption, and various forms of deceptions and chicanery, and search for remedial strategies for eradicating these ills of FECS. Several contemporary market cases of fraud, corruption, and bribery will be identified to illustrate the contents of this chapter.

With the increasing prevalence of awards for reporting fraudulent activity, it is important to learn if there are unintended consequences associated with the language offering such awards. Aside from issues regarding submitting unsubstantiated claims of fraud to the Securities and Exchange Commission (SEC), Section 922 of the Dodd–Frank Act may inadvertently encourage would-be whistleblowers to delay reporting fraud. Potential whistleblowers may choose to delay reporting due to the consideration of alternatives to external reporting, in a misguided attempt to increase the size of an award, or due to their ethical stance on the issues. Using a three-stage mixed methods (experiment, open-ended interviews, and experiment) approach, this study provides evidence that increased knowledge of statutes involving external whistleblowing may result in reporting delays. The data suggest that despite statements from the SEC forbidding this, managers may choose to delay reporting when under the threshold necessary to receive an award. In such a manner, managers may be allowing the fraud to grow to a necessary perceived level over time. As might be expected, the accountants in this study were more cautious, checking to see if internal reporting worked first. Of particular note, 16 individuals indicated that they would never report, with the motivation apparently driven by fear of job loss and/or retaliation. Lastly, the intention to delay or speed up reporting may be very different based on the perception of ethics involved in the decision.

The need for independent audit goes back to the agency theory, the theory of delegation of power and the issue of trust. Stakeholders delegate power to management to manage the business on their behalf, yet they face the risk of information asymmetry and management motivations to commit fraud. The main aim of having an independent auditor was therefore to reduce the risk of information asymmetry and fraudulent behaviour by management. Auditors are required by the International Auditing Standards to detect material fraud and error, and they are expected to have a duty of care for stakeholders. However, recently independent auditors, whether conducting private or public audit, have been scrutinised for failing to detect material fraud. There have been a lot of discussions in the literature about the role of private auditors in detecting fraud, but very little discussions about the role of public auditors in detecting fraud. This chapter will outline the difference between private audit and public audit; explain the legal liability of public auditors in relation to fraud detection; the role of public auditors in detecting fraud; and will critically review the root causes for auditors’ failure to detect fraud.

Accounting-based financial scandals caused by fraudulent financial reports negatively affect the financial markets and cause loss of confidence in investors. Financial reporting quality needs to be improved in order to build and maintain trust in financial markets. To increase the quality of financial reports, fraudulent financial reporting risks should be defined. At this point, regulators, practitioners, and researchers are in constant search.

There are improved approaches to the detection of financial reporting frauds in the literature. Many studies have been conducted on the “Fraud Triangle Theory” and the “Fraud Diamond Theory” approaches. The Fraud Triangle Theory argues that while fraudulent action is taking place in defining the elements of press, rationalization, and opportunity, the Fraud Diamond Theory approach argues that in order to achieve these three elements, the capability to carry out a fraud in individuals must be improved.

In this study, it is aimed to investigate the effect of Fraud Diamond elements on fraudulent financial reports. For the scope of the research, data of 26 companies from Manufacturing Industry enterprises operating in BORSA ISTANBUL between 2013 and 2017 were used. Financial reports of the companies are divided into two groups: (1) Fraudulent Financial Reports and (2) Non-Fraud Financial Reports. The hypotheses developed within the scope of the research were tested using the Logistic Regression analysis in IBM SPSS Statistic 20 program.

As a result of the study, it has been determined that there is a negative correlation between borrowing level, asset profitability, independent audit firm, auditor exchanges and institutionalization level, and fraudulent financial reports. It was understood that the change in assets and the size of the audit committee did not have any effect on the fraudulent financial reports.

Purpose – This study investigates the nature, types, and methods of fraudulent financial reporting committed by Chinese listed companies with a view to understanding corporate behavior relating to management fraud in China. Such an understanding is important for preventing frauds and achieving better financial reporting compliance.

Design/Methodology/Approach – This study adopts a descriptive research approach using the data based on 182 punishment bulletins issued by the China Securities Regulatory Commission from 2002 to 2006. The study considers three categories of frauds (i.e., false income statements, false balance sheets, and insufficient or false disclosure) and uses these categories to describe and analyze the fraud cases.

Research findings/Insights – Based on the sample of 83 cases over the 5-year period from 2002 to 2006, this study finds that all the frauds in the sample involved the manipulation, alteration, and falsification of reported financial information. Fraud schemes often contained more than one technique to misstate financial statements, typically through overstating revenues and assets, and understating liabilities and expenses. Most of the sample companies committed several frauds simultaneously. This study also reveals that most of the frauds committed by Chinese listed companies lasted more than 2 years, with the longest being 9 years, and common intervals between the initial fraud year and the announcement year of punishment were more than 3 years, with the longest being 11 years.

Theoretical/Academic implications – This study provides an empirical analysis of fraudulent financial reporting cases committed by Chinese listed companies. These cases were rarely studied in the Western literature. This study contributes to the extant literature by providing an insight into management fraud in China. Research into fraudulent financial reporting in the largest developing economy is certainly of interest as prior research into this area is mostly based on developed economies.

Practitioner/Policy implications – The implications drawn from this study could be useful for a better understanding of the management behavior of companies in developing and transitional economies. This study has a potential to assist regulators and accounting professional bodies to set guidelines facilitating corporate compliance of regulated financial reporting.