Why do people commit organisational fraud? Reconstructing fraud theories

Abstract

This study explores the situations leading individuals to commit initial and subsequent frauds. This research is required at the present epoch as there are some reasoning fallacies in the previous studies when analysing people's intentions to commit organisational fraud. As identified, such fallacious reasoning is persistent over time. To address this topical issue, the current study observed the underlying reasons why people commit organisational fraud. As a research context, this study limits its scope to fraud cases in Indonesian local governments. Specifically, the data collected are from high echelons' perceptions and experiences on the causes of co-offending behaviours.

The focus of the study is based on some variables, which are situational variables (unethical work climate and political network), dispositional variables (attitude, subjective norm, perceived behavioural control, obedience to authority, organisational identification, and reciprocal norm), and cognitive reasoning variables (moral judgment and rationalisation). In this sense, these variables are used to explain individuals' intention to commit initial fraud. Moreover, in relation to understand individuals' intention to commit subsequent frauds, this study focused on two other variables; moral affect (guilt and shame) and past behaviour. This study observed the nexus of those micro-and macro- variables as such have received insufficient attention in the literature, leading to a lack of theoretical insight into people's propensity to engage in organisational fraud. This study used an inductive approach by interviewing high echelons of Indonesian bureaucrats as research participants. Semi-structured interviews explored the existence of phenomena covering the reality (such as fraud intention), but not from a single viewpoint. Purposive sampling was used to ensure the richness and quality of the data. This study was conducted in the period of September 2019 - March 2020. For data robustness, the study applied three types of triangulation procedures: triangulation by data sources, method, and theory. Then, the researcher took a stand as an outsider to the group or area researched.

The results suggest that the ways of analysing people's propensity to engage in organisational fraud need to be redirected. Either situational factors or dispositional factors cannot be conceptualised as the direct drivers for predicting fraud intentions. In the context of initial fraud, it was found that there are interdependence relations between the observed situational variables, dispositional variables, and cognitive reasoning variables. Although dispositional variables appeared to be psychological reactions toward an unethical work climate, it is too early to conclude that fraud is likely to occur. Those are not causative factors formulating fraud intentions.

Consistent with a proposed conceptual framework, this study found that cognitive reasoning variables are key features of whether fraud intentions would or would not be proceeded. These results receive support from an analysis of people's propensity to re-offend (subsequent fraud). The significant role of that cognitive reasoning variables is to rationalise any fraud attempt as permissible conduct. As such, when an individual is capable of legitimising his/her fraud attempt into appropriate self-judgement, s/he is less likely to have feelings of guilt and shame. As identified, it becomes one of the plausible reasons why organisational fraud is normalised and institutionalised within Indonesian bureaucracies. In addition to this result, the efficacy of past behaviour, previously assumed as a direct predictor of subsequent behaviour, is not fully validated. The study did not find that people's involvement in their initial fraud is the parameter of their subsequent fraud. They possess the propensity to re-offend if all factors, particularly political networks, attributed to their involvement in initial fraud remain unchanged. Therefore, this study concludes the ways we predict people's propensity to engage in organisational fraud are not synonymous with other types of criminal behaviour. This is because organisational fraud is an action, which needs to be highly justified.