The impact of financial corruption on the Fraud

Document Type : Research Paper

Authors

1 payame noor university, iran, tehran

2 Associate Professor in accounting, Faculty of Economic and social Sciences University of bualisina

3 Associate Prof in accounting, Faculty of Economic and social Sciences University of bualisina

Abstract

 
Fraud in its general concept includes all tools that are made by human beings and that a person uses to gain an advantage over another through false advice or hiding the truth, and includes all sudden events, tricks, secrets, and other unfair ways to deceive others. In a corrupt economic system, issues such as bribery and self-interest are commonplace, which is referred to as crony capitalism. In a corrupt economic system, issues such as bribery and self-interest are commonplace, which is referred to as crony capitalism.  Stavriana et al. (2019) stated that the inherent characteristics of companies depend on the legal environment. Therefore, companies that operate in highly corrupt environments face a weaker financial reporting system. On the other hand, Riahi-Belkaoui (2004) believes that corruption creates an unethical atmosphere that will lead to the appropriation of other people's income. He stated that one cannot expect good accounting quality from a country where corruption is institutionalized or is unable to reduce corruption. The low quality of financial reporting leads to the lack of accountability in companies and helps managers to hide distortions in the company (Jensen & Mackling, 1976). There are three factors influencing the occurrence of fraud: motivation, opportunity, and justification (Cressey, 1959). Institutionalized corruption in a society provides the right platform and opportunity for fraud in financial reporting. In fact, it can be said that the greater the level of corruption in a society, the greater the justification for unethical actions and behaviors, including fraud.
 
2- Research Questions or Hypothesis
Considering the possibility of more fraud in corrupt environments, the hypothesis of this research is formulated as follows:
The presence of financial corruption will lead to an increase in fraud in financial reporting.
 
3- Methods
The purpose of this research is to investigate the effect of financial corruption on the possibility of fraud in financial reporting. For this purpose, the indicators of perception of corruption and accountability have been used to measure corruption, and the measurement of fraudulent companies was also done with the help of auditing standards. The statistical population of the research is 161 companies accepted in the Tehran Stock Exchange for the period of 1391-1400 (1610 years - companies). Considering the nature of the dependent variable, the logit regression method was used to test the hypotheses.
 
4- Results
The results show there is a significant direct relation between the Corruption Perception Index and fraudulent financial reporting. Also, the results show that the lower the accountability index, the higher the possibility of fraud in financial reporting.
 
5- Discussion and Conclusion
The results of the research show that the presence of financial corruption has a positive effect on fraud and providing misleading reports. Therefore, it can be claimed that in corrupt economic environments, managers tend to commit fraudulent actions.
Also, based on the results of the research, the negative relationship between accountability and fraud was confirmed. In fact, an increase or decrease in the accountability index can lead to a decrease or increase in fraud in companies.
On the other hand, to perform the sensitivity test, Benish model was also used to measure fraud. The results of the sensitivity test also indicate the positive effect of financial corruption on fraud in financial reporting.
Based on the results of the research, it is suggested to the legislators and shareholders of the companies to pay attention to the commitment of managers to the implementation of accounting standards and principles to reduce the possibility of deviation in the financial reporting of companies.
It is suggested that other researchers use other corruption indicators such as corruption control index, rule of law index, political stability index, etc., to investigate the effect of corruption on fraud and compare the results with the current research.
 
Keywords: Accountability, Corruption Perception Index, Financial Reporting, Fraud
 
 

Keywords

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Journal of Accounting Advances
Volume 14, Issue 2 - Serial Number 83
November 2022
Pages 191-220

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History

  • Receive Date: 05 December 2022
  • Revise Date: 03 May 2023
  • Accept Date: 02 May 2023

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