Examining fraud risk factors on asset misappropriation: evidence from the Iranian banking industry

Author:Soheil Kazemian, Jamaliah Said, Elham Hady Nia, Hamidreza Vakilifard
Position:Universiti Sains Malaysia – Kampus Kejuruteraan Seri Ampangan
Pages:447-463
SUMMARY

Purpose The paper aims at examining the influences of the elements of fraud diamond on the asset misappropriation within the banking industry of Iran. Primary data were collected through 191 survey questionnaires administered among employees of the top three banks in Iran, which own above 60 per cent of market shares in the banking industry of the country. Design/methodology/approach... (see full summary)

 
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Examining fraud risk factors on
asset misappropriation: evidence
from the Iranian banking industry
Soheil Kazemian
Universiti Sains Malaysia Kampus Kejuruteraan Seri Ampangan
Jamaliah Said
Accounting Research Institute, Universiti Teknologi, Shah Alam, Malaysia
Elham Hady Nia
Accounting Research Institute, Universiti Teknologi MARA, Shah Alam, Malaysia, and
Hamidreza Vakilifard
Science and Research Branch, Faculty of Economics and Management,
Islamic Azad University, Tehran, Iran
Abstract
Purpose The paper aims at examining the inuences of the elements of fraud diamond on the asset
misappropriation within the banking industry of Iran. Primary data were collected through 191 survey
questionnairesadministered among employees of the top three banks in Iran, which own above 60 per cent of
market sharesin the banking industry of the country.
Design/methodology/approach Primary data were collected through 191 survey questionnaires
administered amongemployees of the top three banks in Iran, which own above 60 per cent of marketshares
in the banking industryof the country.
Findings Results strongly supported that all four elements of fraud risk signicantly inuence bank
employee asset misappropriationin Iran. To minimize employee fraud, the banking industry should reduce
opportunitiesand employee negative rationalizationthrough strong internal control.
Research limitations/implications The ndings of this study are useful for policymakers, bank
managers, industry practitioners and academics to understand and subsequently implement strategies to
mitigateasset misappropriation.
Practical implications Managerial implications, limitations of the study and suggestions for future
researchare also included in this paper.
Originality/value The main value of this paper is the determination of thekey variables that constitute the
fraud diamond theory and its dimensions on the asset misappropriation within the banking industry in Iran.
Keywords Iran, Banking, Asset misappropriation, Fraud diamond theory
Paper type Research paper
1. Introduction
Fraud is believed to be among the most critical problems and challenges in the corporate
world today (Skousen and Wright, 2006). According to Ruin (2009), fraud is an act
committed by a party, or an individual who uses deception with the intention to acquire
benets, avoid obligationor cause nancial or non-nancial loss to another party. Evidently,
fraud is impossible to eliminate. However, fraud may be minimized by understanding its
causes and taking proactive measures against it (Abdul Rahman and Salim, 2010). In the
Fraud risk
factors
447
Journalof Financial Crime
Vol.26 No. 2, 2019
pp. 447-463
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-01-2018-0008
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
past century, the issue of banking fraud has expanded at an alarming rate.For example, in
2009, the chairman of a private mortgage company was chargedalmost US$2bn for a fraud
scheme that included failures of Colonial Bank,one of the 50 largest banks in the USA, and
Taylor, Bean & Whitaker, one of the largestprivately held mortgage lending companies in
the same country (KPMG, 2013).According to Napel (2013), the Australian economy has lost
A$5.8bn in fraud. Surveys have shown that these losses have sharply increased in highly
difcult economic climates (Napel,2013). Likewise, Iran has encountered a growing number
of fraud cases in recent decades. For instance,in 2011, the New York Times[1] reported that
Toman 3,000bn (approximatelyUS$2.6bn) was lost because of fraud, resulting inthe largest
fraud loss in Iran in the past three decades.This case involved forged documents to obtain
credit from at least sevendifferent banks (Goldmann, 2010).
Holton (2009) stated three conditions commonly accepted as prerequisites for fraud,
namely, opportunity, rationalization and incentive, which are called the fraud triangle. The
fraud triangle theory (Cressey, 1953) proposes these three elements as signicant indicators or
red ags of fraud. Dissecting fraud risk assessment into these factors reduces the cognitive
attempt required for analysis, which may encourage accuracy. Additionally, the classical term
fraud triangleis used to describe and investigate the nature of fraud. This term expresses
thesethreeitemsasessentialsinfraudoccurrence(Perdueand McDonald, 2010).
The fraud triangle was modied by Wolfe and Hermanson (2004) into a fraud diamond
by adding a new element to the concept, namely, capability. Capability is an element for
dealing with the stress of committing a fraudulent action. Thesefour dimensions of a fraud
diamond can assist in preventing and detecting fraud cases within organizations,
specically in the nancial sector. Several researchers, including Idolor (2010);Owolabi
(2010);Khanna and Arora (2009) and Fadipe-Joseph and Titiloye (2012), noted that the
problem of employee fraud in the banking industry is not limited to any economy, nation,
continent or environment; it is a general phenomenon as the banking system is one of the
major cornerstonesof an economy.
Beasley et al. (2000) discovered that themost common tactics used to protect against the
threat of employee fraud in the nancial sector include turning on internal controls and
checks to reduce opportunities for fraudulent behavior at work. Pressure, which is the
second element in the fraud triangle, is usually the result of an immediate problem or
pressure from an internal or external environment (Harris, 2008). Rationalization, the third
element in the fraud triangle, was dened by Baird and Henderson (2008) as the ability to
justify dishonesty in fraud. Although a majority of studies have adopted the fraud triangle
theory, some researchers believe that the three elements in the fraud triangle are not
sufcient to prevent and detectfraud.
Therefore, the present study focuses on the category of asset misappropriation, which,
according to Khanna and Arora (2009), has the highest rates of occurrence in the banking
sector. In fact, the importance of this study relates to the investigation of the relationship
between each fraud diamond dimension (opportunity, pressure, rationalization and
capability) with misappropriation of assets. The current study aims to assess relationships
between factors identied in fraud diamond theory and assetmisappropriation. To achieve
this goal, the Iranian bankingindustry was examined considering a lack of research on asset
misappropriation in itsbanking industry. This study concentrates on the top threebanks in
Iran, namely, Bank Melli Iran,Bank Saderat Iran and Bank Tejarat Iran, as well as uses the
newly modied fraud theory, known as the fraud diamond, which includes opportunity,
pressure, rationalization and capability with asset misappropriation. Thus, relationships
between the fraud diamond elements and misappropriation of assets were analyzed to
provide insight into the occurrenceof asset misappropriation within Iranian banks.
JFC
26,2
448

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