Philosophical understanding of the dynamics and control of occupational fraud in the public sector: contingency analysis

• DOI: https://doi.org/10.1108/IJOES-04-2022-0078
• Published date: 05 August 2022
• Date: 05 August 2022
• Pages: 432-463
• Subject Matter: Economics,Social economics
• Author: Ach Maulidi

Philosophical understanding of

the dynamics and control of

occupational fraud in the public

sector: contingency analysis

Ach Maulidi

Accounting Department, School of Accounting –Master of Accounting,

Bina Nusantara University, Jakarta Barat, Indonesia

Abstract

Purpose –This study aims to examine the roles of organisational control, structure, culture and

technology in preventing occupational fraud. This study is essential in the current time. It brings a

significant impact on both theor y and practice. In the exis ting studies, there is a la ck of clarity on a

specific mechanism to prevent organisational fraud. The problem is that they tend to generalise the types

of organisational fraud. Conceptually, organisational fraud may include corruption, double funding, asset

misappropriation, bribery or falsification of documents. However, many scholars tend to neglect such

diversities. Consequently, many occupational fraud cases become unstoppable, particularly corruption.

To deal with this topic al issue, the current s tudy applies the term “oc cupational fraud”citedbythe

Association of Certified Fraud Examiner s, consisting of corrup tion, asset misapprop riation and

fraudulent financial statement.

Design/methodology/approach –This study surveyed three Indonesian Local Governments. This

study focussed on management levels thathave strong power for coordinating governmental activities. The

author chose these local governmentsbecause their local leaders (the regents) were jailed due to corruption

scandals.As expected, this study gives us different perceptionsof how fraud mitigation should bedesigned in

the organisation.

Findings –The results suggest that corruption is a little bit complex than other types of occupational

fraud. It is improbable to be prevented through technological and administrative approaches. As such,

organisations need to think of extra efforts that could perfectly tailor the organisational control and

organisational culture, organisational structure and technological advancement. The benefit of t his effort

is related to diagnosing the fitormisfit of organisation designs in addressing the dynamic dimensions of

corporate governance. Then, it can also strengthen the efficacy of preventive measures to deal with

occupational fraud.

Originality/value –This study provides a provocative discussion regarding the public perception of

occupational fraud, consistingof corruption, asset misappropriation and financial statement fraud.And this

study also offers a new refinedconceptual analysis of how to deal with such types of occupationalfraud by

incorporating contingency theory and the Committee of Sponsoring Organizations of the Treadway

Commission(COSO’s) internal control components.

Keywords Corruption, Contingency theory, Occupational fraud, Financial statement fraud,

Asset misappropriation, COSO Internal control

Paper type Research paper

The author would like to thank the editor-in-chi ef and the anonymous reviewers for their

helpful and constructive comments that greatly contributed to improving the final version of

the manuscript. Then, the author also thanks to Lembaga Pengelola dana Pendidikan

(Indonesia Endowment Fund for Education) for financing his study in the University of

Edinburgh, UK.

IJOES

39,2

432

Received7 April 2022

Revised17 June 2022

Accepted11 July 2022

InternationalJournal of Ethics and

Systems

Vol.39 No. 2, 2023

pp. 432-463

© Emerald Publishing Limited

2514-9369

DOI 10.1108/IJOES-04-2022-0078

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/2514-9369.htm

1. Introduction

There is a continuing interest in documenting fraud control mechanisms, for example, internal

control (Zakaria et al., 2016;Chenhall, 2003;Shonhadji and Maulidi, 2020), whistle-blower

system (Vandekerckhove, 2018;Latan et al., 2019) and data analytics (Perols et al., 2017). In

general, they examine the efficacy of those controls in preventing and detecting fraudulent

behaviours. Other studies (Halbouni et al., 2016;Kabuye et al.,2017) also investigate fraud

management, intended to improve the corporate environments in terms of accountabilities. Of

course, those studies produce a substantive discussion on fraud management and control.

However, a study exploring the question of what a specific type of fraud can be adequately

prevented by organisation is still lacking. Importantly, their understanding of occupational

fraud needs to be re-directed. Those previous studies, as mentioned above, seem to generalise

all types of fraud as a basis of their analysis. Maulidi (2020b)andKreikebaum (2008) note that

corruption, a subclass of fraud behaviours, has a visible uniqueness in its antecedence and

consequence. Its antecedence is not merely about inadequate organisational systems but also

about individuals’morale and ethics (Maulidi, 2020b). Additionally, Maulidi (2020b)mentions

that we should not generalise types of fraud in organisation.

The term “fraud”, according to the KPMG (2022), commonly includes activities such as theft,

corruption or procurement fraud, investment fraud, embezzlement, money laundering, bribery

and extortion. So, it is very naïve to argue if a single fraud control mechanism would prevent

those unlawful acts. It is important to note that every fraud scheme has different antecedences

and consequences (Maulidi, 2020b;Kreikebaum, 2008). To our knowledge, organisations

focussing on a single dimension of fraud control can fail to capture the characteristics of fraud

cases. James (2003) and Maulidi and Ansell (2022) criticise prior studies that fraud preventions

that merely focus on routine organisational activities are ineffecti ve in preventing fraud

temptations. So, it becomes the case for organisations. In addition, Cornish and Clarke (1987)

mention that opportunities do not largely influence fraud schemes. For example, a practice of

lobbying is likely to control and redirect people’moral reasoning to commit fraud (Goldberg,

2018). The problem is that many studies on fraud prevention overlook these fundamental

concerns. So, in this regard, the present study takes these concerns as a focus of the study.

Moreover, after reviewing the bulk of organisational, fraud and auditing studies, the

contingency approach to fraud control has little attention. Organisational studies have

predominantly focussed on the assumptions associated with the fitormisfitoforganisation

design in addressing the dynamic dimensions of corporate governance (Filatotchev and Allcock,

2010;Drazin and Van de Ven, 1985;Shenhar, 2001). Conceptually, contingency theory is also

known as an approach to identify factors that negatively influence the nature of the archetypal

bureaucratic form (Greenwood et al.,2014;Van de Ven et al.,2013).Themainconcernof

Greenwood et al.’s (2014) study is to understand how organisations are managed and coordina ted.

In their research, Greenwood et al. argue that the fit between the organisation structures and

systems and its organisational and environmental contexts positively affects the organisation

performance. In other words, a poor organisationalfit degrades organisation performance.

According to the above-unexplored research agendas, this study examines the role of

organisation control, structure, culture and technology in preventing organisational fraud.

These four variables (control,structure, culture and technology), according to some scholars

(Burton et al.,2006;Drazin and Van de Ven, 1985;Christen and Lovaas, 2022;Voges et al.,

2022), are the key concepts to analyse the realm of conflict management and task

uncertainty that affect the organisation performance. Drazin and Van de Ven (1985) argue

that those are more salient predictors of organisational performance to resolve conflict

among unit personnel. As argued, the interaction of those variables offers nuanced

understanding on how organisationswork to manage conflicts.

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Each management process –organisational structure and culture –has overarching rules

that prescribe and proscribe social behaviours (Sirmon et al.,2007;Greenwood et al.,2014). In

addition, Woods (2009) suggests that under conditions of high environmental uncertainty,

managers need valid and reliable information to manage their activities. In this sense, the nexus

of technological information and organisational structure serves as alternative approaches to

examine the link between environmental uncertainty and performance (Woods, 2009).Uptothis

point, it is reasonable to adopt the contingency theory’s underlying paradigms to understand

better the archetypal arrangements in controlling occupational fraud risks. In this context, we

follow Power (2013), arguing that fraud is conceptualised as uncertain malicious risks, in which

all organisational instruments must get involved if we want to prevent it. The focus of the

proposed independent variables is not merely associated with action or behaviour within

organisations (Burton et al.,2006;Drazin and Van de Ven, 19 85) but also with organisations as

structured entities in preventing fraudulent occurrences (Renet al., 2021 a,2021b).

The term fraud for this study refers to occupational fraud comprising three broad fraud

categories: corruption, asset misappropriation and financial statement fraud (ACFE, 2020).

This study can be the first for examining those fraud typologies, using a contingency approach.

In addition, this study challenges the advocate of the Committee of Sponsoring Organizations

of the Treadway Commission (COSO’s) internal control as a deterrent for all types of fraud

cases (Martin et al., 2014;MendesdeOliveira,2022).Empirical evidence suggested in this study

would clarify the efficacy of an organisation’s ability to respond to and manage fraud risks.

Significantly, this study broadens the contingency theory in public sectors, especially by

introducing a clear understanding of the ways to manage and respond to fraud risks.

2. Literature review

2.1 Contingency theory

Contingency theoryis one of the leading theories providing a robust framework for studying

organisational design (Donaldson, 2008). The key idea of the organisational design is to fit

the critical contingencies such as uncertainty,strategy and size (Luo and Donaldson, 2013).

Achieving fit means organisationalfeatures align to contingency factors suchas uncertainty

or unexpected things out of organisational control (Luo and Donaldson, 2013). Some misfit,

or design deviation, happen as a functionalresponse to multiple contingencies that the work

unit faces (Gresov, 1989). So Wang (2010) argues organisations need to accommodate the

problematic situations arising from the uncertainty of unit tasks and react more robustly,

such as via a restructuring to repair their misfits.

In the dynamic environmental contexts, Sirmon et al. (2007) argue each component of the

management processes is individually essential for creating and maintaining organisationvalues.

However, Sirmon et al.’s (2007) framework emphasise that there is no one best way to develop

organisational values because of the high environmental uncertainty and varying degrees of

environmental munificence. In this regard, the role of top management levels is to perform

routine assessments, scan the external environment and make the organisation’ssystemfit

properly (p. 287). In conditions of uncertainty and turbulence, Chenhall (2003) suggests managers

must act with an intent to adapt their organisations to changes in contingencies.

In separate work, Sillince (2005) proposes decentralisation as one of the congruent

approaches to the environmental contingencies that affect organisational structure and

strategy and the fit between the organisational norms, practices and values. As Sillince (2005)

expressed, decentralisation makes organisations accustomed to the conditions of uncertainty

and adaptations. The differentiation of decentralisation outcomes that arise contradictions can

be controlled by integration and synchronisation. By doing it, Sillince (2005) believes it is

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