5: Corporate Culture and Fraud

Trust in public and private institutions has recently eroded. Multiple incidents of financial reporting scandals coupled with the financial crisis of 2007–2008, also called the “global financial crisis,” have resulted in a deterioration of investor trust in the institutions charged with protecting their wealth. This situation occurred in multiple layers and extended beyond the executive and boards of corporations to the regulation of gatekeeping professionals such as ratings agencies and auditors. These organizations not only gambled away investor funds but also undertook calculated moves to defraud their investors.

Dealing with the risk of fraud today is becoming increasing complex and challenging. The emergence of digital data and global markets with complex legal requirements has only added to the intricate task of protecting against fraud. According to PwC's Global Economic Crime and Fraud survey (PwC 2018), almost half of global organizations have experienced fraud but many of the remaining organizations are likely to become victims of undetected fraud. Fraud can manifest itself in several ways including consumer fraud, cybercrime, identity theft, and money laundering. For the purposes of this chapter, fraud refers to financial reporting fraud, which is the intentional manipulation of financial statements in order to mislead. This type of fraud cannot exist in a vacuum because it requires several agents in a firm to commit the fraud and many more to allow it to occur. As such, this chapter considers how an organization's corporate culture affects the prevalence of financial reporting fraud.