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The Audit Forum International Forum on Government Auditing and Public Policy Vol. XII, No. 2, pp.

21-40, July 2009

GROUP PERCEPTUAL FRAUD SYMPTOMS DIFFERENCES: A MULTI-GROUP MODEL ANALYSIS


The Audit Forum International Forum on Government Auditing and Public Policy Vol. XII, No. 2, pp. 21-40, July 2009

Tumpal Wagner Sitorus


Address for correspondence: Jl. Empang Bahagia No. 10, RT 02/06, Jelambar, Jakarta 11460 - Indonesia +6285881609181 (Mobile Phone) Email: tw_sitorus2001@yahoo.com Affilitiations: Auditor The Audit Board, Republic of Indonesia Jalan Gatot Subroto 31, Jakarta 10210 - Indonesia Email: tumpal.sitorus@bpk.go.id The Audit Forum The Audit Board, Republic of Indonesia Jalan Gatot Subroto 31, Jakarta 10210 - Indonesia Phone : (62-21) 57854098 Fax. : (62-21) 57854098 e-mail : asosai@bpk.go.id

Donald Robert Scott


Emeritus Professor School of Commerce and Management Southern Cross University Lismore, New South Wales, Australia 2480 Email: don.scott@scu.edu.au

Anja M. Morton Lecturer in Accounting and Auditing School of Commerce and Management Southern Cross University Lismore, New South Wales, Australia 2480 email: anja.morton@scu.edu.au Chartered Accountant (CA) The Institute of Chartered Accountants in Australia (ICAA)

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Electronic copy available at: http://ssrn.com/abstract=1678845

The Audit Forum International Forum on Government Auditing and Public Policy Vol. XII, No. 2, pp. 21-40, July 2009

GROUP PERCEPTUAL FRAUD SYMPTOMS DIFFERENCES: A MULTI-GROUP MODEL ANALYSIS


The Audit Forum International Forum on Government Auditing and Public Policy Vol. XII, No. 2, pp. 21-40, July 2009

Abstract A series of multi-group assessments of the structural model produced evidence that collusion was perceived as being the highest risk factor of all. The results for the 122 nonauditor respondents, drawn from the justice institutions, indicated that the direct links from opportunity (for fraud), management (organisation) characteristics, and justice avoidance, to commission of fraud, were not significantly different from zero; although they were so in the case of the perceptions of the 122 practicing auditors. Awareness of these links could be of assistance to the accounting profession, audit organisations, police interrogators, fraud prosecutors, and other relevant parties

when collaborating to detect, deter, investigate, and prosecute all forms of fraud. It is anticipated that the evidence from this empirical investigation could lead to the incorporation of these concepts into the Institute for Fraud Prevention (IFP) call for research proposals and to the revision of the fraud risk factors and auditing standards in both global and local contexts. Keywords: Fraud risk factors, Fraud and related auditing standards, Auditing standards setters, Fraud symptoms model, Multi-group structural model analysis, the Institute for Fraud Prevention (IFP) call for research proposals.

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Electronic copy available at: http://ssrn.com/abstract=1678845

The Audit Forum International Forum on Government Auditing and Public Policy Vol. XII, No. 2, pp. 21-40, July 2009

INTRODUCTION Fraud is a worldwide issue. In order to obtain a global auditing perspective, the International Federation of Accountants (IFAC) (2008ab) has invited a broad range of people and institutions from around the world to comment on the International Standards on Auditing (Revised and Redrafted) that may strengthen the guidance on fraud risk factors and related auditing standards. Similarly, in the US context, the Public Company Accounting Oversight Board (PCAOB 2004, 2008) has indicated that it is planning to take into consideration additional fraud risk factors, apart from the non-shareable problem of financial pressure, opportunity, and rationalisation factors proposed by Cressey (1950) based on a 1949 examination of American trust violators. Akerlof (1970) predicted that Business in under-developed (developing) countries is difficult; in particular, a structure is given for determining the economic costs of dishonesty (p. 488). When considering the 2009, 2008, 2007, 2006 Corruption Perception Index (Transparency International 2009, 2008, 2007, 2006), for instance, Akerlofs opinion seems correct as the results showed that most countries which had the lower (worse) and lowest (worst) scores were from developing countries. In an Indonesian context, for instance, the 2009 Corruption Perception Index (CPI) revealed that the CPI of Indonesia (one of the developing countries) was 2.8 (0 = the worst score; 10 = the best score). However, the World Bank (2010) blacklisted individuals and companies not only from developing countries, but also from countries with the higher (better) and highest (best) CPI scores. Additionally, in an e-mail message to the author on October 18, 2008, Alani Mundie revealed that we will be inviting proposals on topics identified by the IFP (Institute for Fraud Prevention) membership ." A number of writers have suggested that entities whether organisational (IFAC IAASB) or human (auditing standards setters) will need support (e.g., Latour & Woolgar, 1979; Law 1992; Murray 2004). The IAASB or auditing standards setters thus need inputs in order to develop international auditing standards that accord with stakeholders different context views. (Mennicken 2008; Dellaportas 2008). It has been recommended that one of the inputs will come from empirical investigations (Loft et al 2006; James M. Sylph, email Dec.13, 2008).1 However,

The Audit Forum International Forum on Government Auditing and Public Policy Vol. XII, No. 2, pp. 21-40, July 2009

no studies have examined the causality of fraud using qualitative and (advanced) quantitative methodologies in multiple contexts as indicated in the next section of literature review. In their responses to support the guidance on fraud risk factors, US forensic experts provided different views of the broad range of fraud risk factors (Apostolou et al 2001). In order to further explore this possibility, we have used the Sitorus & Scott (2008a) modified model in a multiple-group structural model analysis. The groups were comprised of 122 practicing auditors and 122 non-auditors from justice and other relevant justice related organisations. A series of multi-group evaluations of the structural equations model produced different views of the identified fraud symptoms as illustrated by the significant and non-significant causal relationships. The direct paths from the symptoms of opportunity for fraud, management characteristics, and justice avoidance, to commission of fraud, were not significantly different from zero when examined in relation to the justice environment. This would suggest that some previous studies and the fraud risk factors and related auditing standards, used by the accounting profession, have concluded too precipitately that these factors are as important as other identified ones; although, Cressey (1950, 1973), Sitorus & Scott (2008a,b), and the auditing standards setters, concluded that opportunity for fraud and management characteristics were not central (direct) contributors to the occurence of fraud. Most importantly, we have also identified the significant direct path from collusion to the commission of fraud, and hence the fraudulent act, that has implications for those people in a broader range of institutions, who have an interest in the drivers of fraud. These results indicated that auditing standards setters and auditor boards should pay close attention to this identified additional direct risk factor. Strategically, awareness of this path could be of assistance to the accounting profession, audit organisations, police interrogators, fraud prosecutors, and other relevant parties if they decided to work together to detect, to deter, to investigate and to prosecute fraud and corrupt practices. By furthering our knowledge of the views of the two relevant groups, we have discovered that the auditing standard setters may be unable to claim that they have provided auditors with the most important (direct) risk factors. Overall, structural model builders have suggested examining an overall model across population subgroups, including the establishment of measurement invariance across two groups, 4

The Audit Forum International Forum on Government Auditing and Public Policy Vol. XII, No. 2, pp. 21-40, July 2009

in order to detect any potential differences in causal paths (e.g., Raykov 1997; Vanderberg & Lance 2000; Meade et al 2008). This approach effectively permits a further assessment as to whether an acceptable (global) model can also connect to specific (local) users as explored in the following literature review study. This paper is organised as follows. The first section provides an introduction to fraud issues, followed by a review of literature that provides different views of fraud risk factors. The next sections cover the hypothesised multi-sample model of risk factors across the institutions, methodology, data collection, data analysis, discussion and recommendations. A final section concludes. LITERATURE REVIEW: THE DIFFERENT VIEWS OF RISK FACTORS In the year of 1940, after the case of McKesson and Robbins, Inc., the US Securities and Exchange Commission (SEC) released a report stating that: ...accountants can be expected to detect collusive fraud (Dohr 1941, p. 94). When there was a corporate failure, the perceived and actual independence of accountants (Simmnett & Trotman 2002), including the effectiveness of audit committee (Ng & Tan 2003), were questioned. Learning from the US fraud cases, Davia et al (2000) expanded the view of conspiracy by including pseudo-collusion. This pseudo-type was then also reported in a New Zealand fraud case when an employee, in a financial trust position, did not realise that his or her signature had been forged on 67 fictitious invoices (Bishop & Burrowes 2003). Apostolou & Crumbley (2005) then agreed that conspiracy was the factor that most contributed to fraud. Ten years later, after the SEC report, Cressey (1950) proposed a trust violation symptoms framework comprised of his discovery of the non-shareable problems of financial pressure, supplemented by opportunity (e.g., Lafrentz 1924; Riemer 1941) and rationalisation (e.g., Mills 1940; Sutherland 1947), in an American context. However, the framework was limited to an individual analysis. About a half century later, Krambia-Kapardis (1999, 2001, 2002) developed the Cressey framework by adding criminogenic company characteristics (Needleman & Needleman 1979; Tillman & Pontell 1995), crime-prone personality (Romney et al 1980; Albrecht et al 1995), and situational factors (Michael & Adler 1971; Hough et al. 1980) in an Australian environment. It thus permitted the collusive factor to be taken into account.

The Audit Forum International Forum on Government Auditing and Public Policy Vol. XII, No. 2, pp. 21-40, July 2009

Using the 35 US forensic experts at four of the Big Five accounting firms in an AICPAsponsored research project and a mathematical model of the Analytic Hierarchy Process (AHP), Apostolou et al (2001) also reported that management characteristics should be taken into consideration. In the year 2002, the American accounting profession chose to adopt the Cressey trust violation triangle as being the listed fraud risk factors in Statement on Auditing Standards (SAS) No. 99, paragraph 33. This was then followed by the international audit profession (IFAC, 2008a,b) and many countries across the globe. In a 1998 survey of IFAC, it was found that there were 46 countries that had adopted or had no significant differences between their national auditing standards and the international standards (Roussey 1999). In 2008, the IFAC suggested that more than 100 countries had decided to comply with the international standards on auditing as indicated in the Auditors Report of the American Accounting Association (2008). Later, Sanchirico (2006) included information as to how detection avoidance, such as a bribe, could inhibit fraud prosecutions in a justice system. As the issue of fraud and corrupt practices has been a global problem, the Institute for Fraud Prevention (IFP) (2006) offered research grants for research into the causal factors for all forms of fraud. All grant recipients used a case study approach to gain a better understanding of financial statement fraud, procurement fraud, and identity theft. Firstly, Tillman & Indergaard (2007) explored the networks of organisations and individuals (collusion and commission of fraud) that were involved in financial statement fraud. Secondly, with extensive assistance from the US Chicago Police Department, Kresse (2007) examined victim demographic information in regard to identity theft. Thirdly, in the case of U.S. programs in Iraq, Passas (2007) identified a criminogenic environmental factor involved in procurement fraud. A review of this literature, showed that, no studies had examined the causation of all forms of fraud using a multi-group structural equations model analysis in order to re-examine the acceptable (face) contents of SAS No. 99 or International Standards on Auditing (ISA) No. 240 from the views of the relevant users in both global and local environments; although a structural model approach, using actual data (econometrics) and perceived data (psychometrics), had been examined in corporate (financial statement) fraud, environmental risk information, and other areas of accounting and audit research (e.g., Lanen & Larcker 1992; Rodgers 1992; Kalbers & Fogarty 1993; Copley et al 1995; Ittner et al 1997; Chen & Leitch 1998; Shafer et al 6

The Audit Forum International Forum on Government Auditing and Public Policy Vol. XII, No. 2, pp. 21-40, July 2009

1999; Johnston 2000; Uddin 2000; Uddin & Gillett, 2002; Donnelly et al 2003; Kleinman et al 2003; Lee & Kleinman 2003; Leitch & Chen 2003; Shapeero et al 2003; Rodgers & Housel 2004; Gillet & Uddin, 2005; Laitinen 2006; Kalbers & Cenker 2007). From an examination of the methodologies used in this type of research, it is evident that a fraud audit researcher should be open to the possibility of extending his or her research approaches, from fraud associations, case studies, and (single) structural equations modelling, to multi-sample structural equations model analysis exploring different contexts. This has been also called for by DeFond & Francis (2005). In a fraud auditing standards perspective, auditing standards setters have allowed the practicing auditor to consider additional fraud risk factors (e.g., SAS No. 99, paragraph 33 or the ISA No. 240 Appendix 1). Using a sample of 202 audit clients, Mock & Turner (2005) reported that the auditors modified their planned audit program due to the fraud risk factors identification and documentation. Hence, there has been room to make a contribution to expand the significant links of the identified risk factors that can be of immediate practical application for practicing auditors. In accordance with that, this study uses a new approach for (fraud) auditing research, namely a multiple group structural model, to re-test the Sitorus & Scott (2008a) post-hoc (modified) model across the audit and the justice institutions. This was done to explore possible group differences between auditors and non-auditors in regard to the causal

relationships identified by the paths linking opportunity for fraud, collusion, justice avoidance, and criminogenic management characteristics, to the commission of fraud. The groups were comprised of 122 practicing auditors and 122 non-auditors, derived from Indonesian justice institutions and other relevant organisations. The following section starts with the hypothesised structural relationships and complete measurement specification of a modified Sitorus & Scott model of fraud symptoms. HYPOTHESISED MODEL Based on a substantial number of previous studies and with no studies of the causation of fraud using a multi-group model analysis, we propose the hypothesised (initial) model 2 shown in Figure 1.

The Audit Forum International Forum on Government Auditing and Public Policy Vol. XII, No. 2, pp. 21-40, July 2009

Insert Figure 1 about here.

As depicted in Figure 1, there are eight hypothesised causal relationships for the structural components of the modified Sitorus & Scott (2008a) model in the following four risk factor (latent variables) structure. First, F1 (opportunity for fraud) depended on F2 (organisational orientation). Secondly, F3 (commission of fraud) depended on F1 (opportunity), F2 (organisational orientation),3 F4 (collusion), and F5 (justice avoidance). Thirdly, F4 (collusion) depended on F1 (opportunity). Fourthly, F5 (justice avoidance) depended on F2 (organisational orientation) and F4 (collusion). The five latent variables (including fraud commission) were measured by the elements coded in Figure 1. Table 1 reported the significant elements (measures) including their code references, supported by the relevant literature. The set of measures was re-examined using confirmatory factor analysis (CFA). For further explanation on this preliminary step, see the initial results in the next section.

Insert Table 1 about here.

All forms of these fraud associations can thus be expected to predict fraud commission, both directly and indirectly. METHOD, DATA, AND INITIAL RESULTS Survey This study analyses views about all aspects of fraud from fraud findings to fraud prosecutions, in respect of cases which were transferred to the courts. The Sitorus & Scott modified model with its hypothesised relationships (Figure 1) was empirically re-tested using two groups of data collected from a survey of 122 practicing auditors and 122 non-auditors from justice and other relevant institutions vetted and approved by the Southern Cross University (SCU) Human Research Ethics Committee (HREC). The set of questionnaire documents was 8

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also vetted by independent experts from the University of Indonesia and the Attorney Generals department of the Republic of Indonesia. The use of anonymous experts allowed for the overall evaluation of the questionnaire document to check its suitability for an Indonesian environment and hence the ability of the new multi-item scales to obtain good quality data. The experts also identified additional sources of data to allow for a multiple group model evaluation. The original English questionnaire was translated into the Indonesian language by the first author. He is an auditor from the Supreme Audit Institution (SAI) of Indonesia and is able to write in the Indonesian language. However, the translational step was necessary in order to produce an English version of the questionnaire for vetting of the questionnaire by the university ethics committee and to ensure that questions that had been based on English language publications were given the same meaning when translated into Indonesian. Reflective model based theory and initial results The reflective indicator models for the four fraud risk factors, namely opportunity for fraud (e.g., Helliar & Dunne 2004; Pathak 2005; Bierstaker et al 2006; Bierstaker & Thibodeau 2006; Dellaportas et al 2007), collusion (e.g., Cooper 1993; Kalbers & Fogarty 1998; Leung & Cooper 2005), criminogenic organisational orientation (e.g., Pratt & Peursem 1996; Ponemon 1997; Smith et al 2005), and justice avoidance (e.g., Wright 2006) were hypothesised to predict the commission of fraud (e.g., Blackburn 1993; Dunne et al 2003), and hence the fraudulent act. This reflective methodology was decided to be used in this fraud symptoms multi-group model (for details of the use of this methodology, see Bollen & Lennox 1991). All indicators were measured on a 7-point scale. In reflective measurement model based theory, all the elements of construct validity including reliability are important. Therefore, convergent validity and reliability were also reassessed (see Table 2) before evaluating a hypothesised overall model (e.g., Medsker et al 1994).

Insert Table 2 about here.

From Table 2 it can be seen that the latent variables of collusion (F4), justice avoidance (F5) (with the three indicators items), opportunity for fraud (F1), organisational orientation (F2),

The Audit Forum International Forum on Government Auditing and Public Policy Vol. XII, No. 2, pp. 21-40, July 2009

and commission of fraud (F3), exhibited adequate convergent validity and reliability (e.g., Fornell & Larcker 1981; Nunnally & Bernstein 1994). After the examination of all over-identified measurement (fraud risk factors) models, the next stage was the use of confirmatory factor analysis (CFA) to test each fraud risk factor (theory) and to produce initial empirical results (see Table 3), before examining the hypothesised overall group-related model (Figure 1).

Insert Table 3 about here.

The goodness-of-fit indices displayed in Table 3 indicated an acceptable fit for all of the five constructs (e.g., Schermelleh-Engel & Moosbrugger 2003). In other words, this indicated the validity of each individual fraud risk factor. These tested measurement models were used to test the single (overall) model and produced the empirical results shown in Table 4 (a) and Table 4 (c). This test was used to assess whether the hypothesised model (Figure 1) exhibited an acceptable fit to the data.

Insert Table 4 (a) and Table 4 (c) about here.

Because the causal path from organisational orientation (F2) to fraud commission (F5) was not significantly different from zero in the views of both auditors and non-auditors, as shown in Table 4 (a) and Table 4 (c), this direct causal path was omitted from the model. This is evidence that the management characteristics factor was not considered to be one of the significant direct risk factors. As a result, the hypothesised model was now modified as shown in Figure 2.

Insert Figure 2 about here.

From Table 4 (a) it can be seen that, when using the auditor sample, there was one (potentially) non-significant path from opportunity for fraud (F1) to collusion (F4) (p = 0.1). From Table 4 (c), it can be seen that when using the non-auditor sample, there were three nonsignificant paths from opportunity for fraud (F1) to fraud commission (F3) (p > 0.1), from 10

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organisational orientation (F2) to the avoidance of justice (F5) (p > 0.1), and potentially from justice avoidance (F5) to fraud commission (F3) (p = 0.099). However, in order to claim that these (potential) differences can be generalisable, a researcher should evaluate measurement invariance and the hypothesised multi-sample model, as shown in the next research step. If this invariance is unable to be established, it may indicate that the overall finding of group differences was mostly sample specific. Procedure for a multi-group structural model comparison This research conducted a comparison of different groups in relation to the broad range of respondents from audit, justice and other relevant justice related organisations. One of the most important issues that has not been done by previous studies in this topical research area is to establish model comparability in different environments and hence to manage of the (fraud) problem in multiple-population (institution) settings. To explore this, a multiple group structural model approach was used (e.g., see Raykov 1997). Assessing goodness-of fit in a measurement invariance model A researcher should consider that a measurement invariance model has been part of the discussion of the results from research using a multi-group model. If the measurement invariance issue is ignored, then the final results may be unable to be claimed as a true view difference between auditor and non-auditor respondents (e.g., Vandenberg & Lance 2000). The technical issue is that once cross-group constraints have been established, measurement invariance should also be examined statistically (Cheung & Rensvold 2002; Meade et al 2008). Testing for multi-group invariance The modified multi-sample model (unconstrained) was tested and was found to indicate a reasonably good fit: 2 (290) =501.860, p = 0.0, RMSEA = 0.055, SRMR = 0.0797, CFI = 0.932 and TLI = 0.920. The model excluding error terms but including the path coefficients is shown in Figure 3 (a) and Figure 3 (b).

Insert Figure 3 (a) and Figure 3 (b) about here.

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The results, shown in Table 5, also indicate that when imposing the additional restriction of measurement weights (factor loadings) across the two broad groups the model still fitted well (chi-square p-value = 0.078). This multi-group model was therefore shown to be statistically invariant.

Insert Table 5 about here. FINAL RESULTS AND DISCUSSION From Tables 4 (b, d) and Figures 3 (a, b) (path coefficients for both auditors and nonauditors unconstrained), it can be seen that only the latent variable of collusion (F4) was a statistically significant predictor of fraud commission (F3), hence the fraudulent act, for both of the groups of respondents (p 0.02). However, in the view of 122 practicing auditors, the latent variables of justice avoidance (F5) and opportunity for fraud (F1) can also be considered to detect and to deter fraud (p 0.026).

Insert Tables 4 (b, d) In regard to the fraud and related auditing standards perspective, collusion (F4) is not part of the listed fraud risk factors. The US Public Oversight Board (POB) on Audit Effectiveness (2000) reported that practicing auditors were unlikely to detect and to deter collusive fraud (directly); although the US Securities and Exchange Commission (SEC) expected that they could detect it (see literature review section). In its proposed revised and redrafted form, ISA No. 505 (Revised and Redrafted), IFAC (2008b) did not mention the risk of collusion which can involve employee(s) and/or management, as another (specific) fraud risk factor. In order to assist practicing auditors, their audit profession and organisations, these results also permitted us to consider other significant indirect and direct links associated with predicting (detecting and deterring) collusive fraud. These can be identified from the significant risk factor of organisational orientation (F2) to opportunity (F1) for fraud (p = 0.05 and p = 0.0 for auditors and non-auditors, respectively), and from the significant direct factor of opportunity to collusion (p = 0.10 and p = 0.0 for auditors and non-auditors, respectively). Thus, organisational orientation and opportunity are indirect and direct factors, respectively, that can both be considered in order to detect and to deter collusive fraud.

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Since the risk factor of opportunity (F1) has been identified, and is one of the listed fraud risk factors, used by the accounting profession, the question is why IFAC (2008a,b) did not strengthen its guidance on fraud risk factors and related auditing standards by adding the other identified risk factors, which, in this research investigation, were linked directly to opportunity for fraud? These are collusion (F4) and criminogenic organisational orientation or management characteristics (F2). Additionally, is it appropriate to use a 1949 American context case study to develop global fraud and related auditing standards to be used by all IFAC member bodies around the world? We have thus suggested re-formulating the Cressey fraud risk factors in the ISA 240 Appendix 1. However, before so doing, we believe that, to explore worldwide generalisation, a study, using worldwide data, should be undertaken (see our recommendation). Overall, from this study, we have learnt more about the global risk factors of Sitorus and Scott in an Indonesian context and of the international fraud auditing standard (ISA No. 240). The IFAC IAASB fraud risk factors, listed in its ISA 240 Appendix 1, may not relate fully to users in Indonesian audit and justice institutions. We therefore proffer this alternative integrated set of identified fraud risk factors to be used and to be re-tested in Indonesia and in other countries. Similarly, following Sarbanes-Oxley of 2002, DeFond & Francis (2005) encouraged researchers to examine the applicability of effects identified in single country studies using different institutions, to comparative cross-country research. RECOMMENDATION: CALL FOR A COLLABORATIVE STUDY The Institute of Chartered Accountants in Australia [ICAA] as cited in Lee et al (2008), identified a need for a longitudinal study to observe changes in perceptions. The need for a longitudinal study also suggests a need for collaborative research in order to consolidate data from several years. Thus, the two groups of data that were collected in 2007 can be used as a basis for a large longitudinal dataset that can be collected by means of this research instrument in order to examine any potential variation in fraud measures over the years following on from and including the year 2007.

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CONCLUSION Based on this empirical investigation, using a multi-group structural model, it has been shown that the international auditing standards setters cannot claim that their fraud auditing standards have provided practicing auditors across the globe with acceptable examples of fraud risk factors. This is especially true since the risk factors have failed to represent the views of users in different institutions; although these perceptions were drawn from the Indonesian audit and the justice institutions and other relevant justice related organisations. To sum up, in a contribution to the global initiative to harmonise auditing standards, we have identified a limitation in the existing identified fraud risk factors and related auditing standards. We have also identified a multiple-group structural model that can be used to examine such comparative cross-country data for assessing the acceptable of these additional fraud risk factors and model. This may be of assistance to the auditing self-regulators from different countries in developing their auditing standards. Such standards can be both practical so as to be used by the accounting profession and audit organisations, and synergistic so as to be of value to the auditor boards, police interrogators and fraud prosecutors, when investigating reported cases of fraud. Foot-/End-notes
1

Sitorus & Scott (2008a,b,c,d) have provided inputs on the existing fraud risk factors and related auditing standards (revised and redrafted) to the IFAC IAASB, PCAOB, and national auditing self-regulators. In accordance with the study of Loft et al. (2006), we also provide this research report that may be of assistance to the auditing standards setters from different countries in making auditing standards that connect with the users.

Because Cressey (1973) reported that trust violators had often not used rationalisation and Sitorus & Scott (2008a) found that it was only a side issue of the commission of fraud, we decided to drop the rationalisation factor from this hypothesised model.

3.

In the (global) model of fraud symptoms examined by Sitorus & Scott (2008a), there was no significant link between organisational orientation and commission of fraud.

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Smith, M., N. H. Omar, S. I. Z. S. Idris, and I. Baharuddin. 2005. Auditors perception of fraud risk indicators: Malaysian evidence. Managerial Auditing Journal 20 (1) 73-85. Sutherland, E. H. 1947. Principles of Criminology. New York: Lippincott. Tillman, R., and M. Indergaard. 2007. Control overrides in financial statement fraud. www.theifp.org/research%20grants/control%20overrides_final.pdf. ______, and H. Pontell. 1995. Organizations and fraud in the savings and loan industry. Social Forces 73 (4): 1439-1463. Transparency International. 2009. Corruption perceptions index (CPI).

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World

Bank.

2010.

World

Bank

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of

Ineligible

Firms.

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Table 1 The significant fraud risk measures Factors Opportunity (F1) Organisational Orientation (F2) Commission of fraud (F3) Collusion (F4) Fraudsters can also collude with a director (v13), an internal auditor (v14), an audit committee (v15), or even with an external auditor (v16). An attempt is made to intimidate (v17), or to bribe (v18) the court or justice institutions; or the case takes too long (v19). Commission involves a parent company (v9), a shareholder (v10), a subsidiary company (v11), or an affiliated company (v12). Indicators Lack of an audit (v1), physical controls (v2), and transaction authorisations (v3), or poor accounting records (v4). No reward (bonus) for good (better) work results (v5), poor conflict resolution (v6), or lack of open (internal) communications (v7), or authoritarian (v8).

Justice avoidance (F5)

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Table 2 Construct variance extracted and reliability

CFA Construct validity 122 practicing auditors (n=122) Constructs Opportunity (F1) Organisational orientation (F2) Commission of fraud (F3) Collusion (F4) Justice avoidance (1) (F5) Justice avoidance (2) (F5) Items 4 4 4 4 4 3 Variance extracted 0.6 0.5 0.8 0.7 0.5 0.6 Reliability 0.9 0.8 0.9 0.9 0.8 0.8

122 non- auditors (n=122) Constructs Opportunity (F1) Organisational orientation (F2) Commission of fraud (F3) Collusion (F4) Justice avoidance (1) (F5) Justice avoidance (2) (F5) items 4 4 5 4 4 3 Variance extracted 0.7 0.5 0.8 0.7 0.4 0.5 Reliability 0.9 0.8 0.9 0.9 0.7 0.7

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Table 3 CFA Multi-group Fit indices

Justice Opportunity Organisational Commission for fraud orientation of fraud Collusion Avoidance Fit Indices Degree of freedom Probability level 2 SRMR RMSEA CFI TLI (F1) 4 .037 10.189 .0230 .080 .988 .963 (F2) 4 .434 3.795 .0221 .000 1.000 1.002 (F3) 4 .055 9.239 .0069 .074 .995 .986 (F4) 4 .067 8.788 .0208 .070 .992 .977 (F5) 4 .207 5.893 .0221 .044 .992 .977

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Table 4 (a) Regression weights (122 auditor respondents, single model) Estimate F1 (Opportunity for fraud) <--- F2 (Organisational orientation) F4 (Collusion) F5 (Justice avoidance) F5 (Justice avoidance) F3 (Commission of fraud) F3 (Commission of fraud) F3 (Commission of fraud) F3 (Commission of fraud)
* = significant at 90% level ** = significant at 95% level

S.E.

C.R.

.204 .243 .225 .246 .481 .301 .317 -.028

.104 1.973 .049** .148 1.647 .100* .062 3.618 .000** .089 2.777 .005** .196 2.454 .014** .135 2.233 .026** .101 3.147 .002** .135 -.204 .839

<--- F1 (Opportunity for fraud) <--- F4 (Collusion) <--- F2 (Organisational orientation) <--- F5 (Justice avoidance) <--- F1 (Opportunity for fraud) <--- F4 (Collusion) <--- F2 (Organisational orientation)

Table 4 (b) Regression weights: (122 auditors unconstrained, multi-group model) Estimate F1 (Opportunity) F4 (Collusion) F5 (Justice avoidance) F5 (Justice avoidance) F3 (Commission of fraud) F3 (Commission of fraud) F3 (Commission of fraud)
* = significant at 90% level ** = significant at 95% level

S.E.

C.R.

<--- F2 (Organisational orientation) <--- F1 (Opportunity) <--- F4 (Collusion) <--- F2 (Organisational orientation) <--- F5 (Justice avoidance) <--- F1 (Opportunity) <--- F4 (Collusion)

.204 .243 .225 .245 .467 .296 .318

.104 1.964 .050** .148 1.646 .100* .062 3.607 .000** .094 2.600 .009** .184 2.545 .011** .133 2.233 .026** .101 3.157 .002**

Table 4 (c) Regression weights (122 non-auditor respondents, single model) Estimate F1 (Opportunity for fraud) F4 (Collusion) F5 (Justice avoidance) F5 (Justice avoidance) F3 (Commission of fraud) F3 (Commission of fraud) F3 (Commission of fraud) F3 (Commission of fraud)
* = significant at 90% level ** = significant at 95% level

S.E.

C.R.

<--- F2 (Organisational orientation) <--- F1 (Opportunity for fraud) <--- F4 (Collusion) <--- F2 (Organisational orientation) <--- F5 (Justice avoidance) <--- F1 (Opportunity for fraud) <--- F4 (Collusion) <--- F2 (Organisational orientation)

.695 .464 .328 .133 .203 .160 .700 -.137

.130 5.330 .000** .116 3.994 .000** .110 2.973 .003** .125 1.062 .288 .123 1.652 .099* .137 1.169 .243 .126 5.563 .000** .145 -.943 .346

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Table 4 (d) Regression weights (non-auditors unconstrained, multi-group model) Estimate F1 (Opportunity) F4 (Collusion) F5 (Justice avoidance) F5 (Justice avoidance) F3 (Commission of fraud) F3 (Commission of fraud) F3 (Commission of fraud)
* = significant at 90% level ** = significant at 95% level

S.E.

C.R.

<--- F2 (Organisational orientation) <--- F1 (Opportunity) <--- F4 (Collusion) <--- F2 (Organisational orientation) <--- F5 (Justice avoidance) <--- F1 (Opportunity) <--- F4 (Collusion)

.694 .465 .330 .129 .194 .080 .695

.132 5.280 .000** .116 4.001 .000** .117 2.814 .005** .128 1.007 .314 .124 1.564 .118 .104 .773 .439

.127 5.489 .000**

Table 5 Multi-sample nested models with increased constrains: (Assuming model Unconstrained to be correct)

Model Measurement weights Structural weights Structural covariances Structural residuals Measurement residuals

DF 14 21 22 26 45

CMIN 22.012 41.305 44.560 49.622 148.752

P .078 .005 .003 .003 .000

NFI Delta-1 .006 .012 .013 .014 .043

IFI Delta-2 .007 .013 .014 .016 .047

RFI rho-1 -.001 .002 .002 .001 .021

TLI rho2 -.001 .002 .002 .002 .023

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v1 v2 v3

v5

v6

F1
v4 v9

F2 F3
v10 v12 v11 v16 v8

v7

v13

F4 F5
v14 v15 v17 v18 v19 v105 v105

Figure 1 Hypothesised (modified) model of Sitorus & Scott (2008a) (error terms omitted) Eight hypothesised causal relationships for the structural components element

The variable and factor names are shown in Table 1.

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Opportunity (F1) Organisation (F2)

Fraud (F3)

Collusion (F4) Justice (F5)

Figure 2 Structural model component of Sitorus & Scott (2008a) (indicators and error terms omitted) Seven hypothesised causal relationships for the structural components element

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Opportunity (F1)

.22 Organisation (F2)

.20

.17

Fraud (F3) .311 .312 .26

Collusion (F4) .39 Justice (F5)

Figure 3 (a) Path coefficients of auditor sample (unconstrained, multi-sample structural model)

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Opportunity (F1) N. S.

.625 Organisation (F2)

.41

Fraud (F3) N. S. .615 N. S.

Collusion (F4) .38 Justice (F5)

N. S. = Non-significant

Figure 3 (b) Path coefficients of non-auditor sample (unconstrained, multi-sample structural model)

31