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A Prospect Theory-Based Research on Occupational Fraud

Author: LiuXinYuan
Tutor: ChenYan
School: Dongbei University of Finance
Course: Accounting
Keywords: occupational fraud prospect theory cognitive bias tendency of fraud
CLC: F275
Type: Master's thesis
Year: 2011
Downloads: 66
Quote: 1
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Abstract


The occupational fraud has been broadly concerned by scholars all over the world for its high rate of occurring, critical damage, diversity of layout and complexity of factors. It has been taking place frequently since 1960s, although series of measures have been taken by countries, the fraud still exists. Recently, occupational fraud in Societe Generale(法国兴业银行)-one of the most famous cases which occurred in 2008-again, gives us an alarm bell.The author notices that most of the existing literatures are established on pattern of "factors-fraud", which insists that once there are some factors of fraud, the fraud will then occur. Yet some of the literatures analyze fraud at the foundation of "economic man", but it’s rarely possible for human being to achieve "perfect rationality", so that analyzing fraud based on "bounded rationality" is becoming increasingly necessary. The author believes that there are a "black box" between the factors and the result-fraud. In order to figure out the path between them, the author describes the influences of cognitive bias and the decision-making model of fraud based on prospect theory, and then amends the operating patterns, finally proposes some fraud-control measures and strategies in the view of cutting off the link between factors and result.In the first and second part, the thesis introduces the background and significance, the train of thought and the ways. This part also defines the conception and the feature of occupational fraud, making it clear that the occupational fraud decision-making is bounded rationality, which decides that it is necessary and appropriate to use prospect theory to analyze that decision-making process, and also introduces prospect theory and the function of cognitive bias.In the third part, the thesis analyzes the mechanism of fraud decision-making on the foundation of prospect theory and cognitive bias, using some typical cases to prove it. In the fourth part, the author investigates fraud tendency using questionnaire survey, she choose managers of the organization, financial workers and students who will be engaged in such kind of work as respondents. The outcome of statistical analysis makes it clear that most of the operating patterns of fraud decision-making are confirmed by majority respondents; and for the operating patterns denied by the respondents, the author also makes a reasonable explanation.In the fifth part, the author proposes some advices from eluding cognitive bias, enhancing locking technique both in people and organization, in order to improve occupational fraud control measures.The author takes the definition of fraud decision-making as a point of penetration, amalgamating the inherent limits and the pursuit of utility maximization, and clarifies the feasibility of using prospect theory in this study; theoretically explores the operating patterns in the process of fraud decision-making, reveals the inner mechanism of occupational fraud, and perfects the current classical theory. At the meantime, this research will also be helpful for the syncretism of modern accounting and auditing. Practically, the author proposes some fraud-control measures and strategies in the view of correcting the cognitive bias and amending the operating patterns, breaks out the usual formula, and provides a new perspective for the follow-up research.

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