Fraud Disclosure Tendency in Banking System: Impact of Psychological Contract Breach and Organizational Factors

Document Type : Original Article

Authors

• Ali Sheikhi ¹
• Amin Nazemi ²

¹ accounting, shiraz university, shiraz, iran

² accounting. shiraz university, shiraz, iran

10.22067/ijaaf.2024.44223.1376

Abstract

This study addresses the impact of psychological contract breaches and organizational factors on fraud disclosure in the banking system. The statistical population includes all the employees and internal auditors in the banks listed on the stock exchange in 2022. The data is collected using a questionnaire. Structural equation modeling and Smart PLS v.3 Software propose and test eight hypotheses. Results showed a significant negative relationship between interpersonal effect, employee transactional relationship, financial system instability, deficient organizational changes, and unethical organizational morality with fraud disclosure. However, results showed no significant relationship between past disclosure responses and fraud disclosure tendency. The mentioned organizational factors affect fraud disclosure via the mediating role of psychological contracts. The last hypothesis showed that employees tend to disclose fraud to their supervisors rather than to the fraudster and internal auditors. This article is an innovative study because it is the first research addressing psychological contracts' effects in the accounting and auditing field. Our results and findings by investigating the negative impact of psychological contract breach on the tendency to disclose fraud contribute to audit literature, fraud diamond, and fraud disclosure. Psychological contract breach might affect the “opportunity” element in the fraud diamond by not whistleblowing fraud. Management relies on their employees as an internal control against fraud.

Keywords

• Financial Fraud
• Whistleblowing
• Organizational Factors
• Psychological Contract Breach
• Financial Instability

Main Subjects

• Accounting

---

©2024 The author(s). This is an open access article distributed under Creative Commons Attribution 4.0 International License (CC BY 4.0)

References

1. Ayani, H. (2021). detection of fraud in bank data. Management and Accounting. 12(5), pp. 477-499. (In Persian).
2. Brink, A., Eller C. K. and H. Gan (2015). Reporting Fraud: An Examination of The Bystander Effect and Evidence Strength. Advances in Accounting Behavioral Research, 18(2), pp. 125-154. https://doi.org/10.1108/S1475-148820150000018004
3. Cohen, J. (1988). Statistical Power Analysis for the Behavioral Sciences (2nd ed.). Hillsdale, NJ: Lawrence Erlbaum Associates, Publishers.
4. Chan, P. K., Fan, W., Prodromidis, A. L. and Stolfo, S. J. (1999). Distributed data mining in credit card fraud detection. IEEE Intelligent Systems and Their Applications, 14(6), pp. 67-74. https://doi.org/10.1109/5254.809570
5. Dorminey, J., Fleming, A. S., Kranacher, M. J. and Riley Jr, R. A. (2012). The evolution of fraud theory. Issues in Accounting Education, 27(2), pp. 555-579. https://doi.org/10.2308/iace-50131
6. Eisenberger, R., Armeli, S., Rexwinkel, B., Lynch, P. D., & Rhoades, L. (2001). Reciprocation of perceived organizational support. Journal of Applied Psychology, 86(1), 42–51. https://doi.org/10.1037/0021-9010.86.1.42
7. Fornell, C., and Larcker, D. F. (1981). Evaluating structural equation models with unobservable variables and measurement error. Journal of Marketing Research, 18(1), 39–50. https://doi.org/10.2307/3151312
8. Foroghi, D., Hamidian, N. and Bahrami, F. (2022). The Effect of Corporate Social Responsibility on Fraudulent Financial Reporting. Financial Accounting Knowledge, 9(1), pp. 1-27. (In Persian). https://doi.org/10.30479/jfak.2022.16357.2933
9. Hu, L.-t., & Bentler, P. M. (1999). Cutoff criteria for fit indexes in covariance structure analysis:
Conventional criteria versus new alternatives. Structural Equation Modeling, 6(1), 1–55. https://doi.org/10.1080/10705519909540118
10. Gallani, S., Krishnan, R., Marinich, E. J. and Shields, M. D. (2019). Budgeting, psychological contracts, and budgetary misreporting. Management Science, 65(6), pp. 2924-2945.
11. Golparvar, M., Javadian, Z. and Brazandeh, A. (2011). Contract with Organizational Commitment and Job Satisfaction: Replaceable Variables and Theoretical Relativism. Psychological Methods and Models, 1(3), pp. 51-64. (In Persian).
12. Hammouri, Q., Altaher, A. M., Rabaa’i, A., Khataybeh, H., and Al-Gasawneh, J. A. (2022). Influence of psychological contract fulfillment on job outcomes: A case of the academic sphere in Jordan. Problems and Perspectives in Management, 20(3), pp. 62-71.
13. Hemat Panah, A., Mehdad, A and Farsi, Z. (2017). The effect of the perception of adherence to the psychological contract on the organizational citizen performance in the employees of an industrial company: the mediating role of organizational loyalty. Knowledge and Research in Applied Psychology, 1(71), pp. 18-25. (In Persian). https://doi.org/10.30486/jsrp.2018.540474
14. Henseler, J., Ringle, C.M. & Sarstedt, M. A new criterion for assessing discriminant validity in variance-based structural equation modeling. J. of the Acad. Mark. Sci. 43, 115–135 (2015). https://doi.org/10.1007/s11747-014-0403-8
15. John, O. N., Okonkwo, V. I., Okaro, C. S. O., Martins, B. O. and Otekunrin, A. O. (2023). Effect of Fraud and Corruption on Capital Market Performance in Nigeria. Journal of Economics, Management and Trade, 29(1), pp. 40-53.
16. Johnson, E. N., Kidwell, L. A., Lowe, D. J. and Reckers, P. M. (2019). Who follows the unethical leader? The association between followers’ personal characteristics and intentions to comply in committing organizational fraud. Journal of Business Ethics, 154, pp. 181-193. https://doi.org/10.1007/s10551-017-3457-y
17. Kaplan, S. E., Pope, K. R. and Samuels, J. A. (2011). An examination of the effect of inquiry and auditor type on reporting intentions for fraud. Auditing: A Journal of Practice & Theory, 30(4), pp. 29-49. https://doi.org/10.2308/ajpt-10174
18. Karani, A., Trivedi, P. and Thanki, H. (2022). Psychological contract and work outcomes during COVID-19 pandemic. Journal of Organizational Effectiveness: People and Performance, 9(1), pp. 149-168. https://doi.org/10.1108/JOEPP-09-2020-0186
19. Liang, H. L. (2023). Dual effects of regulatory focus on work-related consequences: The mediating roles of psychological contracts. Management Decision, 61(1), pp. 339-355. https://doi.org/10.1108/MD-09-2021-1232
20. MacGregor, J. and Stuebs, M. (2014). The silent Samaritan syndrome: Why the whistle remains unblown. Journal of Business Ethics, 120, pp. 149-164. https://doi.org/10.1007/s10551-013-1639-9.
21. Mortazavi, S., Rahimnia, F., Rezaian, A. and Chitsazian, A. (2012). Recognizing the content of the psychological contract in faculty members (case study: Ferdowsi University of Mashhad). Strategic Management Thought, 2(11), pp. 99-122. (In Persian). https://doi.org/10.30497/smt.2013.1703
22. Namazi, M. and Ebrahimi, F. (2015). Modeling and prioritization of factors affecting the intention to report financial frauds by accountants. Empirical Studies in Financial Accounting, 10(49), pp. 1-28. (In Persian). https://doi.org/10.22054/qjma.2016.4192
23. Ozili, P. K. (2016). Fraud Detection, Conservatism and Political Economy of Whistle-Blowing. Academic Journal of Interdisciplinary Studies, 5(3), pp. 17-24.
24. Raeisi Nafchi, A.S and Dastgir, M. (2018). Presenting a model to identify risk factors affecting the occurrence of fraud in banks (case study, Resalat Bank of Isfahan). Financial Accounting, 11(41), pp. 23-45. (In Persian). http://qfaj.mobarakeh.iau.ir/article-1-1572-fa.html
25. Rousseau, D. M. (2001). Schema, promise and mutuality: The building blocks of the psychological contract. Journal of Occupational and Organizational Psychology, 74(4), pp. 511-541. http://dx.doi.org/10.1348/096317901167505
26. Scheetz, A. M. (2016). The Effect of Psychological Contract Violations on Employee Intentions to Report Fraud. Case Western Reserve University.
27. Shahriari Nezhad, S. and Ghaffari, S. (2021). Investigating the impact of succession planning implementation on employees' psychological contract considering the moderating role of managers' leadership style (a case study of Bank Mellat corporate banking). Management, Tourism and Technology. 10 (3), pp. 1-25. (In Persian).
28. Sharma, N. and Garg, P. (2017). Psychological contract and psychological empowerment as employee engagement drivers in Indian IT sector. International Journal of Applied Business and Economic Research, 15(1), pp. 279-287.
29. Taheri Nia, M., Muslimi, A. and Vasheghani Farahani, T. (2022). Studying the effect of weak internal control on the risk of fraudulent financial reporting with emphasis on the moderating role of management characteristics. Audit knowledge. 10(82), pp. 320-342. (In Persian).
30. Wetzels, M., Odekerken-Schröder, G. and Van Oppen, C. (2009). Using PLS path modeling for assessing hierarchical construct models: Guidelines and empirical illustration. MIS Quarterly, 33(1), pp. 177-195. https://doi.org/10.2307/20650284
31. Wolfe, T.D and Hermanson, R.D. (2004). The Fraud Diamond: Considering the Four Elements of Fraud, CPA Journal, 47(12), pp. 38-42.
32. Young, K. M., Stammerjohan, W. W., Bennett, R. J. and Drake, A. R. (2021). Psychological contract research in accounting literature. Advances in Accounting Behavioral Research, 24(1), pp. 117-137. https://doi.org/10.1108/S1475-148820200000024005