Are labor contracts efficient to combat fraud?
| Date | 17 July 2009 |
| DOI | https://doi.org/10.1108/13590790910973098 |
| Pages | 255-261 |
| Published date | 17 July 2009 |
| Author | Ricardo Azevedo Araujo |
| Subject Matter | Accounting & finance |
Are labor contracts efficient
to combat fraud?
Ricardo Azevedo Araujo
Catholic University of Brasilia, Brasilia, Brazil
Abstract
Purpose – The purpose of this paper is to approachthe issue of fraud preventionby using the theory of
incentivesto design a mechanism that makes employeesto reveal their true type, that is, theirwillingness
or abilityto combat corruption. Basedon this information, themanager may propose particularcontracts
for different typesof employee.
Design/methodology/approach – Themechanism design approachassumes that the manager or the
principal is entrusted with the power of making the employees agents – to provide effort. This
methodology isadapted to assess the efficiency of the laborcontracts to prevent fraud.
Findings – The paper shows that the labor contracts are efficient to combat fraud when the type of
the employee, measuredby his/her willingness to cope with fraudprevention is known by the manager.
If this worker’sprivate information notavailable for the manager, thenthe contract is not efficient dueto
the problemof hidden information that leads to a moral hazard.Only a second-best solution is attainedin
this case.
Research limitations/implications – The labor contracts are subject to the problem of hidden
information.
Practical implications – This is a theoretical result that points out the importance of using labor
contracts in orderto stimulate workers to cope with fraud prevention.
Originality/value – Thepaper presents an attemptto apply an incentive theoreticapproach to evaluate
the efficiencyof the labor contractscheme of combating fraud.Also, it reveals the fragilepoints of such an
approach and how to overcomethem.
Keywords Fraud, Labour market,Contracts of employment, Incentives(psychology),
Employee behaviour
Paper type Research paper
1. Introduction
In this paper, an incentive-based approach to fraud prevention is studied. The analysis
departs from the consensus that managers and employees play an important role in the
fraudprevention since a great dealof combat against corruptiondeparts from their reports
on suspiciousactivities. In the fight against money laundering,for instance, employeesof
financial institutions play a centralrole in reporting suspiciousactivities. They should be
permitted or requiredto report promptly their suspicious to managers that may pass the
information to competent authorities. Further investigations carried on by competent
authorities may lead to theprosecution of offenders.
However, it is not a consensus that employees are willing to combat fraud mainly if
they do not find the right incentives to do so. Bolton and Dewatripont (2005, p. 338), for
instance, presents an exposition of the auditing problems in which ther e exists the
possibility ofcollus ion amongstmanagers – supervi sors – and workers – supervisees
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
Visiting fellow of the Department of Economics of University of Siena with financial support
from the Brazilian Council of Science and Technology (CNPq).
Are labor
contracts
efficient?
255
Journal of Financial Crime
Vol. 16 No. 3, 2009
pp. 255-261
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590790910973098
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