Fraud triangle in public procurement: evidence from Indonesia
| Published date | 07 October 2019 |
| Date | 07 October 2019 |
| DOI | https://doi.org/10.1108/JFC-11-2018-0121 |
| Pages | 951-968 |
| Author | Ni Wayan Rustiarini,Sutrisno Sutrisno,Nurkholis Nurkholis,Wuryan Andayani |
Fraud triangle in public
procurement: evidence
from Indonesia
Ni Wayan Rustiarini
Student at Department of Accounting, Brawijaya University, Malang, Indonesia
and Lecturer at Department of Accounting, Mahasaraswati Denpasar,
Denpasar, Indonesia
Sutrisno Sutrisno,Nurkholis Nurkholis and Wuryan Andayani
Department of Accounting, Brawijaya University, Malang, Indonesia
Abstract
Purpose –This study aims to examine the effects of fraud triangle (pressure, opportunity and
rationalization) on individual fraudulent behavior in Indonesian public procurement. Empirical research in
this area is relativelysparse.
Design/methodology/approach –Data werecollected using laboratory experiments.
Findings –The results revealed that fraudulent behavior is higher when an individualhas high pressure
and high opportunity.These factors play an important role in determiningindividual rationalization. Most of
participants used “displacing responsibility”to rationalize their actions.This study also demonstrated that
negativeaffect mediates the relationship between fraudulent behaviorand rationalization.
Research limitations/implications –First, fraudulent behavior research cannot be separated from
social desirability bias. Second, the experiments only involved individual decision-making, not in groups.
Finally,this study did not examine the effectivenessof rationalization in reducing negativeaffect.
Practical implications –Over the years, the government has only focused on the identification of
pressure and reduction of opportunities, but ignored individual psychological reasons. Considering that
procurement fraudis always increasing, the government must more focus on individual reasons to designan
effectiveprevention and detection system.
Social implications –There are various conflicts of interest in public procurement budgeting. These
conflicts can distort resource allocation and causes budget leakage. As a result, the government is
incapacitatedto achieve social and economic goals of the community.
Originality/value –There is limited research aboutfraud in public procurement budgeting, especially in
developingcountries. In addition, the fraud triangleresearch, which focuses on rationalizationis still limited.
Keywords Fraud, Rationalization, Public procurement
Paper type Research paper
Introduction
Fraudulent actions in public procurement process[1] are not only a risk but also the
foundation for serious problems in organizations (Murray, 2014). The number of fraudulent
activities increases on a yearly basis (European Commission, 2014;Kroll, 2013;PwC, 2014).
The opportunity to commit fraud increasesbecause of the usage of a large budget in public
procurement by different countries (Plavsic, 2004). Public procurement budget for each
country has been found to be around 10-30 per cent of national gross domestic product
(GDP), and also, discovered to make up 18.42 per cent of the world’s GDP (United Nations
Office on Drugs and Crime, 2013). In developing countries,budget on public procurement is
Fraud triangle
in public
procurement
951
Journalof Financial Crime
Vol.26 No. 4, 2019
pp. 951-968
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-11-2018-0121
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
around 70 per cent of the total budget (Basheka et al., 2013).Ironically, around 20-25 per cent
has leaked because of procurement malpractice (UNODC, 2013). Despite all these, there is
limited researchthat analyze fraudulent behavior in public procurement(Murray, 2014).
In general, Southeast Asia countries has over the years been experienced various public
procurements fraud, including Indonesia with suffered widespread corruption and have
encountered significantobstacles in effectively combating it (Jones, 2009). About 40 per cent
of Indonesian Government budget ismeant for public procurement (Corruption Eradication
Commission, 2014). However, over the past 10 years, cases of fraud in public procurement
took second rank after bribery (Corruption Eradication Commission, 2014). The most
phenomenal case is procured electronicidentity cards project, which resulted in large scale
losses. Up to 49 per cent of the budgetor about Rp 2.5tn (US$13m) were distributed to public
officials and lawmakers for the approval of the project (Kompas.com, 2017). Therefore, it is
pertinent to have an understanding of the situational factors that give motivation to
perpetrators in justifyingthis criminal act.
Actually, fraudulent acts in publicprocurement begins from the planning stage, through
the budgeting process. In most organizations for economic co-operation and development
member countries, this phase full of conflicts of interest. That condition can distortion of
resources allocation and increase fraud opportunity (European Commission, 2014). In
Indonesia, budgeting process as the root of procurement problems (Corruption Eradication
Commission, 2014). Approximately 98 per cent of local government corruption occurred at
the budget planning stage (Warta Ekonomi, 2017). Despite the budgeting phase presents a
great opportunity for fraud,previous research have focused on procurement implementation
(Auriol, 2006;Buchner et al., 2008;Han et al.,2012;Wihardja, 2010). Based on these
limitations, this study focus on procurement budgeting fraud, particularly in developing
country.
The major conceptual framework is the fraud triangle.According to this framework, the
occurrence of fraud is based on three elements,namely, pressure/motivation[2], opportunity
and rationalization (Cressey, 1953). The first two elements as common fraud predictors
(Hogan et al.,2008;Murphy, 2012;Wells, 2004), but only few researchers have focused on
rationalization (Hogan et al., 2008;Murphy, 2012). Cressey’s interview result revealed that
rationalization is an important antecedent in fraudulent acts (Reinstein and Taylor, 2017).
This study used cognitivedissonance theory lens to analyze individuals rationalization.
This study also examines the negative affect variables that individuals feel when
committing fraud. Individuals that engage in unethical acts experience a negative affect
even though they have moral disengagement (Mayhew and Murphy, 2014). Mayhew and
Murphy (2014) also found that misreporters feel increased negative affect, consistent with
Murphy (2012) findings. Individuals experience increased feelings of guilt and discomfort
when they have motivation and opportunity to misreport financial statements (Murphy,
2012).
In this study, pressure and opportunityas predictors of public procurement fraud. It was
also discovered that negative affect plays a mediation role in the relationship between
fraudulent behavior and rationalization. Most individuals have a tendency of using
“displacing responsibility”rationalization in justifying their fraudulent act (Mayhew and
Murphy, 2014).
This research contributes to accounting literature and it can be implemented in public
sector organizations.The findings support the fraud triangle theory, particularlyexplain the
rationalization of individual cognitive processes when involved in fraudulent acts. The
practical implication for public sector organizations are to understand the root causes of
procurement fraud as a whole. Over the years, the government has only focused on the
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