Is the fraud diamond perspective valid in Kenya?
| DOI | https://doi.org/10.1108/JFC-11-2019-0141 |
| Published date | 07 February 2020 |
| Date | 07 February 2020 |
| Pages | 810-840 |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
| Author | Kizito Ojilong’ Omukaga |
Is the fraud diamond perspective
valid in Kenya?
Kizito Ojilong’Omukaga
School of Graduate Studies, Research and Extension,
United States International University Chandaria School of Business,
Nairobi, Kenya
Abstract
Purpose –The purpose of this study wasto determine the influence of the elements of the fraud diamond
theory in detecting financial statement fraud among non-financial firms in Kenya. Secondary data used to
calculate ratios and figures representingthe study variables was collected using a checklist for each of the
targetedfirms listed in the Nairobi Securities Exchange in Kenyafor the 2013-2017 period.
Design/methodology/approach –Secondary data used to calculate ratiosand figures representing the
study variables was collected usinga checklist for each of the targeted firms listed in the Nairobi Securities
Exchange in Kenya for the 2013-2017 period.Convenience sampling technique was used to come up with a
sample size of 35 out of thetargeted population of 45 non-financial firms listed in Kenya (78% representation).
This sample sizewas representative enough of the targeted population.
Findings –The results strongly supported that all the four elements of the fraud diamond triangle
influenced financial statement fraud in Kenya. However,using three parameters, namely R
2
, predicted sign
and standard error, to comparethe applicability of either the Yoon et al. (2006) or the modified Jones (1991),
our study findings are mixed. It is therefore imperativethat a new model should be developed in detecting
earnings management in the Kenyan context. Note that including other variables will to a greater extent
increase the explanatory power in detectingearnings management practiced by non-financial firms listed in
Kenya.
Research limitations/implications –Use of secondary information in the study was one limitation.
Certain financial informationwas missing from some of the targeted firms’official websites and the Nairobi
SecuritiesExchange research handbooks. The researcher ensuredthat only non-financial firms whose audited
financial statementswere easily accessible were included in the study.Firms whose records were not readily
availablewere excluded from the survey.
Practical implications –Practically, this study enables regulatory authorities in Kenya to understand
the extent with which each element of the fraud diamond theory could be relied on in detecting financial
statement fraud. Moreover,it will advise them on the areas to lay more emphasis when attempting to detect
financialstatement fraud using this model.
Originality/value –The main value of this study is the determination of the key elements of the fraud
diamond theory, which have influence on financial statement fraud among non-financial firms listed in
Kenya.
Keywords Financial statement fraud, Fraud diamond
Paper type Research paper
1. Introduction
Recently, corporate financial accounting scandals have rocked the global financial sector.
Companies such as WorldCom, Enron, Tyco and Global Crossing are some of the most
prominent firms that suffered from the devastating effects of financial fraud. These costly
scandals have promptedcompanies’world over to be more concerned than ever beforeabout
fraud, which has eroded investors’confidence in the financial markets (Zahra et al.,2007).
Consequently, large organizations have been compelled to hire professionals such as
JFC
28,3
810
Journalof Financial Crime
Vol.28 No. 3, 2021
pp. 810-840
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-11-2019-0141
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
forensic auditors to assist management in coming up with fraud preventive measures to
curb financial fraud in their organizations. Sithic and Balasubramanian (2013) defined
financial fraud as “a deliberateact that is contrary to law, rule, or policy with intent to obtain
unauthorized financialbenefit.”No doubt that the collapse of high-profile companies like the
ones mentioned above has left major doubts in the investors mind regarding the
effectiveness of the quality of financial reporting, corporate governance and reliability of
audit functions in the affected firms. Many factorshave been linked to these scandals. They
include lack of vigilant oversight from the board; self-seeking management; improper
business conducted by senior managers; ineffective internal audit functions; lenient
regulations; inadequate financial disclosures and shareholder’s inattentiveness (Sahiti and
Bektashi, 2015).
The dominant framework concerning fraud is commonly known as the “fraud triangle.”For
fraud to occur, the fraud triangle argued that three conditions must be present, namely, pressure
or incentive that motivates an individual to commit fraud for instance personal financial
problems; an opportunity for fraud to be perpetrated for instance weaknesses in internal controls
and an attitude that enables the individual to rationalize fraud or commit it Cressey (1950).
Wolfe and Hermanson (2004) argued that in an environmentfull of all the three elements
of the fraud triangle theory,namely, perceived pressure, opportunity and rationalization,the
equation for fraud to occur is not complete unless the fourth element, namely, capability is
present. The capability element is what definesthe potential perpetrator’s ability and skills
to commit fraud.
Wolfe and Hermanson (2004)further explained that an:
[...] opportunity opens the door for fraud to happen. Pressure i.e. incentive and rationalization are
intended to draw the potential perpetrator towards it. However, for the whole process to be
complete, the potential perpetrator must have the capability to identify and recognize the
existence of the doorway as an opportunity and be able to take advantage of it by walking
through it, not just once, but repeatedly.
With the introduction of this fourth element affecting individuals’decision to commit unethical
behavior, organizations and auditors need to understand their employees’individual personal
abilities and traits to be able to assess the risk of fraudulent behaviors posed by their
employees in positions they hold in the organization or the public sector in general.
Several studies have been carried out in the past regarding various elements of fraud
detection in Kenya. They include Kuria and Muturi (2015),Kiprono and Ng’ang’a (2018),
Masengeli et al. (2018) and Chepkoech and Rotich (2017). Despite the abovementioned
studies, the researcher is not aware of any study that has embraced all the four components
of the fraud diamond theory as promulgated by Yoon et al. (2006) in detecting financial
statement fraud or Dechow et al. (1995) commonly known as the modified Jones (1991)
model. This study is therefore intended to address this concern by evaluating the influence
of pressure, opportunity,rationalization and capability on financial statement fraud.
2. Literature review
Fraud has grown rapidly over the last few years and there is a growing trend for large
organizations to consider hiring professionals such as forensic accountants to reduce the
pressure and potential of occupationalfinancial frauds. According to Nawawi and Salin (2018),
occupational fraud is the use of one’s occupation for personal enrichment through the deliberate
misuse of or misapplication of the employing organization’s resources or assets. Irrespective of
the sector, a wide category of crimes, swindles and employee trust violations fall under the
category of fraud. Reurink (2018) defines fraud as an intentional act made by one or more
Fraud
diamond
perspective
811
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