The effect of social and intellectual capital on fraud and money laundering in Iraq
| DOI | https://doi.org/10.1108/JMLC-12-2021-0142 |
| Published date | 16 February 2022 |
| Date | 16 February 2022 |
| Pages | 227-252 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
| Author | Mahdi Salehi,Hasanain Ali Mohammed Al-Msafir,Saeid Homayoun,Grzegorz Zimon |
The effect of social and
intellectual capital on fraud
and money laundering in Iraq
Mahdi Salehi
Department of Economics and Management,
Ferdowsi University of Mashhad, Mashhad, Iran
Hasanain Ali Mohammed Al-Msafir
Ferdowsi University of Mashhad, Mashhad, Iran
Saeid Homayoun
University of Gavle, Gävle, Sweden, and
Grzegorz Zimon
Department of Banking and Finance, Rzesz
ow University of Technology, Rzesz
ow, Poland
Abstract
Purpose –This study aims to assess therelationship between intellectual and social capital andfinancial
statement fraud and money laundering of Iraqi firms beforeand after the emergence of the Islamic State of
Iraq and Syria (ISIS). In otherwords, this paper seeks to answer the question of “whether the intellectualand
social capitalcan contribute favourably to fraud infinancial statements and money laundering or not.”
Design/methodology/approach –For the study, the multivariate regression model is used for
hypothesis testing. Research hypotheses have also been examined using asample of 35 listed firms on the
Iraqi Stock Exchange during 2012–2018, using the panel data technique-based multivariate regression
pattern and fixed-effectmodel.
Findings –The results show a negative and significantrelationship between social capital and intellectual
capital, fraud in financial statements and money laundering. Besides, the results indicate a positive and
significant effect of the interactivevariable of ISIS on the relationship between social and intellectual capital
and fraud in financialstatements and money laundering.
Originality/value –Since this paperis the first study on such a topic in the emergent markets, it provides
helpful information for the users,analysts and legal institutions about intellectual capitaland social capital
that contributes significantlyto fraud and money laundering of business units. Moreover, the study results
help the developmentof science and knowledge in this field and fill the existing gap in the literature.
Keywords Intellectual capital, Social capital, Fraud in financial statements, Money laundering
Paper type Research paper
Introduction
One of the most severe security phenomena of the present era is the emergenceand spread of
the Islamic State of Iraq and Syria (ISIS)terrorist group in West Asia and North Africa. This
phenomenon has affected all political, security, economic and cultural developments in this
region and has been studied by variousfields. This study aims to examine the impact of ISIS
on the relationship between social and intellectual capital and fraud and money laundering
of companies listed on the Iraq stock exchange (ISX). What is defined as capital today is
something beyond physical capital that was common in the past. Today, various capitals,
including social capital, have become essential, which has led to the promotion of physical
Effect of social
and
intellectual
capital
227
Journalof Money Laundering
Control
Vol.26 No. 2, 2023
pp. 227-252
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-12-2021-0142
The current issue and full text archive of this journal is available on Emerald Insight at:
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capital. For this reason, the presentstudy aims to investigate the impact of social capital on
intellectual capital and its components such as human capital, structural and relational
capital of companies listedon the ISX and it examines how this relationship has changed in
the periods before and after the presence of ISIS in Iraq. Wu (2005) states that in today’s
world, what is more important thanfinancial and physical resources is considered one of the
main components of competitiveadvantage in managing the intellectual capital of business
units. Intellectual capital management also primarily originates from driving social factors
(Chen et al.,2005).One of these social factors, which is one of the branches of management of
social phenomena, is social capital. Along with intellectual capital, it is one of the main
pillars of performance development and increasing productivity of business units (Erdem,
2013). Because social capital increases the desire for teamwork, it provides a happy and
lively environmentfor employees, ultimately leading to organisationalcommitment.
In this regard, intellectual capital andits components also guide employees towards the
business goals and lead to the improved overall performance of the organisation; this is one
of the goals that business units pursue.There has been a lot of research on social capital and
intellectual capital worldwide,except in Iraq, which shows that the two have a positive and
significant impact on each other. For example, Bueno et al. (2004)state that social capital is
intellectual capital. However, there has been no research in Iraq in this regard and no
research in the world on the impact of ISIS on this relationship. The presence of ISIS in the
Middle East had a profound effect on the economy and performance of the region’s
commercial units; it evenaffected stock market indices in the region. The presence of ISISin
Iraq had many negative effects on theIraq economy and its active business units. The fear
and terror that this terrorist group has inflicted on the region, especially Iraq, has been so
great that it has even affected these countries’financial, political, economic and social
relations. This group has had a very negative impact on the performance of Iraqi business
units and a more negative impact on thewelfare indicators of Iraq. Every year since 2007,
the Legatum Research Institute(Legatum prosperity index) publishes the welfareindicators
of 142 countries based on their performance in 9 areas of welfare (Such as social capital,
economy, business opportunities, governance, education, health, security and safety,
environment and individual freedoms). Iraq is also one of these countries, among the very
low-ranking countries in this ranking.One of the reasons for this fall is the presence of ISIS
in this country and the effects it has had on these nine areas.
Fraud and money laundering are common phenomenain business. According to Section
24 of the Iranian Standards on Auditing, fraud is the fraudulent act of one or more
managers, employeesor third parties to obtain an undue advantage and is any intentionalor
unlawful act. Therefore, the prevention and detection of significant fraud in financial
statements have always been of particular interest to investors, legislators, standardises,
managers and auditors. In addition to negatively affecting a country’s trade, fraud is also
one of the most critical obstacles to economic development because it weakens the law,
reduces trust in government institutions and calls democratic principles into question
(KPMG, 2007). Businesses with high intellectual capital are looking for high-quality
auditors; high audit quality is also one of the items that help prevent fraud in financial
statements (Nasl Mousavi et al., 2016; Naslmosavi and Jahanzeb, 2016). Therefore, it is
expected that business units with higher intellectual and social capital are less likely to
commit misbehavioursuch as fraud and money laundering. A review of research in this area
shows that most of the study conducted in money launderingis dedicated to examining the
effectiveness of anti-money laundering frameworks and related laws and regulations. For
example, Huang (2015) analyses the anti-money laundering regulations of the USA and
states the reasons for their implementation.Alberto (2016) examines the effectiveness of the
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