COVID-19 Pandemic and Fraudulent Financial Reporting Motives in Emerging Markets: A Comparative Study

Authors

1 Department: Economics and Administrative Sciences, Ferdowsi University of Mashhad Mashhad, Iran.

2 Department: Economics and Administrative Sciences, Al-Furat- Al-Awsat Technical University. Kufa, Iraq.

3 Department: Economics and Administrative Sciences, Ferdowsi University of Mashhad. Mashhad, Iran.

Abstract

The study aims to investigate and comparatively identify the effects of the COVID-19 pandemic on fraudulent reporting motives in three emerging markets, namely Iran, Iraq, and Egypt. The present research method is a descriptive survey. The statistical population consists of independent auditors in three countries, and field methods and questionnaires have been used to collect data. The results indicate that COVID-19 pandemic affects management motives for committing fraud. They include respectively: sudden personal financial needs, need to receive financial resources for firm, pressure from owners in family companies, tax incentives, greed, government pressure in state-owned firms, concealing financial distress, avoidance of exclusion or deterioration in stock market, trust and self-esteem, tendency to increase compensation/payment of the management, pressure due to threats and compulsion, concealment of personal and illegal exploitation of assets, implementation or going beyond analysts’ forecasts, high levels of market competition, revenge, manager’s culture and values, management ideology or beliefs, and comparison of social status. This is the first study to investigate and compare the impact of the COVID-19 pandemic on fraudulent reporting incentives in emerging markets. Further, this study was conducted in three countries of Iran, Iraq, and Egypt, which have different contextual conditions (political, economic, cultural, etc.), indicating the impact of environmental conditions on the effects of Covid outbreaks. It can help stakeholders, including legislators,  capital market regulators and auditors in other markets, especially emerging markets, to deal with the risk of fraudulent reporting during the COVID -19 and other similar crises.

Keywords

References

Akther, T. and Xu, F. (2020). Existence of the Audit Expectation Gap and Its Impact on Stakeholders’ Confidence: The Moderating Role of the Financial Reporting Council. International Journal of Financial Studies, 8(1), 1-25. https://doi.org/10.3390/ijfs8010004
Alao, B. B. and Gbolagade, O. L. (2020). COVID 19virus Pandemic and Business Disruption: The Consideration of Accounting Roles in Business Revival. International Journal of Academic Multidisciplinary Research, 4(5), 108-115. https://ssrn.com/abstract=3614521
Albitar, K., Gerged, A.M., Kikhia, H. and Hussainey, K. (2021). Auditing in times of social distancing: the effect of COVID-19 on auditing quality, International Journal of Accounting & Information Management, 29(1), 169-178. https://doi.org/10.1108/IJAIM-08-2020-0128
Ali, M., Alam, N. and Rizvi, S. A. R. (2020). COVID 19virus (COVID-19)-An epidemic or pandemic for financial markets. Journal of Behavioral and Experimental Finance, 27(25), 100-341.‏ https://doi.org/10.1016/j.jbef.2020.100341
Ariyanto, D., Jhuniantara, I., Ratnadi, N., Putri, I. and Dewi, A. (2021). Detecting fraudulent financial statements in pharmaceutical companies: Fraud pentagon theory perspective. Accounting, 7(7), 1611-1620. https://doi.org/10.5267/j.ac.2021.5.009
Arnold, C. (2020). Summary of COVID - 19 audit considerations. International    Federation of    Accountants, New York, USA.
Bagherpour, M. A., Monroe, G. S. and Shailer, G. (2014). Government and managerial influence on auditor switching under partial privatisation. Journal of Accounting and Public Policy, 33(4), 372-390.‏ http://dx.doi.org/10.1016/j.jaccpubpol.2014.04.004
Baret, S., Celner, A., O’Reilly, M. and Shilling, M. (2020). COVID-19 potential implications for the banking and capital markets sector. Maintaining Business And Operational Resilience, 11(8), 74-88.
Barua, S. (2020). Understanding COVID 19nomics: The economic implications of the COVID 19virus (COVID-19) pandemic. Working Paper,‏ http://dx.doi.org/10.2139/ssrn.3566477   
Beneish, M. D. and Vargus, M. E. (2002). Insider trading, earnings quality, and accrual mispricing. The accounting review, 77(4), 755-791.‏ https://doi.org/10.2308/accr.2002.77.4.755
Bergstresser, D. and Philippon, T. (2006). Ceo incentives and earnings management. Journal of financial economics, 80(3), 511-529.‏ https://doi.org/10.1016/j.jfineco.2004.10.011
Bhuiyan, A. I., Sakib, N., Pakpour, A. H., Griffiths, M. D. and Mamun, M. A. (2021), COVID-19-related suicides in Bangladesh due to lockdown and economic factors: case study evidence from media reports. International Journal of Mental Health and Addiction, 19(6), 2110-2115. https://doi.org/10.1007/s11469-020-00307-y
Bora, D. and Basistha, D. (2021). The outbreak of COVID‐19 pandemic and its impact on stock market volatility: Evidence from a worst‐affected economy. Journal of Public Affairs, 21(4),‏ 1-10. https://doi.org/10.1002/pa.2623
Cennimo, D.J. (2020), What is COVID–19, New Jersey Medical School, America.
Chaney, P. K. and Lewis, C. M. (1995). Earnings management and firm valuation under asymmetric information. Journal of corporate finance, 1(3-4), 319-345.‏ https://doi.org/10.1016/0929-1199(94)00008-I
Choi, J. H. and Gipper, B. (2021). Fraudulent financial reporting and the consequences for employees. Working Paper, Korea ,  http://dx.doi.org/10.2139/ssrn.3346759
Chow, C. W. (1982). The demand for external auditing: Size, debt and ownership influences. Accounting review, 57, 272-291.‏ https://www.jstor.org/stable/247014
Christie, A. A. and Zimmerman, J. L. (1994). Efficient and opportunistic choices of accounting procedures: Corporate control contests. Accounting review, 69, 539-566.‏ https://www.jstor.org/stable/248431
Claessens, S. and Fan, J. P. (2002). Corporate governance in Asia: A survey. International Review of finance, , 3(2), 71-103.‏ https://doi.org/10.1111/1468-2443.00034
Cohn, M. (2021), Companies have trouble detecting fraud during COVID. University of Pennsylvania, New York, USA.
Cressey, D. R. (1953). Other people’s Money: A study of the social psychology of embezzlement. Glenco", IL: Free Press. https://doi.org/10.1086/221475
Dechow, P. M. and Skinner, D. J. (2000). Earnings Management: Reconciling the View of Accounting Academics, Practitioners, and Regulator. Accounting Horizons, 14(2), 235-250. https://doi.org/10.2308/acch.2000.14.2.235
Dechow, P. M., Sloan, R. G. and Sweeney, A. P. (1996). Causes and consequences of earnings manipulation: An analysis of firms subject to enforcement actions by the Sec. Contemporary accounting research,  13(1), 1-36.‏  https://doi.org/10.1111/j.1911-3846.1996.tb00489.x
Defond, M. L. and Jiambalvo, J. (1993). Factors related to auditor‐client disagreements over income‐increasing accounting methods. Contemporary Accounting Research, ,  9(2) , 415-431.‏ https://doi.org/10.1111/j.1911-3846.1993.tb00889.x
DeFond, M. L. and Jiambalvo, J. (1994). Debt covenant violation and manipulation of accruals. Journal of accounting and economics, 17(1), 145-176.‏ https://doi.org/10.1016/0165-4101(94)90008-6
Dorris, B. (2020). COVID 19virus Pandemic Is a Perfect Storm for Fraud. Association of Certified Fraud Examiners, USA.
Fan, J. P. H. and Wong, T. J. (2005). Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia. Journal of Accounting Research, 73(1), 35-72.  https://doi.org/10.1111/j.1475-679x.2004.00162.x
Fernandes, N. (2020). Economic effects of COVID 19virus outbreak (COVID-19) on the world economy. Working Paper, European. http://dx.doi.org/10.2139/ssrn.3557504
Gaver, J. J., Gaver, K. M. and Austin, J. R. (1995). Additional evidence on bonus plans and income management. Journal of accounting and Economics, 19(1), 3-28.‏ https://doi.org/10.1016/0165-4101(94)00358-C
Gepp, A. (2015). Financial statement fraud detection using supervised learning methods, Ph.D, Bond University, Australia, Robina.
Goodell, J. W. (2020). COVID-19 and finance: Agendas for future research. Finance Research Letters, 35(40), 1-5.‏ https://doi.org/10.1016/j.frl.2020.101512
Gordon, E. A., Henry, E., Louwers, T. J. and Reed, B. J. (2007). Auditing related party transactions: A literature overview and research synthesis. Accounting Horizons,  21(1), 81-102. https://doi.org/10.2308/acch.2007.21.1.81
Gul, F. A., Chen, C. J. and Tsui, J. S. (2003). Discretionary accounting accruals, managers' incentives, and audit fees. Contemporary accounting research, 20(3), 441-464.‏ https://doi.org/10.1506/686E-NF2J-73X6-G540
Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of accounting and economics, , 7(1-3), 85-107.‏ https://doi.org/10.1016/0165-4101(85)90029-1
Healy, P. M. and Palepu, K. G. (1993). The effect of firms' financial disclosure strategies on stock prices. Accounting horizons, 7(1), 1-11.
Healy, P. M. and Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting horizons,  13(4),  365-383.‏ https://doi.org/10.2308/acch.1999.13.4.365
Holthausen, R. W. (1990). Accounting method choice: Opportunistic behavior, efficient contracting, and information perspectives. Journal of accounting and economics, 12(1-3), 207-218.‏ https://doi.org/10.1016/0165-4101(90)90047-8
Holthausen, R. W., Larcker, D. F. and Sloan, R. G. (1995). Annual bonus schemes and the manipulation of earnings. Journal of accounting and economics, s, 19(1), 29-74.‏ https://doi.org/10.1016/0165-4101(94)00376-G
Horwarth, C. (2011). The Mind Behind the Fraudster Crime: Key Behavioral and Environmental Element. USA Crowe Horwarth International. https://www.fraudconference.com/uploadedFiles/Fraud_Conference/Content/Course-Materials/presentations/23rd/ppt/10C-Jonathan-Marks.pdf
International Auditing and Assurance Standards Board (IAASB). (2009). International Standard on Auditing No. 240 (ISA No.240): The Auditors’ Responsibilities Relating to Fraud in an Audit of Financial Statements. https://www.ifac.orq
Ivanov, D. (2020). Predicting the impacts of epidemic outbreaks on global supply chains: A simulation-based analysis on the COVID 19virus outbreak (COVID-19/SARS-CoV-2) case. Transportation Research Part E: Logistics and Transportation Review, 136(23),‏ 1-14. ‏ https://doi.org/10.1016/j.tre.2020.101922
Jensen, M. C. and Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.‏ https://doi.org/10.1016/0304-405X(76)90026-X
Kaka, E. J. (2021), Covid-19 and Auditing. Journal of Applied Accounting and Taxation, 6(1),‏ 1-10.‏ https://doi.org/10.30871/jaat.v6i1.2311
Kaka, E.J. (2020). The COVID-19 crisis, risk compliance and its aftermath on professional accountants. Indonesian Journal of Accounting and Governance, 4(1), 65-81. https://doi.org/10.36766/ijag.v4i1.61
Kakati, S. and Goswami, C. (2019), Factors and motivation of fraud in the corporate sector: A literature review, Journal of Commerce & Accounting Research, 8(3), 86-96. https://www.researchgate.net/publication/337388684
Kang, J. K. and Shivdasani, A. (1995). Firm performance, corporate governance, and top executive turnover in Japan. Journal of financial economics,  38(1), 29-58.‏ https://doi.org/10.1016/0304-405X(94)00807-D
Kaplan, S. N. and Minton, B. A. (1994). Appointments of outsiders to Japanese boards: Determinants and implications for managers. Journal of financial economics, ,  36(2), 225-258.‏ https://doi.org/10.1016/0304-405X(94)90025-6
Karpoff, J. M. (2020). The future of financial fraud. Journal of Corporate Finance, 66(4), 1-12. https://doi.org/10.1016/j.jcorpfin.2020.101694   
Kassem, R. (2018). Exploring external auditors’ perceptions of the motivations behind management fraud in Egypt – a mixed methods approach, Managerial Auditing Journal, 33(1), 16-34. https://doi.org/10.1108/MAJ-11-2016-1470
Kassem, R. and Higson, A. (2015). Combating fraud: is Egypt ready? Insights from the literature, Journal of Emerging Trends in Economics and Management Sciences, 6(5), 290-298. https://hdl.handle.net/10520/EJC181664
Kazemian, S., Said, J., Hady Nia, E. and Vakilifard, H. (2019). Examining fraud risk factors on asset misappropriation: evidence from the Iranian banking industry, Journal of Financial Crime, 26(2), 447-463. https://doi.org/10.1108/JFC-01-2018-0008
Kluger, B. D. and Shields, D. (1989). Auditor changes, information quality and bankruptcy prediction. Managerial and Decision Economics, 10(4), 275-282.‏ https://www.jstor.org/stable/2487342
Levy, H. B. (2020). Financial Reporting and Auditing Implications of the COVID-19 Pandemic, The CPA Journal, 90(5), 26-33.‏
Mitchell, D. and Dougall, M. (2020). COVID-19: Protecting business from fraud and corruption. Australia, New Zealand.
Niesche, C. (2020). How coronavirus heightens the risk of fraud. Retrieved July, 7, 2021.
Parsons, N ., Winrow. P. and Moyser, A. (2020). Financial reporting implications of COVID-19, Financier Worldwide Magazine, London, United Kingdom.
Poole, V. (2020). Accounting consideration related to COVID 19virus disease    2019.    IFRS in Focus, London, United Kingdom.
Rae, K. and Subramaniam, N. (2008). Quality of internal control procedures: Antecedents and moderating effect on organisational justice and employee fraud. Managerial Auditing Journal, , 23(2), 104-124.‏ https://doi.org/10.1108/02686900810839820
Rahimikia, E., Mohammadi, S., Rahmani, T. and Ghazanfari, M. (2017). Detecting corporate tax evasion using a hybrid intelligent system: A case study of Iran, International Journal of Accounting Information Systems, 25(1), 1-17. https://doi.org/10.1016/j.accinf.2016.12.002
Ramamoorti, S., Morrison, D. and Koletar, J. W. (2009). Bringing Freud to Fraud: Understanding the state-of-mind of the C-level suite/white collar offender through “ABC” analysis, Institute for Fraud Prevention (IFP) at West Virginia University, Morgantown,‏ United States
Rashwan, A. R. and Alhelou, E. (2020). The Effects of the Covid-19 Pandemic on the Company's Sustainability under International Accounting Standards, International Journal of Academic Accounting, Finance & Management Research,‏ 4(7), 34-51. http://dspace.alazhar.edu.ps/xmlui/handle/123456789/628
Sallal, F., Bagherpour, M.A. and Saei, M.J. (2021). Fraudulent financial reporting motivations in emerging markets, Journal of Financial Crime, 28(3), 892-905. https://doi.org/10.1108/JFC-09-2020-0188
Sansa, N. A. (2020). The Impact of the COVID-19 on the Financial Markets: Evidence from China and USA, Electronic Research Journal of Social Sciences and Humanities, 2(2), 29-39. http://dx.doi.org/10.2139/ssrn.3567901
Schwartz, K. B. and Menon, K. (1985). Auditor switches by failing firms. Accounting Review, 60, 248-261.‏ https://www.jstor.org/stable/246789
Shi, G., Sun, J. and Zhang, L. (2018). Product market competition and earnings management: A firm‐level analysis, Journal of Business Finance & Accounting, 45(5-6), 604-624. https://doi.org/10.1111/jbfa.12300
Shi, W., Connelly, B. L. and Hoskisson, R. E. (2017). External corporate governance and financial fraud: Cognitive evaluation theory insights on agency theory prescriptions, Strategic Management Journal, 38(6), 1268-1286.‏ https://doi.org/10.1002/smj.2560
Sikder, M., Zhang, W. and Ahmod, U. (2020). The consequential impact of the Covid-19 pandemic on global emerging economy, American Journal of Economics, 10(6),  325-331.‏ https://doi.org/10.5923/j.economics.20201006.02
Stiglitz, J. (2020). Internationalising the Crisis. Project Syndicate, Columbia, United States.
‏Sule, S., Yusof, N. Z. M. and Bahador, K. M. K. (2019). Users’ Perceptions on Auditors’ Responsibilities for Fraud Prevention, Detection and Audit Expectation GAP in Nigeria, Asian Journal of Economics, Business and Accounting, 10(1), 1-10.‏ https://doi.org/10.9734/AJEBA/2019/46832
Sunardi, S. and Amin, M. N. (2018). Fraud detection of financial statement by using fraud diamond perspective. International Journal of Development and Sustainability, 7(2),  878-891.
Šušak, T. (2020). The effect of regulatory changes on relationship between earnings management and financial reporting timeliness: The case of COVID-19 pandemic, Zbornik radova Ekonomskog fakulteta u Rijeci: časopis za ekonomsku teoriju i praksu, 38(2), 453-473.‏ https://doi.org/10.18045/zbefri.2020.2.453
Teguh, K. M. and Kristanto, A. B. (2020). Company Characteristics and the Tendency of fraudulent financial reporting. Jurnal Akuntansi Bisnis, 13(2), 130-142.  http://dx.doi.org/10.30813/jab.v13i2.2145
Teoh, S. H., Welch, I. and Wong, T. J. (1998). Earnings Management and the Post-Issue Performance of Seasoned Equity Offerings. Journal of Financial Economics, 50,  63-99.
Thorps, D. and Harding, T. (2020). Auditing fraud risk during a pandemic, Indiana Wesleyan University, North Carolina, United States
Tysiac, K. (2021). Deterring and detecting fraud at a time of heightened risk, University of Notre Dame, North Carolina, United States
van Ruth, S. M. (2020). Impact of the COVID-19 pandemic on food fraud vulnerability in food supply networks, Wageningen Food Safety Research.‏ Wageningen, Netherlands.
Walczak, S. (1999). Gaining competitive advantage for trading in emerging capital markets with neural networks. Journal of Management Information Systems, 16(2), 177-192.‏ https://doi.org/10.1080/07421222.1999.11518251
Wang, Q. (2020). Cost of the Accounting Scandal of Luckin Coffee to Multiple Aspects and the Influence Under Current Economy and Pandemic Time, In 2020 2nd International Conference on Economic Management and Cultural Industry (ICEMCI2020), Beijing, China.
Waraich, S. (2020). Luckin Coffee’s Accounting Scandal: Leaving Investors with a Bitter Taste. International Journal of Economics & Finance Research & Applications, 4(1), 40-45.
Watts, R. L. and Zimmerman, J. L. (1983). Agency problems, auditing, and the theory of the firm: Some evidence. The journal of law and Economics, 26(3), 613-633.‏ https://doi.org/10.1086/467051
Watts, R. L. and Zimmerman, J. L. (1986). Positive accounting theory‏, New Jersey, Prentice-Hall.
Watts, R. L. and Zimmerman, J. L. (1990). Positive accounting theory: a ten year perspective”. Accounting review, 131-156.‏ https://www.jstor.org/stable/247880
Wengler, D. (2016). Increasing Auditor Sensitivity to the Risk of Fraudulent Financial Reporting: Assessing Incentives and Pressures on Top Management, University of South Florida, Florida, United States. https://digitalcommons.usf.edu/etd/6428
Widhoyoko, S. A. (2017). Fraud in Rights and Contracts: A Review of Bankruptcy Case of Livent Inc. Based on Governance, Risk, and Compliance (GRC) Framework. Binus Business Review, 8(1), 31-39.‏ https://doi.org/10.21512/bbr.v8i1.1827
Wójcik, D. and Ioannou, S. (2020). COVID‐19 and Finance: Market Developments So Far and Potential Impacts on the Financial Sector and Centres. Tijdschrift voor economische en sociale geografie, 111(3), 387-400.‏ https://doi.org/10.1111/tesg.12434
Wolfe, D. T. and Hermanson, D. R. (2004). The fraud diamond: Considering the four elements of fraud.‏ The CPA Journal, 38-42. https://digitalcommons.kennesaw.edu/facpubs
Zhang, D., Hu, M. and Ji, Q. (2020). Financial markets under the global pandemic of COVID-19. Finance Research Letters, 36(33), 1-6.‏ https://doi.org/10.1016/j.frl.2020.101528
Zhou, H., Sun, G., Fu, S., Jiang, W. and Xue, J. (2019). A Scalable Approach for Fraud Detection in Online E-Commerce Transactions with Big Data Analytics,‏ CMC: Computers, Materials & Continua, 60(1), 179-192. https://doi.org/10.32604/cmc.2019.05214
International Journal of Business and Development Studies
Volume 14, Issue 1
March 2022
Pages 119-146

Files

Share

How to cite

Statistics