Abstract
In this paper, we analyze the governance, control and media patterns underlying financial reporting and asset misappropriation frauds. We argue that the fraud triangle framework (incentive, opportunity, rationalization) that underlies most prevention and detection practices provides a partial picture of the fraud landscape and does not pay enough attention to its dynamic nature. In our view, a missing ingredient is managerial hubris, fed by fawning media and financial market participants, which ignites and accelerates the fraud triangle. Hubris is characterized by exaggerated self-confidence, arrogance and oblivion to reality. Focusing on the population of financial frauds in Canadian publicly traded firms during the 1995-2005 period, we show that hubris, i.e., irrationality, may be a critical factor to understand corporate financial frauds. Our findings also suggest that fraud patterns may differ across countries, constrasting with the adoption of global auditing standards.
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