IntroductionIt has been established that the impact of fraud is detrimental to all societies, which also explains poor economic performance especially in the context of developing economies. The current business environments have experienced an upsurge in fraud and many academic researchers and business participants have investigated the factors involved in fraud and corruption. Also, the scope of fraud and its consequences and magnitude have been discussed in the literature. It is generally agreed by researchers of fraud that cost of fraud is unknown. This is because the nature of fraud is hidden so the cost of fraud is also hidden and incalculable. In addition, fraud causes intangible damage such as reputational and social damage to the organization and these costs are not easy to estimate. Many researchers believe that pervasiveness of fraud has to be considered as one of the important factors that contributes to economic growth, the effectiveness of public management, strategic decision making for investment, and forming international relationships. The Oxford English Dictionary (2009) defines fraud as - wrongful or criminal deception intended to result in financial or personal gain. In academic literature fraud is defined as leading to personal enrichment by circumventing the prevention measures without necessarily being prosecuted by judiciary systems (Phua, 2005). Public sector fraud is pervasive and fraud is present in all the mechanism of development in different forms, magnitude and consequences. Public sector fraud is broadly defined as abusing an organizational system for personal gains. In this work, we study the effect of economic variables on fraud. Economic variables reflect the economic status of the country and public as a whole. The data set used in this research were obtained from 60 developing countries in the time period of 1995 to 2014. In this research, we used the world bank definition of developing and developed countries. We found that there is a service sector - fraud positive association and an industrial sector - fraud negative association in the context of developing counties subjected to our study.Value added reflects the contribution of labor and capital to production. In this study, we used value added in industry and service sector. Value added by activity breaks down the total value added by sector, namely industry, and service activities in this paper. The shares of each sector are calculated by dividing the value added in each sector by total value added.Our aim in this paper is to examine the combined effect of economic variables on fraud. To accomplish this, we used 7 variables namely; fraud, the size of government, democracy, per capita income, inflation, the total value added of the industrial sector divided by GDP, and the total value added of the service sector divided by GDP.We use panel model throughout our study. Panel data combine a time series dimension with a cross section dimension. We also applied co-integrated test to give an explanation for the long run association between the variables. In addressing the inquiry of what the causes of corruption are, with few exceptions, majority of the empirical studies have examined various cross-sectional comparative, but country case studies and/or by regional analysis has not been emphasized enough. Recent studies, notably by Sandholtz and Koetzle (2000), Treisman (2000), Fisman and Gatti (2002), and Pellegrini and Gerlagh (2008), considered several aspects of the causes of corruption across countries. With the complexity of corruption issues and use of different empirical methodologies, studies have separately or with combination of factors analyzed the economic, political, historical and cultural traditions of the causes of corruption. But the findings show some lack or inconclusive results on the relationship between corruption and some variables such as the size of government and democracy as non-economic variables. …