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Fraud: A culturally constructed phenomenon
The survey found that the greatest number of fraud offenses were made by employees of organizations (31.8 percent).
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he Indonesian chapter of the Association of Certified Fraud Examiners (ACFE) recently released a report on occupational fraud in Indonesia called Survei Fraud Indonesia 2019 (SFI 2019). The respondents in the surveys were antifraud practitioners and scholars in Indonesia.
The report provides a picture of trends in occupational fraud in Indonesia and explores how it affects various organizations in the country. It also depicts patterns of behavior and the multiple ways occupational fraud is perpetrated. Based on the survey, the majority of the identified occupational fraud schemes in Indonesia are those of corruption.
The survey covers multiple types of fraud under three broad categories, corruption, asset misappropriation and financial statement fraud. The survey found that the greatest number of fraud offenses were made by employees of organizations (31.8 percent). The second and third largest groups consisted of directors and owners of companies or organizations (29.4 percent) and managers (23.7 percent) respectively.
The report also identified employees as the largest source of fraud reporting in their organizations (50.2 percent). Based on the report, the most financially damaging fraud incidents were those perpetrated by managers and directors/owners with losses per case ranging from Rp 500 million (US$34,400) to more than Rp 10 billion. The higher losses could be associated with the higher level of knowledge and experience of managers, directors and owners. Additionally, the high-value fraud was also related to the opportunities that came with their positions.
Over the years, scholars have conducted various studies to determine why fraud occurs and to find ways to put an end to it. Fraud has been found to be a culturally determined phenomenon. Fraud is and always will be a product of human interaction, and every society has its own set of values influencing the way people act.
Indonesia is generally known as a highly collectivistic culture with high power distance. Such cultural dimensions are manifested in various characteristics of the behavior of Indonesians. According to the SFI 2019, a plurality (36 percent) of occupational fraud schemes in Indonesia were perpetrated by groups of four people or more. This correlates with the notion that in a collectivistic culture, many people prefer to be part of groups, including when committing unlawful activities. Within a collectivistic society, because of the “we” consciousness, opinions are often determined by groups.
More than 55 percent of fraud offenders identified in the SFI 2019 had never been charged before, which means they may have started their career as honest and accountable people. This, of course, raises questions about what might drive an otherwise honest person to commit fraud. According to differential association theory, criminal behavior is generated through a learning process. Individuals learn about how to commit crimes from their interactions with others. The learning process includes criminal techniques, motives and, in many cases of occupational fraud, rationalization.
Referring to Hofstede’s theory of national cultural dimensions, Indonesia is high on power distance and low on individualism (i.e. high on collectivism). The high level of collectivism in a group accelerates the learning process because of more frequent personal interactions among individuals. There is also an intense desire among members of a collectivistic group to emulate each other in order to fulfill perceived social expectations and maintain their statuses.
Some social expectations can be expensive. For example, some social activities such as ceremonies, gatherings and meetings may cost the hosts a fortune. This may lead to an obsession with material wealth.
It is no surprise that, based on the SFI 2019, the most common behavioral red flag for fraud in Indonesia is “living beyond one’s means” (34.7 percent). Studies of cultural dimensions suggest that displaying a lifestyle of sufficient luxury is considered necessary by many people in collectivistic societies to fulfill their social “obligations” and to maintain their statuses. For example, many people with high positions in their workplaces often chose expensive restaurants over cheaper ones to demonstrate their social status.
Power distance also plays a vital role in shaping occupational fraud in Indonesia. Essentially, this dimension is related to people’s level of acceptance of power inequality. Although some studies suggest that high power distance may lead to lower materialism due to people’s acceptance of power inequality, others have found that in countries like Indonesia, it works the other way around.
In Indonesia, high power distance causes many people to admire or even worship power. Therefore, many are very aware of wealth and its association with power and respect and dedicate their lives to pursuing it. The relationship between power distance and materialism can also be associated with the high level of collectivism in the country, where various experiences of the past (e.g., colonization and authoritarian regimes) have made material pursuits a kind of social expectation that everyone must strive to fulfill.
Because of occupational fraud’s concealed nature, studies of the subject depict only the tip of the iceberg. There are still many details about fraud that studies have yet to uncover. The high levels of collectivism in countries like Indonesia also create barriers for researchers in their studies of the subject. In a collectivistic culture, even though the relationships among people within a group are often very strong, the relationships among the groups themselves may not be.
People habitually classify others as part of either an “in-group” or “out-group.” Hence, when collecting data, researchers face many problems associated with being considered part of the out-group by those who would be able to provide the required data. As a result, the quality of fraud data in Indonesia is often below the standard of other countries.
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The writer is director of the Center for Forensic Accounting Studies at the Islamic University of Indonesia (UII) with a PhD in forensic accounting from the University of Wollongong, Australia.
