Title: The impact of cognitive biases on fraudulent behaviour: the Leeson case

Authors: Asokan Anandarajan, Gary Kleinman

Addresses: School of Management, New Jersey Institute of Technology, Newark, NJ 07102-1982, USA. ' School of Business, Montclair State University, One Normal Avenue, Montclair, NJ 07043, USA

Abstract: The forensic accounting literature (e.g., Albrecht et al., 2010) places a great deal of importance on the so-called fraud triangle of motive-means-opportunity. Wolfe and Hermanson (2004) presents a cognitive analysis of factors that may impact the motivation element in the fraud triangle, arguing that situational and other factors may lead individuals to engage in illegal acts without conscious intent to violate the law. We argue that cognitive analyses are important also in understanding individual evaluations of the means and opportunities that confront them. We draw on relevant psychological literature to show how cognitive heuristics can be used to explain why certain managers, in the presence of incentives, rationalise and commit fraud in accounting. We use the |fraud diamond| (Wolfe and Hermanson, 2004) as the basis of our theoretical development. We use the Leeson/Barings bank|s case as an example to demonstrate the application of cognitive biases in the perpetration of fraud.

Keywords: fraud triangle; management fraud; cognitive heuristics; cognitive bias; fraudulent behaviour; Nick Leeson; forensic accounting; psychology; incentives; Barings Bank.

DOI: 10.1504/IJBAF.2011.038756

International Journal of Behavioural Accounting and Finance, 2011 Vol.2 No.1, pp.40 - 55

Published online: 01 Mar 2011 *

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