Journal of Financial Reporting and Accounting

National culture and fraud risk: exploratory evidence

Dessalegn Getie Mihret
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National culture and fraud risk: National culture

and fraud risk
exploratory evidence
Dessalegn Getie Mihret
Deakin University, Geelong, Australia
161

Abstract
Purpose – The purpose of this paper is to test the association between national culture dimensions and
exposure to fraud with a view to drawing implications for understanding fraud risk.
Design/methodology/approach – The study is based on a sample of 66 countries. Regression
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analysis is conducted using Hofstede’s national culture dimensions as independent variables and fraud
risk as a dependent variable. Transparency International’s corruption index was used as a proxy for
fraud risk.
Findings – Results suggest high fraud risk exposure in countries with high power distance and those
having limited long-term orientations.
Research limitations/implications – The study informs deeper understanding of fraud risk
through analysis of fraud risk in a culturally relative sense.
Originality/value – This is the first study (known to the author) to draw the implications of national
culture for understanding fraud risk.
Keywords Fraud, National culture, Fraud triangle, Fraud fighting, Fraud risk, Fraud theory
Paper type Research paper

Introduction
Despite the growing recognition of fraud[1] as a pervasive problem in the increasingly
internationalizing business in contemporary society (Zhuang et al., 2005), implications
of national culture for analyzing fraud remain yet to be explored. Although actual
amounts lost to fraud are difficult to determine, available indicators suggest the size of
fraud losses has been rising (Albrecht et al., 2012; Glover and Aono, 1995; KPMG, 2010).
The Association of Fraud Examiners’ latest survey indicates that organizations lose
5 per cent of their revenues annually to fraud. The association also estimated the loss to
the global economy at US$3.5 trillion (The Association of Fraud Examiners, 2012). In
addition, the level of dishonesty in society tends to be on the rise (Wilson, 2004). The
literature offers systematic approaches to fraud fighting for fraud fighting
professionals – including (but not limited to) auditors. Fraud fighting comprises
preventing, detecting and investigating fraud. The contemporary model for
understanding fraud has its roots in Cressey’s (1950) fraud theory approach to fraud
investigation. This approach comprises developing hypotheses on why and how fraud
could occur and advocates taking appropriate investigation steps that enable
acceptance or rebuttal of the hypotheses (Kranacher et al., 2011; Robinson, 1951). The
approach is articulated in the literature as the fraud triangle, which consists of incentive/ Journal of Financial Reporting and
pressures, opportunities and rationalizations that serve as the motivation for Accounting
Vol. 12 No. 2, 2014
committing fraud (Hillison et al., 1999; International Federation of Accountants, 2009). pp. 161-176
This model is used to analyze fraud exposures; who the potential perpetrators might be; © Emerald Group Publishing Limited
1985-2517
the elements of fraud, namely, theft, concealment and conversion (i.e. using, selling or DOI 10.1108/JFRA-10-2012-0049
 JFRA exchange) of the stolen asset (Kranacher et al., 2011); and what possible prevention,
detection and investigation strategies could be effective in the circumstances (Albrecht
12,2 et al., 2004; Wilks and Zimbelman, 2004).
The reasons why people commit crimes such as fraud cannot be completely
separated from the social context of perpetrators. As numerous individual and social
situations explain why and how frauds occur, the exposure to fraud risk cannot be
162 abstracted form the cultural context of fraud (Aubert, 1952; Cressey, 1955, 1986; Zhuang
et al., 2005). The implications of national culture for understanding fraud risk received
little research attention. Understanding such implications holds promise for enhancing
the systematic approach for fighting fraud. Hofstede’s (2001) five dimensions of national
culture, namely, power distance (PDI), individualism (IDV), uncertainty avoidance
(UAI), long-term orientation (LTO) and masculinity (MAS), provide useful perspectives
on national culture. These dimensions signify, respectively, the extent to which unequal
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distribution of power among individuals in a given society is expected and accepted;

people exhibit individualistic (as compared to collectivistic) behaviors; tolerance to
uncertainly exists; thoughts and actions are long-term orientated; and masculine (as
compared to feminine) orientations predominate.
The motivation for the present paper emanates from the notion that national culture
dimensions provide a useful input to developing fraud theories that take into account
cultural factors in understanding fraud incentives/pressures, opportunities and
rationalizations. Examining implications of the diverse national cultures of countries in
developing fraud theories could enable deeper understanding of potential motivations
for fraud in specific cultural contexts. It also enables in-depth analysis of elements of
theft, concealment and conversion involved in all acts of fraud (Vanasco, 1998).
Criticisms leveled against fraud fighting professionals such as auditors for failures to
detect fraud (Glover and Aono, 1995) as well as the paucity of academic literature on
fraud (Coram et al., 2008) makes the present study particularly timely. Based on the
notion that motivation and elements of fraud are culturally relative (Zhuang et al., 2005),
the study tests the association of national culture dimensions with perceptions of
corruption using a sample of 66 countries to draw implications for understanding fraud
risk.
The remainder of this paper is structured as follows. In the following section,
hypotheses are formulated based on a review of relevant literature. Section 3 outlines the
research methods including a detailed specification of a regression model. Section 4
presents the results of the study as well as discussion and implications of the results.
Finally, Section 6 concludes the paper.

Literature review and hypothesis development

The act of fraud comprises three elements, namely, the actual theft, concealment of what
has been stolen and conversion, i.e. the use, selling or exchange of the ill-gotten asset
(Vanasco, 1998). The literature provides a systematic approach to preventing, detecting
and investigating fraud. The fraud theory approach, which advocates developing
hypotheses about why and how fraud could occurs (Cressey, 1950), informs the
conceptual tool of the fraud triangle that is commonly used to analyze motivations for
and the likelihood of fraud being committed (Albrecht et al., 2012). The fraud motivation
triangle comprises three components: perceived pressures/incentives, opportunities and
rationalizations for fraud (Hogan et al., 2008; Hopwood et al., 2008). This conceptual tool
 is used to analyze financial pressures or other incentives that induce individuals to National culture
engage in fraudulent behaviors. It also enables us to examine opportunities that
perpetrators might exploit to commit fraud and analyze how fraudsters might attempt
and fraud risk
to justify (i.e. rationalize) their dishonest acts (Albrecht et al., 2012; Hogan et al., 2008).
Fraud prevention remains the most cost-effective fraud fighting strategy used by
organizations. This approach involves developing a culture of honesty and ethical
conduct; assessing fraud risks facing the organization; and putting in place measures 163
that mitigate the risks. Fraud perpetration, like any unethical behavior, is determined by
the individuals’ level of moral development (Albrecht et al., 2012; Dellaportas et al.,
2006). Thus, creating a culture of honesty and high ethics plays a crucial role in fraud
prevention (Kaptein and Schwartz, 2008; Stevens, 1999). Maintaining ethical culture
involves hiring honest individuals; communicating expectations through policies and
ethical codes of conduct; maintaining clear and effective policies for dealing with fraud
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and ensuring that top management models ethical conduct (Albrecht et al., 2012; Wang
and Kleiner, 2000). Providing fraud awareness training; creating good working
environment; implementing monitoring systems such as internal audit and
whistle-blowing; conducting proactive audits of fraud; and creating expectation of
punishment for fraud serve as additional fraud mitigation strategies (Albrecht et al.,
2012).
The characteristics of fraud and fraud examination strategies outlined in the
foregoing paragraphs suggest that considering the cultural context of fraud could
contribute to a greater understanding of fraud risk faced by victims in a given cultural
context. That is, conditions for the occurrence of fraud suggest the relevance of culture
to fraud risk. In Cressey’s (1955, p. 116) view, “[b]ehavior, attitudes, beliefs, and values
are not only the products but also the properties of groups”. Thus, considering culture
could allow a deeper understanding of fraud risk and the acts of theft, concealment and
conversion that accompany frauds.
The influence of culture on how people think and act (Hofstede, 1997) can be analyzed
both at the level of smaller sociological units of analysis such as organizations and at the
more macro, i.e. national, level (Hofstede, 2001). Hofstede (2001, p. 9) defines culture as
“the collective programming of the mind that distinguishes the members of one group or
category of people from another”. Hofstede studied national culture globally and
developed national culture classifications in terms of PDI, uncertainly avoidance, LTO,
individuality and MAS. PDI refers to “the extent to which the less powerful members of
institutions and organizations within a country expect and accept that power is
distributed unevenly” (Hofstede, 1997, p. 28). While uneven distribution of power among
members of society is a well-established notion, Hofstede’s study shows that some
cultures exhibit higher PDI than others. In a similar vein, some national cultures exhibit
the characteristic of high tolerance to ambiguity compared to others that tend to avoid
uncertainty through clearly laid out policies, rules and laws to guide actions. Hofstede
(1997, p. 116) states that “uncertainty avoiding cultures shun ambiguous situations.
People in such cultures look for a structure in their organizations, institutions, and
relationships [,] which makes events clearly interpretable and predictable”.
Also, some cultures are characterized by LTO, “which stands for fostering of virtues
oriented towards future rewards, in particular perseverance and thrift” (Hofstede, 1997,
p. 261). The other dimension, individuality, relates to the extent to which “the ties
between individuals are loose” compared to collectivistic cultures where “people from
 JFRA birth onwards are integrated into strong, cohesive in-groups, which throughout people’s
lifetime continue to protect them in exchange for unquestioning loyalty” (Hofstede, 1997,
12,2 p. 51). Finally, MAS:
[…] pertains to societies in which social gender roles are clearly distinct (i.e. men are
supposed to be assertive, tough and focused on material success whereas women are
supposed to be more modest, tender, and concerned with the quality of life) (Hofstede,
164 1997, p. 82).
This contrasts with femininity that “pertains to societies in which social gender roles
overlap i.e. both men and women are supposed to be modest, tender and concerned with
the quality of life” (Hofstede, 1997, p. 83).
National culture dimensions offer interesting perspectives that can inform
established fraud examination approaches available in the literature. However, the
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approaches and analytical tools are not developed in consideration of the impact of the
diverse cultures in which fraud fighting professionals could be engaged. Assuming
culture as a constant in the use of the fraud triangle as an analytical tool oversimplifies
the complex motivation for fraud and the analysis of possible mechanics of fraud
schemes. The importance of organizational culture and working approaches on the
occurrence of fraud is recognized in the literature. Nevertheless, the implications of
national cultural dimensions for understanding fraud risk remain yet to be studied. An
empirical test of the link between fraud risk and national culture holds promise for
refining the analytical tools available to fraud fighting professionals. A starting point to
understand the link between national culture dimensions and fraud is to articulate the
possible connections between the concepts of national culture and fraud risk.
Despite the limits imposed by the paucity of prior empirical and theoretical studies in
this area, conceptual links can be developed between fraud risk and national culture.
PDI has the potential to influence fraud exposure of potential victims because PDI
defines power relationships between individuals in a given society. The perception of
power distribution can influence fraud perpetrators’ perceived pressures and
opportunities as well as rationalization for contemplated fraud. Power relations often
contribute not only to the recruitment of individuals into fraud schemes (Albrecht et al.,
2012) but also how individuals behave in fraud prevention and detection mechanisms
such as whistle-blowing (Brody et al., 1999; Near et al., 1993; Tavakoli et al., 2003;
Zhuang et al., 2005). The literature does not permit proposing a directional hypothesis on
the potential association between PDI and fraud risk. Nonetheless, logical conceptual
arguments can be developed for both a positive and an inverse association. As an
example, perception of high PDI may create an attitude of being neglected on the part of
individual employees of organizations. This attitude, in turn, could erode employee
commitment to organizational values and thus lead to opportunistic behaviors to
engage in fraudulent activities. Another side of the argument could be that fear of
authority might mediate the relation between fraud and high PDI in such a way that the
two relate inversely. Hence, a non-directional hypothesis is formulated as follows:
H1. The cultural dimension of PDI is associated with fraud risk.
The national culture dimension of IDV refers to the extent to which relationships
between individuals are anchored on the individual as compared to the collective.
Values and groups, which remain important concepts of culture, influence the extent of
individual’s tendency to learn deviant behaviors that lead to unethical acts (Burgess and
 Akers, 1966; Matsueda, 1988). Both individuals and collectives can commit fraud. National culture
Control mechanisms in contemporary organizations are more effective in preventing
frauds that are committed by individuals than those committed by groups. Therefore,
and fraud risk
while the direction of correlation tentatively remains an empirical question, it is logical
to predict a significant association between IDV and fraud risk. Thus, the following
hypothesis is proposed:
H2. The cultural dimension of IDV is associated with fraud risk. 165
The other dimension of culture, i.e. UAI, can influence fraud risk because cultures that
tend to minimize uncertainty may be able to foresee the potential effect of fraud and
mitigate fraud risks by putting appropriate preventive mechanisms in place. Factors
such as strong corporate governance systems could be associated with this cultural
dimension. Consistent with this notion, Beasley et al. (2000) found that differences in
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corporate governance mechanisms determine differences between fraud and non-fraud

companies. Therefore, the following hypothesis is proposed:
H3. The cultural dimension of UAI is inversely associated fraud risk.
Another factor that possibly affects fraud risk in a similar way to UAI is LTO.
Organizations that operate in long-term-orientated societies may conduct a prognosis of
fraud risks in the long-term and respond to the risks in a proactive manner. Hence, H4 is
stated as follows:
H4. The cultural dimension of LTO is inversely associated with fraud risk.
The relative paucity of prior research in this area does not permit proposing a
conceptual link between the MAS dimension and fraud risk. Nonetheless, the link
between MAS and the rest of the variables is evident (Hofstede, 2001). Furthermore, a
recent study by (Kanagaretnam et al., 2011) shows a significant positive association
between MAS and earnings management, which is to management fraud. Following
this empirical evidence, the following hypothesis is formulated:
H5. The cultural dimension of MAS is positively associated with fraud risk.

Methods
Research model and variables
Based on the foregoing analysis of the possible association of fraud risk with national
culture dimensions, the following regression model is formulated:

CORI ⫽ ␤0 ⫾ ␤1 PDI ⫾ ␤2 IDV ⫺ ␤3 UAI ⫺ ␤4 LTO ⫾ ␤5 MAS ⫹ e

Where,
CORI ⫽ corruption index, used as a proxy for fraud risk. CORI values range between
0 and 10 based on Transparency International’s 2011 corruption indices of
countries[2];
␤0 ⫽ the model constant;
␤1 to ␤5 ⫽ changes in CORI associated with unit changes in independent variable
values;
PDI ⫽ with scores ranging from 11 to 104;
IDV ⫽ (as compared to collectivism), with scores ranging from 6 to 91;
 JFRA UAI ⫽ with scores ranging from 8 to 112;
LTO ⫽ with scores ranging from 5 to 95;
12,2 MAS ⫽ (as compared to femininity), with scores ranging from 16 to 118; and
␧ ⫽ prediction error (residual).

166 The sample

A total sample of 66 countries (Table I) was used in this study. Countries covered both
in Transparency International’s (2011) corruption perception survey and Hofstede’s
(2001) cultural dimension scoring were included in the sample. Sixty-six countries were
included in the study because Hofstede’s (2001) national culture dimension scores were
available only for 66 countries of the 95 countries for which Transparency International
published national corruption indices. Although the sample size is determined by the
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availability of data, this size is sufficient to produce valid results for a multiple
regression model with five independent variables (Hair et al., 2010).

Data and measurement

Actual fraud data are often difficult to find because apart from the acts of concealment
that accompany all frauds, victims tend not to publicize discovered frauds (Albrecht
et al., 2012). In view of this difficulty, Transparency International’s CORI was used as a
proxy for fraud risk in the present study. While fraud and corruption differ in some
respects, the two concepts exhibit key commonalities. Black’s Law Dictionary states that
corruption is:
[…] a vicious and fraudulent intention to evade the prohibitions of the law. [It] is [*t]he act
of an official or fiduciary person who unlawfully and wrongfully uses his station or
character to procure some benefit for himself or for another person, contrary to duty and
the rights of others (http://thelawdictionary.org/corruption/).
This dictionary also states that “[f]raud consists of some deceitful practice or willful
device, resorted to with intent to deprive another of his right, or in some manner to do
him an injury” (http://thelawdictionary.org/fraud/). The fact that fraudulent intentions
underpin corruption shows the close link between the two concepts. Both fraud and
corruption involve compromising integrity to exploit relationships of trust to gain
illegitimate advantage. In recognition of this link, Albrecht et al. (2012, pp. 516-520)
regard corruption a type of fraud classified as “occupational abuse”. Similarly,
Kranacher et al. (2011, p. 384) adopted Black’s Law Dictionary’s definition of corruption
used in the context of forensic accounting. Thus, the choice of corruption as a proxy for
fraud risk is reasonable. Data for the dependent variables were obtained from national
corruption indices of the 2011 annual survey results of Transparency International,
which are publicly available at Transparency International’s Web site (Transparency
International, 2011). Transparency International states the scope of the survey as
follows (Transparency International, 2011, p. 3):
The surveys and assessments used to compile the index include questions relating to the
bribery of public officials, kickbacks in public procurement, embezzlement of public funds,
and questions that probe the strength and effectiveness of public-sector anti-corruption efforts.
The survey is based on perception of corruption at a national level. Transparency
International determined indices for each country ranging from 10 (“very clean”) to 0
 Country PDI IDV MAS UAI LTO CORI
National culture
and fraud risk
United States of America 40 91 62 46 29 7.1
Australia 36 90 61 51 31 8.8
United Kingdom 35 89 66 35 25 7.8
The Netherlands 38 80 14 53 44 8.9
New Zealand 22 79 58 49 30 9.5
Italy 50 76 70 75 3.9
167
Belgium 65 75 54 94 7.5
Denmark 18 74 16 23 9.4
France 68 71 43 86 7
Sweden 31 71 5 29 33 9.3
Ireland 28 70 68 35 7.5
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Norway 31 69 8 50 20 9
Switzerland 34 68 70 58 8.8
Germany 35 67 66 65 31 8
South Africa 49 65 63 49 4.1
Finland 33 63 26 59 9.4
Poland 68 60 64 93 5.5
Czech Republic 57 58 57 74 4.1
Austria 11 55 79 70 7.8
Hungary 46 55 88 82 4.6
Israel 13 54 47 81 5.8
Spain 57 51 42 86 6.2
India 77 48 56 40 61 3.1
Argentina 49 46 56 86 3
Japan 54 46 95 92 80 8
Iran 58 41 43 59 2.7
Jamaica 45 39 68 13 3.3
Brazil 69 38 49 76 65 3.8
Egypt 80 38 52 68 2.9
Iraq 80 38 52 68 1.8
Kuwait 80 38 52 68 4.6
Lebanon 80 38 52 68 2.5
Libya 80 38 52 68 2
Saudi Arabia 80 38 52 68 4.4
United Arab Emirates 80 38 52 68 6.8
Turkey 66 37 45 85 4.2
Uruguay 61 36 38 100 7
Greece 60 35 57 112 3.4
Philippines 94 32 64 44 19 2.6
Mexico 81 30 69 82 3
Ethiopia 64 27 41 52 25 2.7
Kenya 64 27 41 52 25 2.2
Portugal 63 27 31 104 6.1
Tanzania 64 27 41 52 25 3
Zambia 64 27 41 52 25 3.2 Table I.
Malaysia 104 26 50 36 4.3 Hofstede’s national
Hong Kong 68 25 57 29 96 8.4 culture dimension scores
(continued) and CORI of countries
 JFRA Country PDI IDV MAS UAI LTO CORI
12,2
Chile 63 23 28 86 7.2
China 80 20 66 40 118 3.6
Ghana 77 20 46 54 16 3.9
Nigeria 77 20 46 54 16 2.4
Sierra Leone 77 20 46 54 16 2.5
168 Singapore 74 20 48 8 48 9.2
Thailand 64 20 34 64 56 3.4
El Salvador 66 19 40 94 3.4
South Korea 60 18 39 85 75 5.4
Taiwan 58 17 45 69 87 6.1
Peru 64 16 42 87 3.4
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Costa Rica 35 15 21 86 4.8

Indonesia 78 14 46 48 3
Pakistan 55 14 50 70 2.5
Colombia 67 13 64 80 3.4
Venezuela 81 12 73 76 1.9
Panama 95 11 44 86 3.3
Ecuador 78 8 63 67 2.7
Guatemala 95 6 37 101 2.7

Sources: Scores for PDI, IDV, MAS, UAI and long-term orientation are obtained from Hofstede’s s
survey results (Hofstede, 2001); CORI is obtained from Transparency International’s 2011 international
Table I. survey; the scores range from 10 (“very clean”) to 0 (“highly corrupt”)

(“highly corrupt”). Reverse coding was applied in using this data for the present study.
That is, for the purpose of data analysis, corruption indices were determined as 10 minus
X, where X is Transparency International’s CORI of a country in the sample. This makes
interpretation of the statistical analyses results more direct as countries with high code
values were those with high perception of corruption.
The data for the independent variables, i.e. PDI, IDV, UAI, LTO and MAS, were
collected from Hofstede’s (2001) scores of national culture dimensions. Hofstede
developed the scores based on a global survey of 116,000 employees of the IBM
Company in 50 countries in 1980. Hofestede’s subsequent studies enabled him not only
to cover other countries but also to identify the LTO dimension which was not part of the
original study. Hofstede’s study continues to serve as a basis for numerous accounting
and business research studies (Chand et al., 2012; Cronjé, 2011; Desender et al., 2011;
Kanagaretnam et al., 2011; Venaik and Brewer, 2010).

Results
Descriptive statistics
Descriptive statistics were examined before conducting the regression analysis. Table I
presents the lists of 66 countries in the sample along with variable values.
Descriptive statistics are presented in Table II on distribution of the data including
measures of normality. Kurtosis and Skewness statistics show suitability of the data for
regression analysis.
 Correlation results and assessment of multicolinearilty National culture
Correlation values for the variables are reported on Table III show that the independent
variables are reasonably well correlated with the dependent variable. Also, the
and fraud risk
correlation values among independent variables are not too high, which indicates that
endogeneity did not affect the results.

Multiple regression results and test of hypotheses 169

The regression results showed R2 value of 0.752, which exhibits that the model achieves
a reasonably high predictive value. As can be seen on Table IV, the regression model
with CORI as a dependent variable and PDI, UAI, LTO and MAS as independent
variables is statistically significant (F ⫽ 11.494, p ⬍ 0.0001).
Results reported in Table V provide the necessary statistics needed to test the
hypotheses:
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H1. The cultural dimension of PDI is associated with fraud risk.

Mean SD Skewness Kurtosis

N Minimum Maximum Standard Standard Standard
Variables statistic statistic statistic Statistic error Statistic Statistic error Statistic error

PDI 66 11 104 60.21 2.567 20.854 ⫺0.431 0.295 ⫺0.299 0.582

IDV 66 6 91 41.17 2.853 23.175 0.516 0.295 ⫺0.835 0.582
MAS 66 5 95 50.17 2.101 17.070 ⫺0.271 0.295 0.855 0.582
UAI 66 8 112 65.06 2.753 22.367 ⫺0.300 0.295 ⫺0.225 0.582
LTO 25 16 118 43.84 5.688 28.441 1.153 0.464 0.460 0.902
CORI 66 0.50 8.20 4.9424 0.29854 2.42538 ⫺0.517 0.295 ⫺1.191 0.582
Valid N Table II.
(list-wise) 25 Descriptive statistics

Variables PDI IDV MAS UAI LTO CORTI

PDI 1
IDV ⫺0.660** 1
MAS 0.076 0.090 1
UAI 0.157 ⫺0.211 0.051 1
LTO 0.193 ⫺0.291 0.278 0.166 1
CORI 0.644** ⫺0.639** 0.165 0.221 ⫺0.110 1
Table III.
Note: ** Correlation is significant at the 0.01 level (two-tailed) Correlations

Model Sum of squares df Mean square F Significance

Regression 138.063 5 27.613 11.494 0.000b

Residual 45.643 19 2.402
Total 183.706 24
Table IV.
Notes: a Dependent variable: CORI; b
predictors: (Constant), MAS, IDV, UAI, LTO and PDI ANOVAa
 JFRA Unstandardized coefficients Standardized coefficients
12,2 Model B Standard error Beta T Significance

(Constant) ⫺3.381 3.343 ⫺1.011 0.325

PDI 0.122 0.035 0.853 3.498 0.002
IDV ⫺0.001 0.026 ⫺0.005 ⫺0.021 0.984
UAI 0.050 0.020 0.320 2.511 0.021
170 LTO ⫺0.029 0.012 ⫺0.301 ⫺2.347 0.030
MAS ⫺0.014 0.020 ⫺0.101 ⫺0.733 0.472
Table V.
Coefficientsa Note: a Dependent variable: CRI
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H1 that PDI is associated with fraud risk is supported (t ⫽ 0.002, p ⬍ 0.05). The positive
coefficient of the PDI variable confirms one of the two possible directions predicted in
formulating the regression model:
H3. The cultural dimension of UAI is inversely associated with fraud risk.
H3 that UAI is inversely associated with fraud risk is partially supported (t ⫽ 2.511, p ⬍
0.05). While the variable exhibits statistical significance, the positive sign of the
coefficient for the UAI variable contradicts the argument developed in formulating of
the hypothesis:
H4. The cultural dimension of LTO is inversely associated with fraud risk.
H4 that LTO is inversely associated with fraud risk is also supported (t ⫽ ⫺2.347, p ⬍
0.05). The negative coefficient of the LTO variable in the regression results confirms the
inverse relation predicted in the development of the hypothesis.

Discussion and implications

The implications of national culture have received little research attention in the context
of fraud risk assessment. The growing recognition of fraud as a pervasive problem in
contemporary society makes timely the study of the link between dimensions of national
culture and fraud risk. This paper has argued that national culture dimensions can
influence the level of fraud risk. The rationale for the present study emanates from the
view that the implicit assumption of culture as a constant in analyzing fraud
oversimplifies not only the complex motivations for fraud but also the analysis of
possible mechanics of fraud schemes. The study has presented exploratory empirical
evidence on the association of Hofstede’s national culture dimensions and fraud risk
using a sample of 66 countries. The results exhibit statistically significant relationships
of PDI, UAI and LTO with countries’ corruption indices used as a proxy for fraud risk.
The results show higher corruption indices in countries characterized by high PDI and
lower LTO. On the other hand, the data did not support the predicted association of
individuality and MAS dimensions with fraud risk. Also, the result on the direction of
the association between CORI and UAI contradicts the inverse relation predicted in the
design of the study.
The positive association of PDI and fraud risk is interesting. The direction of the
association was undetermined in the argument developed in formulating H1.
Arguments for both a positive and an inverse association were proposed based on
 interpretation of the relevant literature. The results have confirmed that fraud risk National culture
is high in cultural settings characterized by high PDI. The possible impact of PDI on
fraud perpetrators’ rationalizations in committing fraud is noteworthy. High PDI
and fraud risk
has the potential to generate a perception of being neglected in important decisions
of organizations, and, thus, make it easier for potential perpetrators to justify
dishonest acts. This finding is also consistent with the existing literature which
shows that non-participative organizational cultures are likely to experience more 171
acts of fraud than others (Albrecht et al., 2012). The finding informs practice on the
potential use of power in recruiting individuals into fraud schemes. Coercive power
is often used in such a recruitment (Albrecht et al., 2012), and it is safe to assume that
this genre of power is greater in high PDI cultures than others. This result also
suggests the need for fraud investigators to take into account the more conducive
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environment that PDI could create for fraud than its role in preventing fraud. This
understanding could help auditors and other professionals to develop more
pragmatic fraud theories in analyzing fraud cases or assessing the potential of a
certain environment to sustain fraud.
Contrary to the prediction made in developing the model, the data showed positive
association between UAI and fraud risk. The literature presents little evidence for a
positive relation; instead, strong arguments can be made to the contrary. Fraud
opportunities are high when internal controls are poor and policies guiding actions of
employees are not clearly defined. Similarly, proactive fraud fighting steps including the
nurturing of ethical culture in organizations and recruitment of honest employees
(Albrecht et al., 2012) are logically connected to UAI. Thus, the results for H3 can only be
taken as tentative, which suggests the need for further studies to consider further
empirical tests on this relationship.
Another major finding of this study is the statistically significant association
between fraud risk and LTO of cultures. Consistent with the argument developed in the
research design, the data confirm the inverse association of LTO and fraud risk. As
long-term-orientated cultures are characterized by emphasis on self-actualization
(Hofstede, 2001), the result supports the argument that individuals in long-term-
orientated cultures are more committed to their organizations’ values and, thus, are less
likely to commit dishonest acts by giving in to short-term pressures or incentives.
Therefore, because such a LTO may result in reduced pressure for fraud, fraud fighting
efforts in such cultures should be focused on understanding the opportunity and
rationalization.
Despite the conceptual links established between the IDV variable and fraud risk, the
empirical test did not support this link. The fact that the control variable, i.e. MAS, did
not exhibit statistical significance shows that this variable has little impact on other
independent variables. On the other hand, the individuality variable has conceptual
importance in the model. The conceptual link between this variable and fraud risk is
arguably strong. Fraud happens when perpetrators face non-sharable pressures
(Albrecht et al., 2012). The extent to which pressures are non-sharable can logically be
determined by the extent to which cultural orientations are individualistic (Hofstede,
2001). Thus, the result on H2 warrants further research on the link between the two
variables with a larger sample or with methodological alterations that enable deeper
analysis of the link using case studies of actual frauds.
 JFRA The validity of measures used in the study warrants a consideration. Prior
research has confirmed the validity of measures used in Transparency
12,2 International’s regular surveys (Wilhelm, 2002). Also, while Hofstede’s study was
conducted before three decades, the continuing relevance of cultural dimensions is
shown by the fact that this model is used in recent accounting and business research
(Chand et al., 2012; Cronjé, 2011; Desender et al., 2011; Kanagaretnam et al., 2011;
172 Venaik and Brewer, 2010). This continuing usefulness of Hofstede’s study is
consistent with the implied assumption in the present study that cultural values are
stable over time. In evaluating this validity consideration, the unavailability of
alternative measures of cultural dimensions should be taken into account. Another
validity consideration in interpreting the results is the use of public sector
corruption indicators for testing more general hypotheses that relate to both public
and private sector organizations. This issue does not affect the results of this study
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because it can be reasonably assumed that individuals working in public and

private sector organizations in a given society largely share the same cultural
values. Hence, individuals working in the two sectors are not expected to vary in a
systematic way in regard to fraudulent behavior.
The results fill an important gap in the literature because the implications of
national culture on fraud remained unexplored. It is shown that national culture can
provide a useful analytical lens to analyze fraud risk in consideration of the cultural
context. This enables better understanding of fraud risk, which is a prerequisite for
devising effective strategies to prevent, detect and investigate fraud. As individual
and social situations explain why and how fraud occurs, the motivation for fraud
cannot be considered culture-free. Thus, understanding the implications of national
culture for fraud prevention, detection and investigation holds promise for effective
fraud fighting. The fraud triangle or other variations of the fraud theory approach
for analyzing fraud can provide a more complete understanding of motivations and
mechanics of fraud by explicitly considering how cultural orientations influence the
motivations and mechanics of potential frauds. This makes the findings significant
for auditors, who are often criticized for limited effectiveness in detecting fraud
(Albrecht et al., 2012; Coram et al., 2008), although some factors including auditor
experience and audit firm size influence the level of effectiveness (Moyes and Hasan,
1996; Owusu-Ansah et al., 2002). Furthermore, the increasing call for the need to
improve audits (McKee, 2006; Vanasco, 1998) as well as the more proactive approach
advocated in the auditing standards (International Federation of Accountants, 2009)
to address issues of fraud suggest practical utility of the findings of the present
study for auditors.
Some methodological issues should be noted. First, the study assumes that
frauds are circumscribed within individual cultures. This means that the data are
assumed to reflect fraud that happens within the bounds of a cultural context, and
thus cross-culture frauds had negligible impact on the perception of respondents of
the Transparency International’s survey. In principle, this assumption can be
challenged when viewed in the context of some types of fraud like Internet fraud
(Tan, 2002), which could be committed by fraudsters in one culture against victims
in another cultural environment. While this assumption helps identify a future
research avenue, it does not undermine the validity of the overall findings of the
present study because the assumption holds true for most fraud schemes. Second,
 while the use of data obtained from publicly available sources brought a National culture
methodological merit, it also restricted the sample size as availability of complete
data in the two datasets was a necessary criterion for sample selection. Nonetheless,
and fraud risk
the sample size of 66 for a multiple regression model with five independent variables
is sufficient to draw statistically valid conclusions (Hair et al., 2010).

Conclusion 173
Despite the understanding that numerous individual and social situations influence
why and how fraud occurs, national culture has not been explicitly considered in models
used to analyze fraud. This paper has argued that understanding the implications of
national culture for analyzing fraud motivation, namely, pressures/incentive,
opportunities and rationalizations– as well as elements of fraud, i.e. theft, concealment
and conversion is a useful approach to enhance the understanding of fraud risks facing
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organizations. The paper is based on interpretation of Hofsetede’s national culture

dimensions from the perspective of the fraud theory approach for fraud examination.
Multiple regression analysis was conducted using Hofsetede’s national culture
dimension scores as independent variables and fraud risk measured using a proxy,
namely, Transparency International’s 2011 corruption indices. Results from a sample of
66 countries show higher fraud risks for countries characterized by high PDI and lower
fraud risks for countries with long-term-orientated cultures. It is concluded that national
culture can offer a useful analytical lens for understanding fraud risks that individuals
and organizations face in respective cultural contexts. The study informs the
understanding of fraud risk in a culturally relative sense. The results suggest that
assuming culture as a constant in analyzing fraud risk oversimplifies not only the
complex motivation for fraud but also the analysis of possible mechanics of fraud
schemes.
The practical and theoretical implications of the conclusion of this study need to
be assessed in view of some limitations of the study. The small sample size used in
the study owing to the secondary data sources makes the study exploratory in
nature. Future research with larger sample size would enable us to confirm, extend,
refine or refute the conclusions. Studies to test the moderating effect of governance
and institutional factors on the association between the independent and dependent
variables of this study would be a useful addition to the literature. Furthermore,
studies with methodological modifications could help us extend the conclusions by
addressing the assumption of cultural circumscription of fraud that underlies the
present study.

Notes
1. International Standards on Auditing (ISA) 240 defines fraud as “An intentional act by one
or more individuals among management, those charged with governance, employees, or
third parties, involving the use of deception to obtain an unjust or illegal advantage”.
2. The 2012 corruption indices run from 0 to 100.

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About the author
Dessalegn Getie Mihret, PhD, FCCA, is a Senior Lecturer in accounting at Deakin University,
Australia. Dessalegn has published in Accounting, Auditing and Accountability Journal,
Managerial Auditing Journal, Accounting History (paper accepted), Pacific Accounting Review,
Journal of Financial Reporting and Accounting, Small Enterprise Research Journal, African
Journal of Accounting, Economics, Finance and Banking Research and International Business
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Research. His areas of research interest include auditing, accounting, corporate governance,
sustainability assurance and fraud examination. Dessalegn Getie Mihret can be contacted at:
dmihret@deakin.edu.au

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