Graduate School of Business Behavioral Intention to Use Forensic Accounting Services for the Detection and Prevention of Fraud by Large Malaysian Companies Gunasegaran Muthusamy This thesis is presented for the Degree of Doctor of Philosophy of Curtin University of Technology January 2011 DECLARATION To the best of my knowledge and belief this thesis contains no material previously published by any other person except where due acknowledgment has been made. This thesis contains no material which has been accepted for the award of any other degree or diploma in any university. Signature: …………………………………………. Gunasegaran Muthusamy 31 January 2011. i ACKNOWLEDGEMENTS I wish to take this opportunity to express my sincere gratitude to my supervisors, Professor Mohammed Quaddus and Professor Robert Evans for their intellectual inspiration and guidance. I am greatly indebted for all the advice, inputs, suggestions and constructive comments that made me complete this research within the prescribed time. Their active involvement and interest in my work motivated me to publish this research in journals and present it in numerous conferences. The publication and presentation of my research has been an invigorating and rewarding learning experience. My journey to Curtin University of Technology would not have been possible without the scholarship offered to me by the Public Services Department Malaysia through the Inland Revenue Board Malaysia. I would like to extend my sincere thanks to them for giving me this opportunity. My heartfelt thanks also go to the warmth and encouragement generated by my bosses and colleagues in Inland Revenue Board Malaysia and some very personal friends who were my guiding pillar of strength. I am also very thankful to my mentor Dato’ Dr. Mohd Shukor Hj. Mahfar for his invaluable support and guidance. I would like to extend my sincere thanks to numerous other individuals in Graduate School of Business, Curtin University of Technology especially the HDR student on the 4th floor who have contributed to the completion of this research. My appreciation also goes to Ms. Joanne Boycott from Curtin Business School and all staff at the Graduate School of Business for their administrative support throughout my doctoral study. I am eternally grateful to my late father, Mr. Muthusamy Nallappan who passed away at the beginning of my doctoral studies. His unlimited love and support encouraged me to embark in this academic journey. He will always be my role model in life. This piece of work could not have been completed without the unconditional love of my family members especially my mother, Nachiamah, brother, Nallasivam ii and sister, Manjula. My heartfelt appreciation goes to my beloved wife, Sunitadevi for her encouragement and motivation in seeing me through this research and also to my children, Sarveen and Sharmilla who have always been my source of inspiration, love and affection. iii DEDICATION This thesis is dedicated in memory of my late father, Mr Muthusamy Nallappan who always believed in me. His strength and vision guided me throughout my doctoral study. iv ABSTRACT This study investigates the factors that influence the behavioral intention to use forensic accounting services in the detection and prevention of fraud by large Malaysian companies. The research was motivated by the underutilization of forensic accounting services, an essential and effective fraud detection and prevention method. The low usage of this service by companies in Malaysia and worldwide has been pointed out as a contributing factor in the escalation of fraud. The organizational intention to use professional services including forensic accounting services have not been researched previously. The research adopts a multi-phased mixed method research approach. In the first phase, the literature review identified the Theory of Reasoned Action (TRA), Theory of Planned Behavior (TPB), Health Belief Model (HBM) and Hierarchy of Effects Model (HOE) as relevant to the study of behavioral intention. The four theories were then cross-examined to conceptualize key constructs relevant to this study to form the initial model. The second phase consist of qualitative data collection from ten large Malaysian companies’ Chief Financial Officers (CFO). The semi-structured interview data is analyzed via a two stage content analysis technique and the initial research model is amended based on the findings. Altogether, eighteen constructs were identified and categorized into seven factors. In the ensuing quantitative phase, a survey instrument, developed to test the model, is utilized in a pilot study on 30 CFOs from large Malaysian companies. The instrument is then refined and administered in a national survey which resulted in 305 useable responses. Quantitative data is analyzed using Partial Least Square based Structural Equation Modeling. The results confirm the significant positive influence of attitude, organizational ethical climate, stakeholder pressure, perceived severity of fraud, and the negative influence of financial costs on the behavioral intention to use forensic accounting services. In addition, the moderating effect of organizational size and organizational type on the relationship between behavioral intention and its direct antecedents is supported. v This study has both theoretical and practical contributions. The theoretical contribution lies in the integrative conceptual model that has successfully incorporated constructs from the TRA, TPB, HBM, and HOE in investigating the behavioral intention to use forensic accounting services. The organizational intention to use professional services including forensic accounting services have not been investigated previously. This study is also the first ethical decision-making model to incorporate threat perceptions from HBM and awareness from HOE. Finally, perceived risks and perceived benefits from HBM, previously thought to be equivalent to attitude from TPB, have instead been established as significant direct antecedents of attitude. Practically, the findings of this study enables the Malaysian government, professional bodies, company board of directors, organizational stakeholders, and accounting firms to improve their understanding on why organizations resist the use of forensic accounting services in the detection and prevention of fraud. It will also allow them to devise practical methods and promotion strategies to increase the awareness, acceptance, and ultimately the use of forensic accounting services in the fight against fraud. vi TABLE OF CONTENTS DECLARATION .....................................................................................................i ACKNOWLEDGEMENTS ................................................................................... ii DEDICATION ....................................................................................................... iv ABSTRACT ............................................................................................................ v TABLE OF CONTENTS ......................................................................................vii LIST OF TABLES ................................................................................................ xv LIST OF FIGURES ...........................................................................................xviii CHAPTER 1: INTRODUCTION ........................................................................... 1 1.1 Background ...................................................................................................... 1 1.1.1 Prevalence of Fraud ..............................................................................3 1.1.2 Cost of Fraud .......................................................................................4 1.1.2.1 Direct Financial Costs ............................................................ 4 1.1.2.2 Management Costs ................................................................. 5 1.1.2.3 Collateral Costs ...................................................................... 6 1.2 Forensic Accounting Services in Fraud Prevention and Detection .................... 9 1.2.1 Forensic Accounting Services in Fraud Prevention ............................. 11 1.2.2 Forensic Accounting Services in Fraud Detection ............................... 12 1.3 Focus of Research .......................................................................................... 15 1.4 Significance of Research ................................................................................ 16 1.5 Outline of Thesis ........................................................................................... 18 CHAPTER 2: LITERATURE REVIEW ............................................................. 21 2.1 Introduction ................................................................................................... 21 2.2 Fraud ............................................................................................................. 22 2.2.1 Fraud Definition ................................................................................. 22 2.2.2 Types of Fraud ................................................................................... 23 2.2.3 Fraud Motivation ................................................................................ 26 2.2.3.1 Pressure/Incentive ................................................................ 26 2.2.3.2 Opportunity.......................................................................... 28 2.2.3.3