HAS THE ADOPTION OF SOPHISTICATED ACCOUNTING SYSTEMS REDUCED THE LEVEL OF FRAUD AND CORRUPTION?
Posted: August 26th, 2021
HAS THE ADOPTION OF SOPHISTICATED ACCOUNTING SYSTEMS REDUCED THE LEVEL OF FRAUD AND CORRUPTION?
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Abstract
Many companies in public and private sectors are not adequately prepared to prevent and detecting corruption and fraud. Fraud detection is an essential strategy adopted in companies as it quickly and effectively detects malpractices, account misstatements, and fraudulent activities circumventing preventive measures in taking corrective actions. An effective model in detecting and fighting corruption and fraud reduces the propensity in future fraudulent activities, thus, saving an organization’s costs. Therefore, without effective fraud detection tools and preventive measures such as sophisticated accounting systems in a company, it makes investigating suspicious activities overwhelming and expensive. This study focused on investigating whether the adoption of sophisticated accounting systems reduced fraud and corruption by employing concepts and previous studies to explore the topic. Additionally, the research analyzed empirical research and literature review related to the subject. Besides, the study used secondary data of fifty countries collected from various websites such as Yahoofinance.com, Boomerang, and Morning star. Regression analysis was used for three-year company annual financial statements data between 2017 and 2019 to get precise results. The study noted that effective modern accounting systems are an efficient anti-corruption strategy that would assist in government transparency and accountability, strengthening the audit system, and computerizing the accounting systems. Hence, a sophisticated accounting system will reduce fraud and corruption levels in both private and public entities.
Keywords: Sophisticated
accounting systems, fraud levels, corruption levels
Table of Contents
General Background of Study. 4
Adoption of Sophisticated Accounting Systems. 5
Specific Research Objectives. 7
Chapter 2: Literature Review.. 8
A Contemporary Review of Previous Studies. 10
Studies on a Company’s Performance and Fraud Reduction. 11
Studies on an Organization’s Profitability and Fraud Levels. 12
Chapter 4: Empirical Results. 17
Data Analysis and discussion of the findings. 18
Reflections and Discussion. 22
Theory Development/Contribution. 24
Reviewing Aims and Objectives. 25
Limitations and Further Research. 26
Has the Adoption of Sophisticated Accounting Systems Reduced the Level of Fraud and Corruption?
The chapter provides summary background information about the research, clarifies the focus of the study, points out the value of the research, the research questions, aims and objectives of the study, and finally, its structure.
General Background of the Study
Fraud and corruption have remained significant risks in the growth of businesses and, thus, to the overall growth in many nations globally. The two practices are ongoing challenges where the financial performance of the businesses is overstated with cost pressure coming from every direction (Wells, 2013). For example, some of the high-profile companies in the world like WorldCom, Tyco International, and Xerox have reported cases of engaging in financial frauds. Recently Enron, an American based company, was also brought down by these practices (Karttunen, 2020; Mulford & Comiskey, 2011; Frezatti et al., 2011; OECD, African Development Bank, 2012). Typically, fraud and corruption are considered as examples of white-collar crimes. They have contributed to the collapse of corporations and are even believed to be instrumental in the worldwide financial crisis. Therefore, these raise ethical issues, thus, indicating a dishonest behavior. Fraud may be described as intentional acts designed to deceive others where the victims suffer while the perpetrator gains. According to Paterson, et al., (2019) corruption refers to the abuse of the entrusted power mainly for private gains. Thus, the intended beneficiaries in the organizations suffer because of these practices as money allocated to run daily activities or projects are stolen because of manipulated or poor accounting systems.
No nation or organization is immune to fraud and corruption as this a pervasive human failure behavior. According to Krambia-Kapardis (2016), these practices are perpetuated and maintained through a culture of silence and extended by secretive cults. The cultural behavior is upheld through people’s ignorance and by the national secret acts, thus protecting the official fraud and Corruption (Zack, 2003; Lambsdorff, Taube & Schramm, 2005). There are little education and empowerment to people into questioning the unexplained and sudden wealth gained by some officials in an organization (Baum, 2006). Besides, fraud and corruption are not a new phenomenon as they have been in place as long as there is a willingness to accept favors in an exchange of conducting private businesses in the interests of some individuals (Brown, 2006; Campos & Pradhan, 2007). However, these practices may be addressed in organizations by focusing on their accountings systems. Thus, this research concentrates on assessing whether the adoption of sophisticated accounting systems has helped reduce corruption.
Adoption of Sophisticated Accounting Systems
Accounting systems are described as records, procedures, and equipment used in performing accounting functions. For a long time, organizations have used manual accounting systems with general journal entries (Riley & Rezaee, 2013; Frezatti et al., 2011; OECD, African Development Bank, 2012). In these systems, the journals and ledgers were on paper. With changing times, the manual system evolved into multiple journals and ledgers; thus, increasing efficiency in accounting (Hosomi et al., 2017; Petrucelli, 2013; Mulford & Comiskey, 2011; Frezatti et al., 2011). The example of these journals includes purchases, cash receipts, cash disbursements, sales, and general journals. Computerized accounting systems consisting of accounting software, computer files, and computers are being used by many businesses to maintain their accounting functions. Therefore, this has served to ease the accounting processes besides improving efficiency in accounting.
However, some businesses still maintain manual accounting systems as it meets their needs, although they may be prone to errors that are not easily detected, thus bolstering fraud and Corruption (Ionescu, 2017;Mulford & Comiskey, 2011; Frezatti et al., 2011). The use of a computerized accounting system is effective compared to the manual system as the computers can easily perform automated accounting activities. Fraud and corruption arise from disorganized information that can easily create confusion and difficult to understand. Besides, the storage of manual accounting systems on paper may be difficult, leading to the loss of financial statements, thus, creating accountability gaps. Therefore, computerized systems, which may be considered as sophisticated, allow quick storage of data, allow organizations to distribute their financial information easily, and provide accurate and up-to-date data. Hence, this reduces the chances of fraud and corrupt practices.
Subsequently, the relevance of sophisticated accounting systems is that it assigns quantitative values of the past, current, and upcoming activities and events. In this way, instances of committing fraudulent activities through data manipulation are lowered because of an already scheduled framework (Belfo & Trigo, 2013; Quitt, 2010). Adeniyi & Olaoye (2020) observed that the accounting system is crucial in providing information to business leaders in specialized analysis or periodic reports that are often sources of information used for making financial decisions. The decision leaders include inventory policymakers, pricing managers, outsourcing, and production supervisors (Nielsen et al. 2015; Northrup, 2006). The information is also crucial when negotiating with the labor force, customer servicing, and implementing capital investment decisions imperative for accomplishing the company’s overall vision and mission. Besides, proper and appropriately structured accounting information and systems can protect the interests of the shareholders, which are crucial to the company’s progress. Therefore, coupled with the proper implementation of information nondisclosure to unauthorized personnel guidelines, an organization can lower fraud and corruption levels by ensuring precise and timely data recording and information monitoring.
The study reviews how the adoption of sophisticated accounting systems has reduced the levels of fraud and corruption. It also recommends the best practices in accounting that may be adopted in the accounting professions. Therefore, this will provide an opportunity to evaluate the methods used in accounting systems and the definition of the level they have detected fraud and corruption in the financial statements.
Subsequently, sophisticated accounting systems provide a proper accounting system in the reporting of financial matters. Hence, this may guarantee the detection and prevention of fraud and corruption in financial reporting (Paterson et al., 2019; Pries & Quigley, 2013). Thus, through understanding the perceptions of the current practitioners, accountants, and users of accounting systems, this research aims to develop a proper plan that may enable these professions to transition from the accounting systems they use to the sophisticated accounting systems. In this way, therefore, organizations can seal some loopholes of corruption and fraud in the financial statements.
Accounting is an important aspect of financial reporting and analysis in an organization or any corporation. In this regard, the following research questions will facilitate attaining appropriate responses in the review of a sophisticated accounting system’s contributions towards curbing fraud and corrupt practices in accounting and financial reporting. The research questions are;
- How has the adoption of sophisticated accounting systems reduced the levels of fraud and corruption in financial reporting?
- Can the training of accounting professionals with sophisticated accounting skills, procedures, and ethics help in reducing the levels of fraud and corruption?
Having developed the research questions for this research, the following section highlights the study’s aims and objectives.
This study’s main objective is to review how the adoption of sophisticated accounting systems has reduced the levels of fraud and corruption. This is in the field of financial records, procedures, and reporting to detect and prevent fraud and corruption.
- To establish the contribution of sophisticated accounting systems towards reducing fraud and corruption in organizations.
- To assess the importance of accounting professionals’ training on the use of a sophisticated accounting system towards curbing fraud and corrupt practices.
The study is implemented through six chapters. Chapter one provides the general introduction of the research, its importance, the research focus or questions, and its objectives. Chapter Two reviews the literature done on by other scholars about the same topic. It describes their research results, opinions, and conclusion. Chapter Three illustrates the research methodology used by the study. It explains all the steps used by the researcher. Chapter Four justifies the resulting data from the study. Chapter Five is a discussion of the findings giving an overview of the theory development and contributions. Finally, Chapter Six gives the study’s conclusion and a summary of the key issues before recommending potential studies.
The chapter expounds on previous applicable literature from other scholars on a similar topic. It contains a discussion on the research results, attributes, opinions, and conclusions.
Organizations ensure that they portray their financial statements as accurate and fair to meet their stakeholders’ expectations on audited accounting information. According to Burke and Clark (2016), the information of financial reports is meant to ensure stakeholders are aware of the organization’s current financial status. As such, companies and government entities are continuously investing in the latest accounting systems to minimize instances of fraud or corruption from happening (Rensburg and Botha, 2014; OECD, African Development Bank, 2013). Occasionally, employees are considered significant perpetrators of fraud or corruption in an organization. Hence, organizations accounting systems become prone to manipulation when they are weakly audited and less secured. As stipulated by Fung (2014) and Ababnehet al. (2019), having weak auditing and accounting standards is a recipe for fraud penetration as it also complicates the ability of stakeholders to scrutinize the use of resources in an organization. Therefore, inadequate accountability mechanisms create loopholes of fraudulent activities as perpetrators quickly take advantage of the existing gaps to execute their illegal under dealings.
The focus of this section is to present an overview of the study area. The section further looks at various works to enhance an understanding of different views about the adoption of sophisticated accounting systems in reducing fraud (Nemati & Barko, 2004; Frezatti et al., 2011; OECD, African Development Bank, 2012). This is discussed under the contemporary review of previous studies addressing the relationship between company performance, fraud, and profitability. The section further highlights the existing research gap about the subject before proposing future areas of consideration and, hence, a recap on the chapter.
Accounting fraud is an intentional wrongful act carried out by persons in an organization or government entity like employees, which could lead to misrepresentation of the accounting statements (Spremic & Jakovic, 2012; Malagueño et al. 2010). Munteanu et al. (2016) and Vasilev et al. (2019) noted that the wrongful actions are done through misleading and deliberately reporting an entity’s financial statements by falsifying accounting or manipulating records, which is usually referred to as cooking the books of accounts. A study conducted by Dauda (2018) noted that accounting fraud could also be done through asset misappropriation, erroneously applying the generally accepted accounting principles (GAAP) or even causing an entity to pay for goods or services that have not been received. Equally, the vice can be conducted by changing accounting principles such as depreciation from one accounting period to another and altering accounting methods such as reporting inventory from either last in first out (LIFO), first in first out (FIFO), or weighted average. Hence, it is expected that companies should be consistent with their accounting principles. It also includes using appropriate methods from one accounting period to another to combat accounting frauds.
There is a need to adopt sophisticated accounting systems in a company. The traditional accounting systems have failed or lagging in dealing with the growing management complexity requirements as they are unable to check frauds in organizations sufficiently (Gee, 2014). As such, there are increasing cases of corrupt instances in many organizations across the globe. According to Nur-tegin & Jakee (2020), corruption is the abuse of trusted power for personal gain to which one owes a duty. Often, the results of a corrupt deal are detrimental and harmful to the overall economy and society. At the same time, Torsello & Venard (2016) and Ameen et al. (2018) noted that corruption is a significant human concern. It is a problem found in all societies and civilizations throughout history, irrespective of their level of prosperity or size. Historically, each civilization has contributed differently to developing corruption concepts (Dimant & Schulte, 2016). Other factors, such as ethical, political, and management systems, have also contributed to its occurrences, thus expanding fraud and corrupt instances since the advent of civilizations.
Similarly, Alferjany et al. (2018) explain that sophisticated accounting systems serve to facilitate the working of companies’ control function towards achieving collective organizational goals. Notably, the systems ensure that management can exercise control by having their desired inputs in the financial results and final reporting (Zarimpas, 2003; May 2016). They need to assess and evaluate the overall performance besides correcting any possible anomalies that could be an incentive for corruption and fraud (Ernest, 2015; Bartsiotas & Achamkulangare 2016; Klein, Dalko & Wang, 2012). The control function ensures that the management follows up with the real implementation of its plans according to the established guidelines and procedures. In this way, it is easy for the organization to monitor and discover the deviations in records and make timely adjustments whenever necessary (Alferjany et al., 2018). Thus, this lowers the instances of corruption and fraud in an organization, ultimately ensuring the shareholders’ property is protected, and their interests are preserved.
A Contemporary Review of Previous Studies
Several researchers have studied the effects of corruption on government and private companies, and the perceptions it creates. For instance, a study by Brusca et al. (2018) observes that organizations need to have robust accounting systems that will ensure strengthened audit departments. The researchers based their work on a panel data from seventy-five nations globally, with their work testing the relationship that exists between the accountability and transparency of a nation. It was established that the enhancement ensured that organizations have robust internal control mechanisms that generate adequate transparency and allows stakeholders to access all the financial and non-financial information about the company. The study also observed that organizations with reliable accounting systems have a better quality of budgetary management systems than those with weak systems. The most significant benefit of a robust accounting system is that it reduces instances of corruption and fraud in the companies. Therefore, in their view, most researchers acknowledge that quality budgetary management, transparency, and security audit systems positively contribute to the institutional perception of corruption.
Effects of Implementing Transparency Measures
According to Peysakhova & Anyushenkova (2018), when organizations use the latest accounting systems, it is possible to embrace adequate, transparent, and accurate information disclosure. Modern accounting systems improve the way accounting processes are done besides eliminating errors in the accounting information. Consequently, this mitigates the risk of an organization’s influential parties conniving to execute illegal or unethical activities that could harm the business committing (Kloviene and Gimzauskiene, 2014; Alabdullah et al., 2013). The systems also limit the exercise of power beyond the employees’ area of control. Equally, Kelley & Evans, (2017) contend that it is paramount to ensure that stakeholders access the financial and non-financial information about an organization’s performance for either public or private entities to reduce instances of misappropriation. Moreover, accounting systems assist in the socio-economic development of societies by providing non-financial information crucial to society’s development, such as social values, comprehensive national income, and environmental considerations (Maciuca & Socoliuc, 2014; DeMaris, 2004). Hence, organizations that commit accounting fraud are aware of its negative ramifications on users, both internal and external, since they cannot decipher the organization’s actual financial position.
Studies on a Company’s Performance and Fraud Reduction
Researchers have studied the effects of organizations using modern and sophisticated accounting systems in their processes, with most studies on the company’s general performance and fraud reduction. A study by Trabulsi (2018) evaluated the result of applying the latest accounting systems on the overall performance of businesses in Saudi Arabia. The study used primary collected from the country’s small and medium scale enterprises. The collection tools were mainly questionnaires distributed to a sample size of one hundred and thirty-seven (137) participants who voluntarily gave information regarding the topical issues of the study. The analysis was done using study the smart partial least squares to test study hypotheses. From the findings, the study showed that using the accounting information system had significant positive effects on organizational performance. Some of these include improving decision making, cost reduction, and advanced financial reporting (Clarke & Rama, 2008; Kanellou & Spathis, 2013; Marcinko & Hetico, 2014; Benito et al., 2018). Once the crucial outcome was the aspect of providing quality information, which is imperative in preventing the occurrence of fraudulent activities. The reasons given include the fact that the system offers complete transactions with the procedure followed. The study by Spremic & Jakovic (2012) examined the effects of using modern accounting systems and established that modern accounting systems increased the company’s e-business effectiveness. The study relied on primary data collected from a sample size of two hundred and fifty-two (252) e-business Croatian companies. Ironkwe & Nwaiwu (2018) studied the impact of accounting information systems on Nigerian companies’ financial and non-financial measures. The scholars’ investigation utilized primary data from sixteen (16) companies, using both qualitative and quantitative methods. The study data were obtained from the Nigerian stock exchange within five years between 2011 and 2014. The data was then analyzed using multiple linear regression techniques with the state scholars’ investigations. The experimental study results indicated that accounting information systems exert substantially beneficial impacts on Nigerian companies’ financial and non-financial parameters. Therefore, it was demonstrated that utilizing sophisticated systems ensured that stakeholders were supplied with statistical package levels of the companies besides enhancing accountability purposes.
Studies on an Organization’s Profitability and Fraud Levels
A review by Ganyam & Ivungu (2019) investigated the effect of applying sophisticated accounting systems on an organization’s profitability and fraud implications. The research used an exploratory approach and relied exclusively on secondary data. The study concluded that there was a significant relationship between profitability and accounting systems that the companies were using(Kanellou & Spathis, 2013; Marcinko & Hetico, 2014; Benito et al., 2018). In this case, it was noted that an accounting system’s effectiveness improves the quality of the financial reports, thus resulting in inappropriate decision-making among the organization’s management. Thus, it is necessary to note that companies advanced accounting systems enhance a company’s performance measures, effective internal control systems, and facilitating financial transaction systems and processes.
Moreover, Saied (2014) analyzed the effects of modern accounting systems on an organization’s financial performance. The researcher used a research design consisting of a survey being carried from forty (40) top managers from Tata consultancy services based in India. The study relied on primary data collected using questionnaires supplied to the respondents. The study’s findings noted that the utilization of accounting systems had a significant relationship with the knowledge of accountants and managers. This implies that having knowledgeable staff who are provided with sophisticated accounting systems works for its benefit. It also goes a long way to supporting decision making and the efficient use of organization resources. Equally, a study by Hla & Teru (2015) examined the efficiency of applying the latest and modern accounting systems on performance measures in organizations. Their work used an exploratory method that solely depended on the application of secondary data. The research findings indicated that the significant effect of the use of information technology is that it has led to the modernization of accounting methods (Shin & Glennerster, 2003). The impact of this is felt majorly in recording and tracking financial transactions. Thus, such developments have led to improved management and strengthened internal controls, crucial in curtailing corrupt practices in any organization.
As illustrated in previous studies, most researches applied qualitative methods both in collection and analysis. A few have used quantitative to implement their studies. Also, interview-based research would facilitate a better examination of the perceptions of preparers and users of a company’s financial statements about fraud and corruption and their ultimate view on the application of sophisticated accounting systems. In this case, therefore, it will offer a piece of incisive information on addressing the main issues of the study.
Accordingly, further investigation is needed to examine the potential of fraud and corruption on market performance in different countries when sophisticated accounting systems are adopted.
Sophisticated accounting systems ensure that the company’s financial information is timely, precise, reliable, and available to the stakeholders on a need basis. The financial information should be free from manipulation and indicate a real, authentic, and correct view. Thus, adopting sophisticated accounting systems in the company ensures that the managers are accountable, improves performance, and reduces fraud instances, leading to better management of internal business transactions. Consequently, sophisticated accounting systems improve financial performance and decision making in the business. It also enhances the application of organizational resources, thereby reducing fraudulent instances. Hence, an improvement in financial reporting helps prevent intentional manipulation and anomalies in financial statements besides limiting the potential of engaging in fraud amongst its employees.
The section describes data, methodology, and statistical techniques adopted in the research to answer the research objectives and questions. Initially, the study evaluates the correlation of sophisticated accounting systems with fraud and corruption levels in developed and developing nations. This review’s conceptual framework is based on Brusca et al. (2018) on accountability and transparency in fighting fraud and corruption. Thus, the selection of the review’s research design was made to accomplish the stated study aims.
The study used a population of one hundred countries in both developed and developing economies. Additionally, the survey used e-mails to send open-end questionnaires to specifically selected companies in both government and private sectors. The selected companies were from various industries, such as banks and finance, agriculture, technology, service, and manufacturing. Furthermore, the questionnaires contained ten questions that reflected the comprehensiveness and timeliness of the research objectives (Burke, Tomlinson & Cooper, 2010; Okour, 2016). More so, the surveys were filled based on the country under review by companies’ representatives and documented support by adequate evidence. The answers are then quantified and an index assigned to each nation on a scale of 1 to 10, 1 being the country with the least fraud levels, and 10 being the highest. A simple average was used to assign the numeric values on the scale of the answers of the ten questions on the questionnaires. Equally, the relevance and benefits of the answers are classified according to Martinez Guzman and Joyce, (2020), Ríos et al., (2016), and De & Masud (2011) on budget transparency and accountability at a global level. More so, the study analyzed the impact of sophisticated accounting systems on fraud levels using three-year company annual financial statements data between 2017 and 2019. The secondary data collected was assessed from various websites such as Yahoofinance.com, Boomerang, and Morning star. However, for comparability purposes, only fifty countries were selected to form the sample size from the population of one hundred countries. Likewise, there was missing financial data for countries that were dropped from the population, hence could not be adopted in the final assessment.
The research adopted a quantitative research design, where regression analysis was used to analyze the impact of the independent variable on corruption and fraud. Secondary data was collected for developed and developing nations according to their corruption levels and the adoption of accounting systems in fraud management. The data collected in the study revolved around accountability, transparency, fraud, and corruption in private and government entities. Additionally, the researchers used the ordinary least squares (OLS) regression model to determine the significance of the study’s variable coefficients: accounting system, transparency, corruption, and fraud levels. Likewise, the regression and correlation models were developed to assess the strength of the relationship between the variables (Breen, 1996; Kanellou & Spathis, 2013; Marcinko & Hetico, 2014; Benito et al., 2018). Thus, quantitative research will assist in addressing and complementing all designs’ strengths, thereby enhancing results reliability. Finally, the dependent variables employed in this study are plotted on Tobit regression to estimate the linear correlation between the study variables. According to Zeng et al. (2019), a Tobit regression uses the maximum possibility method in determining the variation of independent variables (x) against the dependent or expected variable (y). Hence, this is employed to facilitate the understanding of variations among the variables.
The survey adopted dependent, independent, and control variables in its analysis to establish whether the adoption of sophisticated accounting systems influences corruption and fraud.
The dependent variables employed in this study include the Corruption Perception Index (C.P.I.) of nations based on the data provided by Transparency International that accords a score to countries according to how corrupt they are perceived. The C.P.I. scale runs from 0 to 100, with 1 being the highest and 100 the least corrupt. Besides, the World Bank corruption indicator from World Bank (2020) is used as a dependent variable. The World Bank indicator ranks public sectors on a scale of 1to 6, with 1 being the lowest corrupt and 6 the highest corrupt. Still, the International Country Risk Guide that ranks countries according to their risk corrupt had been adopted (P.R.S. Group, 2020). Finally, the government’s confidence level that measures citizens’ confidence with their governments is used as a dependent variable in the survey. Therefore, the data is collected from Democracy Barometer, (2020), before being sorted and analyzed.
The independent variables used in the study are the country’s economic and inequality levels based on the data collected from World Bank (2020) and the democracy level from Democracy Barometer (2020). The economic level reflects the country’s per capita income, gross domestic product (GDP) and purchasing power. Likewise, inequality levels measure unequal income distribution among households in an economy determined by the World Bank. Thus, it is expressed as a percentage, with zero being perfectly equal, and one hundred percent being the highest inequality.
According toNemati & Barko (2004), control variables refers to constant elements that remain unchanged throughout the study. However, these variables can strongly influence the study outcome. In this review, the population of the sampled countries is used as the control variable. The population is considered suitable since it can easily cater for the effect of influential factors not included in the model on dependent variable, thus reducing errors in the final results of the study.
The equations in this study are formulated as follows;
Corruption and fraud levels = α it + β Xit + Eit
Where: t is the period expressed as annum, i
is the country, α it represents the dependent variable, and β Xit shows the
independent variable while Eit is the control variable.
The chapter provides data presentation, analysis, and discussion of the empirical results used in determining whether sophisticated accounting systems influence fraud and corruption levels in developed and developing nations. The chapter employed statistical techniques in data analysis to answer the research questions and accomplish the study objectives. Likewise, descriptive statistics are applied to determine statistics parameters such as the samples mean, median, standard deviation, minimum, and maximum data. Furthermore, Tobit regression was used to determine the relationship between sophisticated accounting systems and corruption and fraud levels and accurate findings in the analysis. Therefore, this section is organized in chronological order as an introduction, data presentation, data analysis, and discussion of the outcome, and summary of research findings.
Descriptive statistics that calculated the samples mean, median, standard deviation, minimum, and maximum values were used to analyze the data, as shown in table 1.
Table 1: Descriptive statistics
| Minimum | Maximum | Range | Mean | Std. Deviation | |
| Corruption Perception Index | 1.25 | 9.54 | 8.29 | 3.66 | 1.78 |
| World bank Corruption Indicator | -1.65 | 2.44 | 4.09 | -0.28 | 0.85 |
| Confidence level | -9.16 | 90.4 | 99.56 | 40.95 | 25.22 |
| Democracy index | 1.78 | 9.87 | 8.09 | 5.68 | 1.85 |
| GDP per capita | 5.64 | 10.89 | 5.25 | 8.72 | 1.17 |
| Population (million) | 0.65 | 1347.92 | 1347.27 | 74.54 | 204.47 |
Table 1 is a descriptive analysis that shows findings from the examination of the variables of the study. The minimum corruption index is 1.25, while the maximum is 9.54, with a mean of 3.66 and a standard deviation of 1.78 according to data collected from Transparency International. However, the World Bank Corruption Indicator shows a minimum of -1.65 and a maximum of 4.09 with a mean of -0.28 and a deviation of 0.85. The other variables include the democracy index, G.D.P. per capita, and population size, as illustrated in Table 1. Subsequently, Table 2 shows Tobit regression on the effects of corruption and confidence level about a country’s G.D.P. per capita, transparency, population, democracy, and equality based on a 10% significance level.
Tobit regression analysis is adopted in the study to establish the correlation between independent and dependent variables in the model using statistical tools and techniques. In the research, Tobit regression is used to determine whether the adoption of sophisticated accounting systems reduces fraud and corruption in the selected countries.
Table 2: Tobit regression
| Variables | World Bank Corruption Indicator | Confidence Level |
| G.D.P. per capita | 0.63 | 0.34 |
| Transparency | 0.84 | 0.16 |
| Population (million) | 0 | 0 |
| Democracy index | 0.74 | 0.31 |
| Equality | -4.59 | -4.6 |
| Significance level | 10% |
According to Table 2, the Tobit assessment reveals the relationship between the variables with confidence and corruption indices. Across the countries examined, equality is ascertained at negative about corruption and confidence levels, implying disparities. Table 3 shows
Tobit regression on effects of perception on corruption and corruption levels about a country’s G.D.P. per capita, transparency, democracy, and equality at significance level 10%
Table 3- Tobit regression
| Corruption Perception Index | World bank Corruption Indicator | |
| G.D.P. per capita | 0.47 | 0.34 |
| Democracy index | 0.18 | 0.09 |
| Transparency | 0.73 | 0.27 |
| Equality | 0.24 | -2.37 |
| R-squared | 0.13 | 0.25 |
| Significance level | 10% |
As indicated, Table 3 is a summary of the Tobit regression on effects of perception on corruption and corruption levels about a country’s G.D.P. per capita, transparency, democracy, and equality at significance level 10%. The results shows that the GDP per capita has a positive relationship with CPI at 0.47 and corruption indicator at 0.34. The same situation is reported for democracy index at 0.18 and 0.09, and transparency at 0.73 and 0.27 for CPI and CI reports, respectively. However, equality reports a negative relationship against the CI while a positive relationship against the CPI. The analysis is performed at 10% significance level, with an r-squared results of 0.13 or 13%. Thus, a 13% r-squared implies that there other factors that influence CPI and CI that accounts for 87% of all the changes in the dependent variables.
Data Analysis and discussion of the findings
Tobit regression in Table 2 shows that a country’s G.D.P. per capita has a positive and significant impact on the effects of corruption and confidence level. Additionally, it can be noted that at a 10% significance level, the G.D.P. per capita influence the corruption levels at 63% and a confidence level at 34%. Furthermore, it can be noted from table 2 that transparency also has a positive and significant impact on the effects of corruption and confidence level. It is also indicated that at the 10% significance level, a country’s transparency affects the corruption levels at 84% and a confidence level at 16%. Likewise, democracy has a positive and significant impact on the effects of corruption and confidence level. It is indicated that at a 10% significance level, a nation’s democracy impacts corruption at 74% and a confidence level at 31%. The three parameters are based on statistical significance, as exhibited by a 10% significance level.
However, the population does not correlate with a country’s corruption level as it has zero effect on both corruption and confidence levels. Furthermore, equality has an inverse relationship with corruption at a 10% significance level. It can be noted from table 2 that equality has an inverse relationship of 4.56 with World Bank Corruption Indicator and also an inverse correlation of 4.6 with the confidence levels. This implies that as a country’s equality level on the distribution of national wealth increases, the corruption level decreases.
Equally, the Tobit regression in Table 3 indicates that a country’s G.D.P. per capita has a positive and significant impact on the effects of corruption and confidence level at a 10% significance level. At a 10% significance level, the G.D.P. per capita influences the Corruption Perception Index at 47% and the World Bank Corruption Indicator at 34%. Furthermore, it can be noted from Tobit regression on table 3 that transparency also has a positive and significant impact on the effects of corruption and confidence level. At a 10% significance level, a country’s transparency affects the Corruption Perception Index at 73% and the World Bank Corruption Indicator at 27%. Additionally, democracy has a positive and significant impact on the effects of corruption and confidence at a 10% significance level. It is indicated that at a 10% significance level, a nation’s democracy impacts the Corruption Perception Index at 18% and a confidence level at 9%. The three variables are based on statistical significance, as exhibited by a 10% significance level.
Furthermore, a country’s equality has a positive and significant relationship of 0.24 with the Corruption Perception Index at a 10% significance level. However, equality has an inverse relationship with the World Bank Corruption Indicator at a 10% significance level, which is 2.37. The R-squared in the Tobit regression on table 3 is 0.13 and 0.25 in the Corruption Perception Index and World Bank Corruption Indicator. Consequently, this shows that equality harms corruption perceptions, indicating that nations with high equality levels require more transparency and accountability to control corruption levels. Democracy index has a positive correlation showing countries with high democracy rates have low corruption levels and better mechanisms to fight fraud and corruption acts. Therefore, countries with high accountability and transparency levels encounter the least corruption levels as public entities disclose all vital financial information to their citizens and other stakeholders.
The research findings indicate that G.D.P. per capita, democracy index, and transparency has a positive and significant relationship with the perception of corruption and corruption levels. This implies that countries can reduce corruption levels by adopting transparency levels in their public companies by using innovative accounting systems that ensure full disclosure of accounting information, eliminate accounting errors, and enhance accountability. Furthermore, transparency is an essential requirement in communication and public administration that enhances integrity and reliability in public institutions, winning public trust that will lower the Corruption Perception Index. Therefore, transparency has a significant and positive relation to corruption levels, as accounting systems produce relevant, reliable, and precise information to citizens and other stakeholders.
Additionally,
countries with a high level of democracy index have low corruption rates as
democracy enhance accountability in public funds and fight corruption.
Likewise, G.D.P. per capita is an important indicator of corruption levels as a
country’s citizens feel a sense of well-being when the G.D.P. per capita is
high, as reflected in their living standards. Therefore, countries can reduce
corruption levels by checking on the three variables that are G.D.P. per
capita, democracy index, and transparency. However, the population does not
affect fraud and corruption levels; thus, increasing or decreasing the
country’s demographics does not affect corruption. On the other hand, equality
has an inverse relationship with corruption levels, and increasing inequality
will lead to a decrease in a country’s corruption.
Transparency has a significant and positive relation to corruption levels, as accounting systems produce relevant, reliable, and precise information to citizens and other stakeholders. As such, the findings in this study are consistent with research conducted by Öge, (2016) that holds that transparency matters in corruption compliance efforts and fraud levels in business operations. The study findings are consistent with a previous study by Meijer et al. (2018) that observed that government transparency in public entities lowers the corruption levels and perception in the countries. Additionally, the study holds that transparency enhances communication and public administration, ensuring integrity and reliability in public institutions, which win public trust and lower corruption perception index in a country. These findings agree with a previous review by De et al. (2018) that holds that improving record management by using an accounting system, an accounting system promotes transparency preventing corruption. The research findings support a study by Žurga (2017) that stated that transparency enhances communication in accountability, ethical behavior, and clean government in the fight against corruption. Therefore, transparency plays a key role in promoting accountability and reducing corruption levels in a country.
At the same time, it was noted that countries that adopted accrual accounting and sophisticated financial systems have the lowest fraud levels in their business operations. Thus, this result agrees with Mnif and Gafsi’s (2019) review, which established that adopting accounting standards in public sectors positively correlates with fraud levels. Further, it noted that modern accounting systems reduce accounting errors and misstatements and reduce fraud in companies. As such, these findings were consistent with previous studies by Saona and Muro (2018), Reurink (2018), and Houqe (2018) that observed that incorporating accounting systems in business operations led to the reduction of fraudulent activities in companies. Also, the researchers noted that the companies that use the modern accounting system experienced fewer fraud levels than companies that adopt traditional accounting systems. These findings are consistent with a review by Danica t al. (2019), which stated that modern accounting systems have minimal human interferences in manual data entry, thus reducing accounting errors and misstatements. Hence, countries that used accrual accounting and sophisticated financial systems compared to the traditional accounting systems reported lower fraud levels.
Equally, high corruption levels have an inverse relationship with the confidence level, as observed by the research analysis. In this case, it implies that countries with low corruption levels elicit high confidence with their citizens and the highest transparency and accountability levels. The conclusion is consistent with a study on the adoption of accounting standards by Duenya et al., 2017 in Nigeria. It was observed that proper accounting techniques have a positive correlation with companies’ accountability. Additionally, a high confidence level in a country is explained in the legitimacy theory. This also agrees with an investigation by Mbelwa et al. (2019) that noted that the accrual accounting system improves the confidence level of a country, reducing corruption levels. Therefore, when there is more transparency in the country, the citizens have more confidence in the government, consistent with the research findings.
However, the study noted that high-income distribution inequality affects corruption perceptions and high risk of engaging in corrupt and fraudulent activities. These findings agree with the analysis by Chapman and Lindner, (2016), Benito et al. (2018), and Tajaddini and Gholipour, (2018) that holds that income equality in terms of salaries lowers the level of corruption in countries. Furthermore, the study noted that high natural resource inequality in a country leads to high corruption. These outcomes correlate with previous studies by Policardo and Edgar, (2018) and Uslaner and Rothstein, (2016) that noted that economic inequalities lead to high corruption levels in a country. Therefore, high-income distribution inequality leads to high corruption levels in a country as more citizens engage in corrupt activity, sufficiently high monitoring levels.
Similarly, the democracy level has a significant and positive impact on corruption levels, as observed in the review. These findings are consistent with previous studies by Zandi et al. (2019), Gossel, (2018), and Van (2017) that holds that countries with high democracy indices have low corruption rates as democracy enhance accountability in public funds and fight in corruption. Additionally, it was noted that G.D.P. per capita has a positive relationship with corruption levels, which is consistent with a study by Christos et al. (2018), Ghaniy and Hastiadi, (2017), and Dutta et al. (2017) that observed that human capital and G.D.P. per capita have a significant and positive correlation with corruption levels in a country. However, the population does not correlate with corruption levels consistent with a study by Kolstad and Wiig (2016) that observed that participation rates, democracy, and unemployment rates influence corruption levels while the population is a constant factor. This conclusion is consistent with a review conducted on countries with high democracy levels with low corruption levels, as observed by Dimant and Schulte, (2016). Therefore, private and public companies should adopt sophisticated accounting systems to enhance accountability and transparency, reducing fraud and corruption levels.
Theory Development/Contribution
The
research contributes to studies indicating the extent to which sophisticated
accounting systems influence fraud and corruption levels in developed and
developing nations. From the analysis, it can be concluded that an accounting
framework is an essential tool in fraud and corruption reduction. It
facilitates the implementation of precise financial transactions, thereby
enhancing accountability and transparency. Additionally, the data collected
from fifty sample countries indicate that modern accounting techniques have a
significant and positive impact on reducing fraud and corruption levels. Consequently,
public and private sectors should adopt advanced accounting systems to help in
transparency and accountability on how they manage their resources.
Furthermore, incorporating sophisticated accounting systems in business
operations minimizes accounting errors, misstatements and reflects the precise
financial performance of companies to the stakeholders and other users of
financial information. Thus, e-governance initiatives and modern technologies
enhance accountability and provide a measure against fraud and resource
misappropriation. Hence, the fight against corruption requires political will
at the supranational level and involvement of all stakeholders to achieve
fiscal and technological integration.
The chapter concludes with the study objectives and contribution before recommending further research, and overall conclusions about the study.
The study has provided an understanding of the role of sophisticated accounting systems in reducing fraud and corruption levels.The study has focused on investigating whether the adoption of sophisticated accounting systems reduced fraud and corruption by employing concepts and previous studies to explore the topic. Thus, empirical studies and review of literature has been assessed to enhance the understanding of the research area. Throughout the study, it is demonstrated that modern accounting systems have become an integral part of organizations as they generate crucial information used in accounting and overall decision-making processes. Furthermore, incorporating sophisticated accounting systems in business operations minimizes accounting errors, information misstatements, and reflects companies’ precise financial performance to the stakeholders and other users of financial information. Equally, the primary goal of sophisticated accounting systems is to control business operations by preventing, minimizing, and combating accounting frauds and errors. More so, the systems assist companies in improving performance and achieving their vision and mission. Hence, reliable internal control systems are required for companies to generate the expected accounting information in reducing corruption and fraud levels in institutions. At the same time, the study postulates that it is essential to embrace modern and sophisticated accounting systems when executing managerial roles, particularly controlling and planning, given that they can lower instances of fraud. The sophisticated accounting system used in the planning function helps companies provide data related to the study and analyses of organizational goals. It also provides the business leaders with information that concerns the relationship between profits, volume, and cost, critical in determining the amount of interaction and interdependence between the three variables. Therefore, it is an essential tool for enhancing the preparation of lists of financial flows, budget plans, and building a forecast on the organization’s needs. In this case, sophisticated systems go a long way towards enhancing the implementation of quantitative measures of accounting, thereby lowering instances of fraudulent activities. Equally, the preparation of lists about budgeting and forecasting are later converted into financial statements that are crucial in reflecting the various facets of an organization’s activities. Therefore, this is crucial in the coordination of detailed plans and policies that the various departments adopt to meet their deadlines and accomplish targets.
The study findings can be used to contribute to diverse business operations using a sophisticated accounting system to reduce corruption and fraud. The research conclusions can be adopted in the development and application of accounting systems to support business operations in improving performance, adjusting their techniques, and reducing accounting misappropriations and fraud. Additionally, business owners can use the study recommendations to enhance internal control systems based on modern accounting techniques. Company management in accounting departments and information technology specialists can utilize the knowledge presented by the study to develop an accounting method that will automatically update accounting information such as inventory level and human resource issues to reduce errors from manual data inputs. Besides, top-level company management can benefit from advanced accounting systems to facilitate decision-making processes, enhancing efficient control systems, and improving the business’ financial performance. Therefore, the study will immensely enhance the reduction of corruption and fraud in all company levels by using sophisticated accounting systems and improving overall business performance.
Limitations and Further Research
Most previous studies addressing the same topic and objectives applied qualitative methods in data collection and analysis. This is a considerable limitation in research development and analysis as only a few reviews have used quantitative methods in implementing their research. Besides, the study collected secondary data in its data and methodology due to the Covid-19 pandemic, limiting travels and access to sources for primary data. Thus, one-on-one interviews research would enable better examination of the perceptions of preparers and users of a company’s financial statements on fraud and corruption, as well as their ultimate view on the application of sophisticated accounting systems. In this case, therefore, it will offer a piece of incisive information on addressing the main issues of the study. Hence, further investigation is needed to examine the potential of fraud and corruption on market performance in different countries when sophisticated accounting systems are adopted.
Fraud and corruption form the significant problems of society and
economic growth. It leads to poor management of resources in private and public
entities. It directly impacts the economic level, the country’s legal system’s
strength, and the individual’s socio-cultural dimensions. Accounting fraud
disadvantages the users of financial information since the reports do not
accurately depict the organization’s financial position. Also, contemporary
issues in and management have contributed significantly to the occurrences and
increase in fraud. Therefore, the government and private sector should work
together to address the menace by implementing transparency and accountability
policies in the institutions. Adopting sophisticated accounting systems can
reduce fraud and corruption due to accurate financial recording, quality
systems development, and effective financial management structures. Thus,
companies should adopt modern accounting systems to assist in quality budgeting
and financial management to improve organizations’ perceptions of fraud and
corruption.
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