ACCOUNTING & FINANCE

1. Agency Theory

Stephen Ross and Barry Mitnick were the first scholars to proposed and created agency theory. Agency theory expanded this risk-sharing method among individuals or group to include the so-called agency problem that occurs when cooperating parties have different goals and division of labour (Jensen & Meckling, 1976). Specifically, agency theory is at present a relationship, in which one party called the principal delegates work to another person called the agent, who performs that work. This can be applied in fraud topics

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3 (4), 305-360.

2. A Dynamic Theory of Personality – Kurt Lewin (1935)

The main theory identified in Psychology was Kurt Lewin’s Dynamic Theory of Personality (1935). Behavior derives from the coexistence of facts. This coexistence of facts creates a dynamic field, which means that the state of any part of the field depends on all other parts. Behavior depends on the current field rather than the past or the future (Lewin, 2013). This can be applied in fraud topics

Lewin, K. (2013). A dynamic theory of personality-selected papers. Read Books Ltd.

3. American Dream Theory – Messner and Rosenfeld (1994)

This can be applied in fraud topics

Messner, S., & Rosenfeld, R. (1994). Crime and the American Dream. Belmont: Wadsworth

4. Attribution Theory

Harold Kelley‘s model (1973) is an attribution theory in which people make causal inferences to explain why other people and us behave in a certain way (Kelley & Michela, 1980). It is concerned with both social perception and self-perception (Kelley, 1973). Attribution theory is concerned with how ordinary people give meanings to explain the causes of behavior and events. Attributions are the result of a cognitive process by which people assign an underlying cause and explanation to an observed event (Kelly, 1973; Kelly & Michela, 1980). That means, individual tried to develop a common-sense explanation of why actions have occurred and make causal inferences. It is assumed that people make attributions to achieve a greater level of understanding (and thus control) over their lives and environment. Attribution theory is a social psychology theory that explores how people interpret events and behaviors and how they ascribe causes to the events and behaviors. attribution theory examines the use of information in the social environment to explain events and behaviors. This can be applied in corporate donations, internal control system topics

Kelly, H.H. (1973). The process of causal attribution. American Psychologist, 28, 107-128.

Kelly, H.H., Michela, J.L. (1980). Attribution theory and research. Annual review of Psychologist, 31, 457-501

5. Benefit Theory

According to Musgrave & Musgrave (1973) and Musgrave and Peacock (1958), the benefit theory bases taxes to pay for public-goods expenditures and the willingness to pay for benefits received. It was initially developed by Knut Wicksell (1896) and Erik Lindahl (1919). Benefit theory proposes that governments should impose taxes on payers according to benefit provided. The higher the benefits a person or an entity derives from governmental action the more such individual or entity should pay to the government. This can be applied in taxation topics

Musgrave,R.A., & Musgrave,P.B.(1973). Public Finance in Theory and Practice, ch. 3, The Theory of Social Goods, C. Efficient Provision of Social Goods, p.68.

Musgrave, R.A., & Peacock, A.T. [1958] 1994 ed. Classics in the Theory of Public Finance, 72-119.

6. Broken Trust Theory – Albrecht et al. (2004)

This can be applied in fraud topics

Albrecht, W. S., Albrecht, C. C., & Albrecht, C. O. (2004). Fraud and corporate executives: Agency, stewardship and broken trust. Journal of Forensic Accounting, 5(1),109-130.

7. Contemporary Theory of Wages

The contemporary propositions have a link of wages with collective bargaining, existence of sticky wages that is made their earnings not adjusting properly with labour market conditions, approval of national minimum wages through the law, and so on (Acharya, 2017). This can be applied in wages topics

Acharya, S. (2017). Wages and wage determination, Ind. J. Labour Econ., 60, 303–308

8. Contracting Theory,

Contract theory is the study of the way people and organizations construct and develop legal agreements. It analyzes how parties with conflicting interests build formal and informal contracts. Contract theory is an economic theory that entails how parties can develop a legal agreement in a situation that involves asymmetric information. Contract theory applies the principles of economic and financial behaviors as the parties involved are motivated by different incentives to undertake on not to undertake a particular action. The first significant development in the field was by Kenneth Arrow in the 1960s. In essence, contract theory provides the parties involved with the appropriate incentives and motivations to work together; it is therefore considered under the economic analysis of law. Contract theory is commonly used by employers and employees seeking optimum employees’ benefits.

9. Cognitive Dissonance Theory – Festinger (1957)

Festinger’s Cognitive Dissonance Theory (1957) concentrates on how humans achieve inner coherence. An individual who suffers from inconsistency tends to become psychologically uncomfortable and is motivated to try to reduce such dissonance, as well as to actively avoid situations and information prone to increase it (Festinger, 1962). This can be applied in fraud topics

Festinger, L. (1957). A theory of cognitive dissonance Evanston. IL: Row, Peterson.

Festinger, L. (1962). A theory of cognitive dissonance. Stanford University Press

10. Differential Opportunity Theory – Cloward and Ohlin (2013)

This can be applied in fraud topics

Cloward, R. A., & Ohlin, L. E. (2013). Delinquency and opportunity: A study of delinquent gangs (Vol. 6). Routledge.

11. Enterprise theory

This is a broader concept than the equity theory, but less well defined in its scope and application. In the entity theory, the firm is considered to be a separate economic unit operated primarily for the benefit of the equity holders, whereas in the enterprise theory the company is a social institution operated for the benefit of many interested groups. In the broadest form these groups include, in addition to the shareholders and creditors, the employees, customers, the government as a taxing authority and as a regulatory agency, and the general public. Thus, the broad form of the enterprise theory may be thought of as a social theory of accounting. The enterprise theory concept is largely applicable to large companies which should consider the effect of its actions on various groups and on society as a whole. From an accounting point of view, this means that the responsibility of proper reporting extends not only to shareholders and creditors, but also to many other groups and to the general public. The most relevant concept of income in this broad social responsibility concept of the enterprise is the value-added concept.

12. Entity Theory

According to Robert (1955) the idea of the corporate entity as it is used today began in the seventeenth century. It is generally agreed that the corporate concept as we understand it today was first promulgated by Lord Coke about 1600; and his declaration that the-corporation is an entity, an artificial person created by the sovereign, found expression by Chief Justice John Marshall in the famous Dartmouth College case (Dartmouth College v. Woodward, 4 Wheat. (U.S.7 51S (IS19) • There is still, however, controversy whether the corporation is an entity created by the law or whether it is merely a group of persons bound together by a contractual relationship.

Roberts, Arthur Theophile, (1955). The Proprietary Theory and the Entity Theory of Corporate Enterprise. LSU Historical Dissertations and Theses.

13. Expected Utility Theory – Neumann and Morgenstern (1944)

This can be applied in fraud topics

14. Equity theory

This focuses on two sides: the input and the outcome. An employee compares his or her job’s inputs with an outcome’s ratio. If the employee perceives inequality, he or she he will act to correct the inequity. The focus of the theory is on the exchange relationship where individuals give something and expect something in return. Richard C. Huseman, John D. Hatfield and Edward W. Miles (2013) and Adams, (1963, 1965) explained that Equity theory draws from exchange, dissonance, and social comparison theories in making predictions about how individuals manage their relationships with others.

Adams, J. S. (1963) Toward an understanding of inequity. Journal of Abnormal and Social Psychology, 67, 422-436.

Adams, J. S. (1965) Inequity in social exchange. In L. Berkowitz (Ed.), Advances in experimental social psychology (Vol. 2, pp. 267-299). New York: Academic Press.

15. Finance Theory-Fisher (1982)

This can be applied in fraud topics

Fisher, R. C. (1982). Income and grant effects on local expenditure: The flypaper effect and other difficulties. Journal of urban Economics, 12(3), pp. 324-345. doi: https://doi.org/10.1016/0094-1190(82)90021-3.

16. Fund Theory

The fund theory emphasizes neither the proprietor nor the entity but a group of assets and related obligations and restrictions governing the use of the assets called a “fund.” Thus, the fund theory views the business unit as consisting of economic resources (funds) and related obligations and restrictions in the use of these resources. The fund theory is useful primarily to government and non-profit organizations. Hospitals, universities, cities and governmental units, for example, are engaged in multifaceted operations that use separate several funds.

17. General theory of profit-driven crimes – Naylor (2003)

This can be applied in fraud topics

Naylor, R. T. (2003). Towards a General Theory of Profit‐Driven Crimes. British Journal of Criminology, 43(1), pp. 81-101. doi: https://doi.org/10.1093/bjc/43.1.81

18. General Theory of Crime – Gottfredson Hirschi (1990)

This can be applied in fraud topics

Gottfredson, M. R., & Hirschi, T. (1990). A general theory of crime. Stanford University Press.

19. Income and employment theory,

This study is underpinned on this theory because it determines the equilibrium level of income of a country and that is related to the level of employment. This theory is concerned with the relative interrelation of these macroeconomic factors, which is levels of output, employment, and prices in an economy setting. Governments only try to create policies that contribute to economic stability. This theory started at the severity of the Great Depression of the 1930s in the United States and Europe. This can be applied in wages topics

20. Institutional Theory

Johan (2017), institutional theory deals with stability and change of institutions. Institutional theory brings in the social context. Examples of institution are education, football as a game; institutions are the rules of the game. Institutional theory addresses the intense and more resilient issues of a social framework; it considers the procedures through which models, regulations, values, norms, and schemas become relevant as authoritative benchmarks for corporate social conduct Scott (2004); Ganda & Milondzo (2018, p.2).

Johan,I.S.(2017), Institutional theory, IN520 Lecture, https://www.uio.no/studier/emner/matnat/ifi/IN5210/h17/lecture-slides/institutional-theory.pdf

Ganda, F. & Milondzo, K.S. (2018), The Impact of Carbon Emissions on Corporate Financial Performance: Evidence from the South African Firms, Sustainability 2018, 10, 2398; doi:10.3390/su10072398.

21. Learning Theory – Sutherland (1949)

This can be applied in fraud topics

Sutherland, E. H. (1949). White Collar Crime. New York: Holt, Rinehart & Winston.

22. Legitimate theory

Legitimacy theorist opined that organizations continually seek to guarantee that they operate within the bounds and norms (limit or boundary) of their respective societies. Legitimacy theory originated from the concept of organizational legitimacy, which has been defined by Dowling and Pfeffer (1975). This can be applied in fraud, environmental disclosure topics

Dowling, J., & Pfeffer, J. (1975). Organizational legitimacy societal values and organizational behavior. Pacific Sociological Review, 18(1), 122-136.

23. Moral Disengagement Theory – Bandura (1991;1999)

This can be applied in fraud topics

Bandura, A. (1991). Social cognitive theory of self-regulation. Organizational behavior and human decision processes, 50(2), pp. 248-287. doi: https://doi.org/10.1016/0749-5978(91)90022-L

Bandura, A. (1999). Social cognitive theory: An agentic perspective. Asian journal of social psychology, 2(1), pp. 21-41. doi: 10.1111/1467-839X.00024

24. Neutralization theory – Sykes e Matza (1957)

People are always aware of their moral obligations to comply with the laws and to avoid certain illegitimate acts. Thus, they reason, if a person practices illegitimate acts, (s)he needs to employ some kind of psychological mechanism that hides this need to follow his/her own moral concepts. Five main types of neutralization techniques were identified: denial of responsibility, denial of injury, denial of the victim, conviction of convictors and appeal to higher loyalties (Sykes and Matza, 1957).

Sykes, G. M., & Matza, D. (1957). Techniques of neutralization: A theory of delinquency. American sociological review, 22(6),664-670.

25. Normative accounting

Normative accounting, on the other hand, takes a fundamentally different approach. Instead of looking at what is already happening at companies today, normative accounting theory tells accounting policy makers what should be done based on a theoretical principle. Logically, normative is more of a deductive process than positive accounting theory. Normative starts with the theory and deduces to specific policies, while positive starts with specific policies, and generalizes to the higher-level principles. (Bassam, et. al 2006) All organizations are moving towards the adoption of more social changes, wherein they include social actions in their operations. Social corporate responsibility is becoming an essential part of the working of all companies.

Bassam, M., Peter, C., & Christopher, N. (2006). Social reporting by Islamic banks, Abacus, vol.42, issue 2, pp.266-289, Business Source Complete

26. Organizational Theory-Victor and Cullen (1988) ; Ashforth e Anand (2003)

This can be applied in fraud topics

Victor, B., & Cullen, J. B. (1988). The organizational bases of ethical work climates. Administrative science quarterly, 33(1), pp. 101-125. doi: 10.2307/2392857.

27. Political Cost Theory

The political cost hypothesis assumes that firms choose the accounting method that keeps profit disclosures under the radar of politicians and regulators. According to Watts and Zimmerman (1978), politicians have the power to effect upon corporations’ wealth re-distributions by way of corporate taxes, regulations, subsidies etc. Moreover, certain groups of voters have incentives to lobby for the “nationalization, expropriation, break-up or regulation of an industry or corporation”, which in turn are seen to provide incentives to politicians to propose such actions.

Watts. R.L. & Zimmerman. J.L., (1978), “Towards a Positive Theory of the Determination of Accounting Standards”, The Accounting Review, Vol. 53, No 1, pp. 112-134

28. Positive Accounting Theory – Watts and Zimmerman (1986)

Positive accounting examines real life occurrences and seeks to understand and then predict how actual companies address the accounting treatment of those transactions. In other words, positive accounting theory looks at actual real-world transactions and events, examines how companies are accounting for those events, and seeks to understand the economic consequences of those accounting decisions. With that knowledge, the theory then tries to predict how companies will account for transactions and events in the future. This can be applied in fraud topics

Watts, R. L., & Zimmerman, J. L. (1986). Positive accounting theory. Prentice-Hall Inc.

29. Prospect Theory-Kahneman E. Tversky (1979).

This can be applied in fraud topics

30. Proprietary Theory

Under the proprietary theory, the entity is the agent, representative, or arrangement through which the individual entrepreneurs or shareholders operate. According to Robert (1955), stated that in the Roman Empire where the master gave to a slave some money and the slave invested wisely and profit were realized and the profit was given to the master. By these means, however, a slave has no right to own property in his own name, and hence, the illustration is more suitable here because the property ownership was in the hands of the slave owner, with the slave being merely an appendage of the owner.

Roberts, Arthur Theophile, (1955). The Proprietary Theory and the Entity Theory of Corporate Enterprise. LSU Historical Dissertations and Theses.

31. Public Interest Theories of Regulation

This theory was traced back to the works of Arthur Cecil Pigou on externalities and welfare economics (Pigou, 1932). Nahid (2008) stated the brief biography of Arthur Cecil Pigou. He was born on 18^th November 1877 and died on 7 March 1959. As a teacher and English economist, he trained many Cambridge economists who went on to take chairs of economics around the world. The major aim of this theory is to ensure the delivery of best possible allocation of scarce resources for individual and collective goods and services in society (Den Hertog, 2010). According to Hantke-Domas (2003), defined this theory of regulation in general terms as a regulation that seeks the protection and benefit of the public at large. This can be applied in fraud topics

Den Hertog, J. (2010). Review of economic theories of regulation. Tjalling C. Koopmans research institute, discussion paper Series 10-18.

Hantke-Domas, M. (March 2003). The public interest theory of regulation: Non-Existence or misinterpretation? European Journal of Law and Economics. 15 (2), 165–194. doi:10.1023/a:1021814416688. ISSN 0929-1261.

Nahid A. (2008). Pigou, Arthur Cecil (1877–1959). The New Palgrave Dictionary of Economics, 2nd ed. Abstract.

Pigou, A. C. (1932). The economics of welfare. London: Macmillan and Co

32. Residual equity theory

This is a concept somewhere between the proprietary theory and the entity theory. In this view, the equation becomes Assets – Specific equities = Residual equity. The specific equities include the claims of creditors and the equities of preferred shareholders. However, in certain cases where losses have been large or in bankruptcy proceedings, the equity of the common shareholders may disappear and the preferred shareholders or the bondholders may become the residual equity holders. The objectives of the residual equity approach are to provide better information to equity shareholders for making investment decision. In a company with indefinite continuity, the current value of equity share is dependent primarily upon the expectations of future dividends

33. Routine activity theory – Cohen and Felson (1979)

This can be applied in fraud topics

Cohen, L. E., & Felson, M. (1979). Social change and crime rate trends: A routine activity approach. American sociological review, 44(4), pp. 588-608.

34. Rational Choice Theory – Kagan and Scholtz (1984)

This can be applied in fraud topics

Kagan, R. A., & Scholz, J. T. (1980). The “criminology of the corporation” and regulatory enforcement strategies. Organisation und Recht, pp. 352-377. doi: https://doi.org/10.1007/978-3-322-83669-4_21

35. Reliability Theory

Reliability theory simply describes the probability of a system completing its expected function during an interval of time (Gavrilov and Gavrilova, 2001). It was originally a tool used to help nineteenth century maritime insurance and life insurance companies in computing profitable rates to charge their customers.

Gavrilov, L. A and Gavrilova, N. S. (2001). The Reliability Theory of Aging and Longevity”, Accounting, Auditing and Finance, 213 (4): 527–45.

36. Signalling Theory

Michael Spence originally proposed the idea of signalling based on observed knowledge gaps between organisations and prospective employees (Spence, 1973). Signalling is the idea that one party called the agent conveys some information about itself to another party called the principal.  In the job-market signalling model by Micheal Spence, employees send a signal to the employer by acquiring more education credentials. In signalling theory, there is lop-sidedness of information which is a problem.

Spence, M. (1973). Job market signaling. The Quarterly Journal of Economics, 87(3), 355-374.

37. Stakeholders Theory

The study is anchored on stakeholders’ theory. The basic proposition of the stakeholders’ theory is that the success of the firm depends on the successful management of all the relationships between the firm and the stakeholders (Okafor, 2018). This theory states that an organization will respond to the expectation of stakeholders through disclosure (Ingumba, 2017). Originally, this term was introduced by Stanford Research Institute (SRI) referring to those groups whose support is indispensable for the organizational existence (Freeman, 1983; 1994). Nowadays, the unfavourable environmental effect on economic development has become worrisome. This is the moral (and normative) perspective of Stakeholder Theory which argues that all stakeholders have the right to be treated fairly by an organization, and that issues of stakeholder power are not directly relevant. Stakeholder definition according to Freeman and Reed (1983): Any identifiable group or individual who can affect the achievement of an organization’s objectives, or it is affected by the achievement of an organization’s objectives.

Ingumba, K.R. (2017). The relationship btw environmental accounting and reporting practices and profitability of manufacturing firms listed on the Nairobi securities exchange, A research projected submitted in partial fulfilment of the requirements of Master of Business Administration, school of business, University of Nairobi

Okafor, T. G. (2018). Environmental costs accounting and reporting on firm financial performance: A survey of quoted Nigerian oil companies, International Journal of Finance and Accounting, 7(1), 1-6.

Freeman, R. and D. Reed (1983) Stockholders and stakeholders: A new perspective on corporate governance, California Management Review, 25, pp. 88-106.

38. Self-control Theory – Hirschi e Gottfredson (1987)

This can be applied in fraud topics

Hirschi, T., & Gottfredson, M. (1987). Causes of white‐collar crime. Criminology, 25(4), 949-974. doi: 10.1111/j.1745-9125.1987.tb00827.x

39. Structuration Theory 

Structuration theory is a more focused, informative, integrative, yet efficient, way to analyse how accounting systems are implicated in the construction, maintenance, and changes of the social order of an organization, than many frameworks used in previous studies.

40. Strain Theory-Merton (1938)

The theory states that society puts pressure on individuals to achieve socially accepted goals, though they do not have the means, and this leads to tension that can make individuals commit crimes.

Merton, R. K. (1938). Social structure and anomie. American sociological review, 3(5), pp. 672-682.

41. Social Psychology – Milgram (1963)

Milgram, S. (1963). Behavioral Study of obedience. The Journal of abnormal and social psychology, 67(4), pp. 371. doi: http://dx.doi.org/10.1037/h0040525.

42. Social Theory and Social Structure –Merton (1938)

The main Sociology theory identified was Social Theory and Social Structure by Robert K. Merton. It was a critique of functionalism. Merton’s interest was directed at the different samples of social organization, which led to the discovery of the structure of opportunities.

Merton, R. K. (1938). Social structure and anomie. American sociological review, 3(5), pp. 672-682.

43. Stewardship Theory – Donaldson and Davis (1991)

This can be applied in fraud topics

Donaldson, L., & Davis, J. H. (1991). Stewardship theory or agency theory: CEO governance and shareholder returns. Australian Journal of management, 16(1), 49-64.

44. Theory of self-regulation- Bandura (1986).

This can be applied in fraud topics

Bandura, A. (1986). The explanatory and predictive scope of self-efficacy theory. Journal of social and clinical psychology, 4(3), pp. 359-373.

45. Theory of Planned Behavior – Ajzen (1985)

This can be applied in fraud topics

46.Theory of Differential Association

The differential association theory’s basic tenet is that crime is learned through interaction with others (Wells, 2005). Dorminey et al., (2012) opine that Sutherland, E.H found out that white-collar criminality is real criminality, which is different from lower-class criminality. This theory is one of Sutherland’s most important contributions to criminal literature when he was alive. And Sutherland’s Differential Association Theory (1947; 1949) focuses on how individuals learn to become criminals but is not concerned with why they become criminals. This can be applied in fraud topics

Dorminey, J., Fleming, A. S., Kranacher, M.-J., & Riley, R. A. (2012). The evolution of fraud theory. Issues in Accounting Education,27(2),555–579.

Wells, J. (2005). Principles of fraud examination. John Wiley & Sons.

47. Theory of Fraud Triangle – Cressey (1950)

The Fraud Triangle is a model to explain the factors that lead one to commit occupational fraud. It consists of three components that together lead to fraudulent behavior: perceived non-shareable financial need (motivation); opportunity; and rationalization. This can be applied in fraud topics

48. Theory of Reasoned Action – Fishbein and Ajzen (1975)

This can be applied in fraud topics

Fishbein, M., & Ajzen, I. (1975). Belief, attitude, intention and behavior: An introduction to research and theory. Reading, PA: Addison-Wesley.

49. Theory of basic human values – Schwartz (1992)

 This can be applied in fraud topics

Schwartz, S. H. (1992). Universals in the content and structure of values: Theoretical advances and empirical tests in 20 countries. Advances in experimental social psychology, 25, 1-65.

50. The Subsistence Theory of Wages

In 18th and 19th centuries, David Ricardian theory of wages relied on the Malthusian postulation which stated that the wages would inevitably move towards the minimum owing to a large population. In 19^th Century, Ferdinand Lassale developed Brazen Law of Wages which is also called Iron Law of Wages. According to Ferdinand Lassale, wages is the same amount sufficient for subsistence. Once actual wages are higher than the subsistence level, there will population increase which will bring about labour supply increase and also lower wages and verse versa (Acharya, 2017). This can be applied in wages topics

Acharya, S. (2017). Wages and wage determination, Ind. J. Labour Econ., 60, 303–308.

51. Theories of Deviance -(Weisburd, Wheeler, Waring & Bode, 1987)

This can be applied in fraud topics

52. Theory of white-collar crime – Coleman (1987) e Sutherland (1940)

Sutherland’s Theory of White-Collar Crime (1940) says that it is a crime committed by a person of respectability and high social status in the course of his profession. This can be applied in fraud topics

Coleman, J. W. (1987). Toward an integrated theory of white-collar crime. American Journal of Sociology, 93(2), 406-439. [5] doi: https://doi.org/10.1086/228750

Sutherland, E. H. (1940). White-collar criminality. American sociological review, 5(1), pp. 1-12. [1]

53. Wages Fund Theory

This also came from the classical era and proposed that wages depended on the amounts available with employers for payment of workers salary and wages and the size of the labour force. Wages increase only with an increase in the resources of the employers or a decrease in the number of workers (Acharya, 2017). This can be applied in wages topics

Acharya, S. (2017). Wages and wage determination, Ind. J. Labour Econ., 60, 303–308

Ojeaburu, Friday (2021).wages determinant and wages gap in public sector: the nigeria experience. Mendeley Data, V1, doi: 10.17632/j3mpppxgmn.1