The Improbability of Fraud in Accounting for Derivatives: A Case Study on the Boundaries of Financial Reporting Compliance

Abstract

This study responds to recent calls in the literature to examine fraud using detailed case studies, extending knowledge beyond individual incentives and capital market reactions towards a more contextualized understanding of the concept. We use an institutional logics perspective to challenge existing assumptions about a universally valid meaning of compliance, fraud, and faithful representation. Presenting the case of the Swedish bank HQ, we show how the interpretation of the accounting standard for option measurement varies across different enforcement bodies because the meaning of compliance is socially negotiated across the institutional logics of markets, financial regulation, and law. The independent decision-making of the different enforcement bodies leads to a systematic variation in the interpretation of principles-based accounting standards without ultimate coordination. To define consistent boundaries of compliance across institutional logics, and thus, to distinguish between fraud and allowable managerial discretion becomes problematic. Faithful representation, in turn, cannot be understood as financial statements reflecting a correct value or as financial statements being prepared in accordance with acceptable practice, as suggested in the earlier literature. Instead, faithful representation itself becomes a contextually bound concept, which can only be defined within an institutional logic.

Preparers’ Construction of Users’ Information Needs in Corporate Reporting: A Case Study

“…Third, we contribute to literature that has mobilized the institutional logics framework to make sense of corporate reporting (e.g., Arena et al, 2018;Cerbone & Maroun, 2020;Edgley et al, 2015;Hartmann et al, 2018;Schneider, 2015). In line with this previous research we corroborate the potential of using institutional logics for better understanding the motivations and activities of preparers regarding their reporting decisions and strategies.…”

“…First, there is a capital market logic, which is rooted in the market logic (Thornton et al, 2012). Under the capital market logic, companies provide information that capital providers demand to form their assessments of the reporting company (Hartmann et al, 2018) because they consider providing this information net beneficial for capital providers. Within the capital market logic, two sub-logics can be contrasted: a valuation logic and a stewardship logic (e.g., Ravenscroft & Williams, 2009).…”

IFRS in National Regulatory Space: Insights from Sweden

“…Secondly, there are cases of fraud in a broad sense (cf. discussion of fraud in Hartmann et al, 2018) and other crimes related to financial reporting. These cases involve the prosecution of individuals by a state prosecutor.…”

“…Therefore, we describe IAS 39 as principles-based in this particular case. The specific incidences of judgement, and the positions taken by different actors, are summarised in Table 2 (for a more detailed discussion of measurement issues, see Hartmann et al, 2018).…”

Research misconduct complaints and institutional logics: The case of Hans Eysenck and the British Psychological Society

“… 2. Hartmann et al (2018 : 845), for example, used an ‘institutional logics perspective to challenge existing assumptions about a universally valid meaning of compliance, fraud and faithful representation’. They showed how these concepts are contextually bound [and] can only be defined within an institutional logic.…”