**2.3 Broken trust theory**

Since Albrecht et al.'s (2004) Broken Trust theory is related to a "Fraud Triangle" concept from corporate fraud literature, we begin by describing the origin of the Fraud Triangle concept. Much of the current corporate fraud literature is based on the early work of Edwin H. Sutherland (1883-1950), a criminologist at Indiana University. Sutherland (1949) was particularly interested in fraud committed by the elite business executives against stockholders. He coined the term "white-collar crime" to mean criminal acts of corporations and individuals acting in their corporate capacity. One of Sutherland's Doctoral students was Donald R. Cressey (1919-1987). Cressey (1973) was especially interested in the circumstances that led embezzlers, whom he called "trust violators," to be overcome by temptation. His hypothesis about the psychology of the embezzlers was later become known as the "Fraud Triangle" concept, which consists of three variables: perceived financial need, perceived opportunity, and rationalization. In the early 1980s, the Fraud Triangle concept was adapted from criminology to accounting by Steve Albrecht of Brigham Young University. Albrecht was especially interested in identifying factors that led to occupational fraud and abuse. His study suggests that there are three variables involved in occupational fraud. Consistent with Cressey's Fraud Triangle concept: " … it appears that three elements must be present for a fraud to be committed: a situational pressure, a perceived opportunity to commit and conceal the dishonest act, and some way to rationalize the act as either being inconsistent with one's personal level of integrity" (Albrecht et al. 1984, p.5). Later, the *Statement on Auditing Standards No.99: Considerations of Fraud in a Financial Statement Audit* issued by the AICPA (2002) adopted much of Albrecht's work on the Fraud Triangle concept detailed in his book *Fraud Examination* (2003). The auditing standard also incorporated many fraud risk factors associated with the three variables of the Fraud Triangle concept: (1) a "pressure" such as a financial pressure to meet analysts' expectation, (2) an "opportunity" such as weak internal controls, and (3) some way to "rationalize" such as "our stock options depend on it."

The American Dream and Corporate Executive Fraud 201

Agency and Stewardship theories, assumes it can explain executives' fraudulent behavior in both fraud and non-fraud companies. Such assumption is weak given that there is very little evidence in the Agency and Stewardship theories that addresses executive behavior in

Second, we believe the Broken Trust theory relate well to the first two variables (Pressure and Opportunity) of the Fraud Triangle concept, but not the third variable (Rationalization) because Albrecht et al. (2004, Table 3, p.127) provide very little explanation on why or how the corporate executives would rationalize their fraudulent behavior under the Broken Trust

The term "the American Dream" was introduced into contemporary social analysis in 1931 by historian James Truslow Adams to describe his vision of a society open to individual achievement. Interestingly, Adams sought to have his history of the United States*, Epic of America*, entitled *The America Dream*, but his publisher rejected the idea, believing that during the Great Depression, consumers would never spend three dollars "on a dream." (Adams 1931, p.68). The term soon became a sales slogan for the material comforts and individual opportunities of a middle-class lifestyle: a car, a house, education for the

The persistence of the term "the American Dream" over subsequent decades is documented in the work of Elizabeth Long, who has analyzed cultural changes in the United States during the years following World War II. Long examines the shifting meanings of the dream of success as reflected in best-selling novels published between 1945 and 1975. She concludes that the core components of the American Dream were reflected in popular writings throughout the thirty-years period following World War II

An "American Dream" theory of crime in the United States was introduced into contemporary sociology by Messner and Rosenfeld (1994). They developed the American Dream theory as an extension to the "Anomie" theory associated with the work of the American sociologist Robert K. Merton (1938). A central idea of Merton's Anomie theory is that motivations for crime do not result simply from the flaws, failures, or free choices of individuals. A complete explanation of crime ultimately must consider the sociocultural environments in which people conduct their daily lives. Merton argues that the social system in the United States is a prime example of a system characterized by internal strain and contradictions. Specifically, Merton observes that an exaggerated emphasis is placed on the goal of monetary success in American society, coupled with a weak emphasis placed on the importance of using the socially acceptable means for achieving this goal. We realize that American capitalism put emphasis on socially acceptable means for financial success, such as competition. In addition, American education system put some emphasis on socially acceptable means for financial success, such as collaboration. However, as pointed out by Merton (1938), a key issue here is the exaggerated emphasis on financial success in a capitalist society that leads to socially unacceptable means. The result of these sociocultural environments is a pronounced strain toward anomie, that is, a tendency for social norms to

companies involved in fraud.

**3. Origin of the American Dream theory** 

children, and a secure retirement.

(Long 1985, p.196).

theory.

In 2004, Albrecht et al. combined the Fraud Triangle concept, the Agency theory, and the Stewardship theory to develop a "Broken Trust" theory of corporate executive fraud. Their Broken Trust theory explains corporate executive fraud in a matrix that links the three variables to corporate executive whose behavior is either consistent with the stewardship theory or agency theory; whose corporate structure is either consistent with the stewardship-based structure or agency-based structure, and whose compensation is either consistent with the stewardship-based rewards and incentives or agency-based rewards and incentives. We summarized their matrix in Table 1. Albrecht et al. conclude that, "to a meaningful degree, executives self-identify with behavior either more consistent with the agency theory or stewardship theory of management, and that those whose behavior is, in fact, more consistent with stewardship theory are more trustworthy and generally less likely to commit fraud" (2004, p.109). A tenet of Albrecht et al.'s Broken Trust theory is that both the Agency theory and Stewardship theory share a common element, "transference of some measure of trust from shareholders to executive level managers," and when executives commit fraud they intentionally break the trust and betray shareholders.


Table 1. The Fraud Triangle Concept, Broken Trust Theory, and American Dream Theory

We next describe an "American Dream" theory from sociology literature as a complement to Albrecht el al.'s Broken Trust theory because we believe the Broken Trust theory has two key limitations. First, a vast majority of management research in Agency and Stewardship theories addresses executive behavior in stable or growing companies, but not in companies involved in fraud (Daily et al. 2003). Therefore, the Broken Trust theory, based on the

In 2004, Albrecht et al. combined the Fraud Triangle concept, the Agency theory, and the Stewardship theory to develop a "Broken Trust" theory of corporate executive fraud. Their Broken Trust theory explains corporate executive fraud in a matrix that links the three variables to corporate executive whose behavior is either consistent with the stewardship theory or agency theory; whose corporate structure is either consistent with the stewardship-based structure or agency-based structure, and whose compensation is either consistent with the stewardship-based rewards and incentives or agency-based rewards and incentives. We summarized their matrix in Table 1. Albrecht et al. conclude that, "to a meaningful degree, executives self-identify with behavior either more consistent with the agency theory or stewardship theory of management, and that those whose behavior is, in fact, more consistent with stewardship theory are more trustworthy and generally less likely to commit fraud" (2004, p.109). A tenet of Albrecht et al.'s Broken Trust theory is that both the Agency theory and Stewardship theory share a common element, "transference of some measure of trust from shareholders to executive level managers," and when executives

commit fraud they intentionally break the trust and betray shareholders.

Pressure Pressure to commit fraud

behavior.

Rationalization Corporate executives are

Opportunities Corporate executives have

Fraud Triangle Concept Broken Trust Theory American Dream Theory

leads corporate executives to break their agency or stewardship relationship.

opportunities to break their agency or

stewardship relationship.

inclined to rationalize their fraudulent actions and

Table 1. The Fraud Triangle Concept, Broken Trust Theory, and American Dream Theory

We next describe an "American Dream" theory from sociology literature as a complement to Albrecht el al.'s Broken Trust theory because we believe the Broken Trust theory has two key limitations. First, a vast majority of management research in Agency and Stewardship theories addresses executive behavior in stable or growing companies, but not in companies involved in fraud (Daily et al. 2003). Therefore, the Broken Trust theory, based on the

An intense emphasis on monetary

success induces corporate

executive fraud.

Corporate executives

success provides

fraud.

exploit/disregard regulatory controls to commit fraud.

A corporate environment that is preoccupied with monetary

justification/rationalization for success by deviant means such as Agency and Stewardship theories, assumes it can explain executives' fraudulent behavior in both fraud and non-fraud companies. Such assumption is weak given that there is very little evidence in the Agency and Stewardship theories that addresses executive behavior in companies involved in fraud.

Second, we believe the Broken Trust theory relate well to the first two variables (Pressure and Opportunity) of the Fraud Triangle concept, but not the third variable (Rationalization) because Albrecht et al. (2004, Table 3, p.127) provide very little explanation on why or how the corporate executives would rationalize their fraudulent behavior under the Broken Trust theory.
