A Monopoly Model Of Accounting Fraud

Abstract

A monopoly model is used to show why a CEO would engage in accounting fraud, high risk behavior given the severe negative consequences, should the fraud be exposed.  A monopoly model of the market transaction between the buyer of the fraud, the CEO, and the seller of the fraud, the accountant, demonstrates the motivation behind the CEO’s willingness to engage in the fraud.  The accountant (seller) receives a monopolist profits while the CEO (the buyer) pays a price equal to the perceived net marginal benefit.  The CEO wants the accountant to believe that the net marginal benefit equals the price when in fact the actual net marginal benefit to the CEO is much lower than the monopolist’s price. The resulting cost to the CEO for fraud is relatively low because of the CEO’s ability to shift a substantial portion of the cost to the company.