The Impact of Collusion on the Operation of a Fraudulent Mortgage Origination Network
Date of Award
Statement on Auditing Standards (SAS) No. 99 illustrates the three fraud conditions (incentives/pressures, opportunities, and rationalizations/attitudes) in detail, but devotes less emphasis to collusion, another important element of fraud. The problem is that lack of research on the impact of collusion, especially at the transaction level, prevents auditors from focusing on this critical element during financial statement audits. Network theory was used to examine the impact of collusive relationships in a mortgage fraud network that operated in a midwestern city from 2003 to 2005. Data were collected from both private and public records. Research questions addressed the role of the three fraud conditions in the structure and operation of the network, changes in the network over time, and the impact of collusion. Fraud conditions displayed in the network were monetary incentives, environmental and structural opportunity, and the predominant use of subprime lenders. Year 1 and Year 2 data in the fraud scheme were compared using t tests, with seller proceeds, mortgage loan ratio, and number of days the property was held by the seller as dependent variables. During Year 2, seller proceeds did not increase, but properties were sold quicker with larger amounts financed. Independent t tests, using collusion as the independent variable and seller proceeds and mortgage loan amounts as the dependent variables, revealed that collusive activities produced greater fraudulent proceeds, but had no significant effect on mortgage loan amounts. This study contributes to positive social change by providing new insights about collusive relationships that auditors can use in the detection and prevention of fraudulent financial statements, which in turn, will lead to fewer future economic losses to stakeholders.