Determining Expected Behaviour of Fraudsters for a Continuous Audit System

Vol 24, No 2; Article by Mathew A. Thomas and Rahul R. Marathe; June 2012

Managements and external auditors are expected to assess and evaluate controls that prevent and detect fraud. A key part of this assessment is determination of fraudeprone areas and the determination of those systems or sub systems that are susceptible to fraud. There are several approaches that are used to find such areas. In this research, we attempt to model the behaviour of fraudsters in order to help determine systems that require close monitoring. We attempt to determine the behaviour of fraudsters in a continuous audit system and where the fraudsters have multiple options for committing fraud. The system is modelled as a Continuous Time Markov Chain where the state changes are caused by the fraudster's actions. In each state the fraudster can either choose to continue the fraud or to resign. The possibility of success in each case is assumed to be probabilistic. This state of affairs is represented as a dynamic game with probabilistic transitions. Since the fraudster assumes that the audit system is a rational player who seeks to minimise the fraudster's expected payoff, the Nash Equilibrium of the complete stochastic game is calculated. The Nash Equilibrium is a set of minimax vectors. These solution vectors represent a complete fraud strategy, which maximises the expected payoff of the fraudster and ensures that she has no ex-post regrets.