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Operational Risk [18]

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Bullet points include: Each individual in a hierarchy determines whether, conditional on the internal control environment, the personal benefit of committing fraud outweighs cost of being detected. If individual chooses not to commit fraud then he chooses his monitoring effort. Thus model includes full ‘loop’ of fraud intensity leading to internal control efforts, which in turn is leading to curbing incentives to commit fraud. Hierarchy assumed to be infinite chain ..., x-1, x, x+1, ... Any individual in chain (x) has an immediate superior x-1 and subordinate x+1. An individual chooses either to exert effort monitoring subordinates or, if he does not monitor, whether or not to defraud the firm

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