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Fraud: Why do people commit it?

fraudAn interesting interview with Eugene Soltes, the Jakurski Family Associate Professor of Business Administration at Harvard Business School, appeared in the Harvard Business School’s Working Knowledge publication. According to the school, “his research focuses on how individuals and organizations confront and overcome challenging situations”. “Why White–Collar Criminals Commit Their Crimes” is an ‘author interview’, Soltes having written Why they do it: Inside the mind of the white–collar criminal. I have not read the book, but suggest that those with continuing responsibility for detecting and/or investigating fraud might want to do so.

Soltes makes some interesting points in the interview.

  • …corporate criminals … often lived comfortable, if not extravagant lives before deciding to break the law. So why did they do it?
  • The book dispels the idea that most corporate crooks are masterminds who carefully calculated their illegal acts, weighing the risks and rewards before embarking on their nefarious plans. ……. More often than not, they didn’t think things through at all.
  • I hope readers can take away a sense that these errors in judgment are much more failures of managerial intuitions and gut instincts, rather than failures of thoughtful reasoning
  • ……..many of the subjects in the book … exhibit an overwhelming lack of remorse for what they’ve done. In part, this is because these men are especially good at rationalization. …. it’s also because the harmful effects of a white–collar crime are less viscerally obvious to perpetrators than, say, the effects of an assault with a deadly weapon. Hit someone with a bat and you’ll undoubtedly realize the physical harm you’ve caused. But if you engage in insider trading, you likely won’t see the reaction of victims or know the specific damage you caused to many people. So while many of the men in the book are capable of feeling sorry for themselves and their families, there’s little emotional concern for their victims.

At this point in the interview, Soltes makes a critical observation.

Many of the book’s subjects seem to view their crimes as solutions to a problem at work, rather than moral failings.

He continues with a quote from Ponzi schemer Steven Hoffenberg:

Morals go out the window when the pressure is on. When the responsibility is there and you have to meet budgetary numbers, you can forget about morals….When you’re a CEO doing a Ponzi, you have to put your life into different boxes. You don’t have a choice. You have to put your family life into one box, your business in a box, your emotions in another. You’ve got no choice.

Over my decades as a chief audit executive (CAE), I performed or oversaw many investigations around the world.

These last two points ring true for several but not all the culprits.

In probably the majority of cases, the fraudster was acting in his own, personal interests. He wanted and thought he needed the money.

But, very often the individual had persuaded him or herself that they were acting in the best interests of the organization (whether that was the organization as a whole or their part of the organization).

For example:

  • One controller in South East Asia managed his reserves so that he could respond to calls from the corporate office for additional profits. His own unit was doing well, so there was no direct benefit for the controller. But, he thought he was supporting corporate interest.
  • A controller in the South of the USA created journal entries to record fictitious revenue. The intent was to prevent the business unit from reporting losses that might lead corporate management to close it down. (My team found multiple business units who had engaged in this form of fraud with the same rationalization.)
  • A senior executive in Asia directed local management to use a warehouse that he owned in partnership with executives of other organizations (who similarly directed their local management to the warehouse). The senior executive was wealthy and highly placed in the company. He didn’t need the money. But, he rationalized that this deal was good for the company.

People violate their organization’s code of ethics for all kinds of reasons.

While there are some board members and top executives who believe that if you pay people well they won’t steal, that is totally false.

Some people, as Soltes says, are capable of rationalizing anything and don’t see the harm in what they do. They have no remorse as they cannot see how any innocents are damaged.

Soltes makes a further point, that when those around you are taking advantage of opportunities, it is easy to do the same.

I found this interesting. What do you think?

Norman D. Marks, CPA, CRMA
Author, Evangelist and Mentor for Better Run Business
OCEG Fellow, Honorary Fellow of the Institute of Risk Management

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