Wall Street Fraud -How Big Is “C”?

(By Joe Koletar) In our book, “A.B.C.’s of Behavioral Forensics” (John Wiley & Sons, 2013), we explore three concepts to better understand and address fraud in organizations:

A – The sole bad apple.

B – The bad group, or bushel.

C – The bad crop, or corrupt organization.

Is it possible financial regulators may have followed our lead, and even expanded it?

The Wall Street Journal of February 2, 2015 carries the following front-page article:“As Regulators Focus on Culture, Wall Street Struggles to Define it,” by Emily Glazer and Christina Rexrode, page A-1.

The authors report that “culture” is now a buzzword used by regulators and financial institutions. They note senior regulators are increasingly expressing concern about organizational culture and excessive risk-taking, but seem to have problems as to how to measure and even define such terms.

The article advises that in October, NY Federal Reserve Chairman William Dudley told financial executives that regulators would consider dismembering financial institutions that failed to adequately address such issues. Glazer and Rexrode note that Mr. Dudley used the term, “culture” forty-four times in his remarks. She also reports he noted that such cultures seem to attract “risk takers.”

One is reminded of the quote by legendary Formula One driver Mario Andretti: “If you are under control you are just not going fast enough.”

As might be expected, consultants and even academics are flocking to the rescue, even going so far as to analyze word usage in internal communications. Some “remedies” propose renewed emphasis on an old, but valuable, mechanism – hotlines. In the view of those experienced in the field, hotlines are valuable, but often not used to their full potential. Others favor sampling employee engagement as the research shows an engaged employee is more prone to a positive relationship to the organization and thus to ethical behavior. Multiplied over all the employees of an organization this does a great deal to mitigate fraud risk.

According to the Association of Certified Fraud Examiners (ACFE), hotlines have, generally, a long and successful track record. The more current approaches may have yet to prove their effectiveness in a complex, profit-driven, and changing industry.

Our book was the result of two years of research, discussion, and collaboration by professionals in the fields of financial regulation, organizational psychiatry, and corporate investigations. Our goal was to meet a challenge presented by Joseph T. Wells, the founder of ACFE. Speaking at a conference of fraud researchers he expressed his frustration that after twenty-five years of investigation by fraud professionals, the “automatic” answer for high-level misconduct is simple greed.

He believes the profession could do better to explain the actions of Madoff and others (i.e., let’s bring Freud to Fraud!) The issue is both simple and challenging and thoughtfully and comprehensively explored in our text – why do those already wealthy decide to cheat? What internal forces drive them?

Since publication, we have presented our concepts to a variety of professionals and experts in the field who deal with these problems on a regular basis. One such program was a comprehensive workshop on fraud with risk officers from International Banks, The Federal Reserve Bank, The SEC, and the IMF. At a break following Dr. Daven Morrison’s description of risk factors for fraud in which a specific vulnerability was mentioned (“flexibility of thought”), an experienced banker approached Daven to note that those who are more “rigid” and thus more likely to stick with the rules (rather than figure out a way around them), have been completely eliminated from the profession: “They are not there anymore”.

The financial services profession had effectively eliminated the “psycho-diversity” required to minimize fraud. There were many other examples of what and how cultures can shift at that conference and at others our team have presented to over the last several years.

Mr. Stephen O’Brien adds (in the online WSJ comments section), “When done right, changing the culture of a firm will take years, and for large firms, probably closer to 10 than five years…..Judging by the article, the present efforts are doomed to failure as they are looking at practices, not beliefs and values [that constitute an organization’s culture].  The managements and consultants are treating the symptoms of a disease, not the cause.”

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.

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