Tag Archives: Fraud

BRINGING FREUD TO FRAUD: UNDERSTANDING THE STATE-OF-MIND OF THE C-LEVEL SUITE/WHITE COLLAR OFFENDER THROUGH “A-B-C” ANALYSIS

This research was funded by the Institute for Fraud Prevention at West Virginia University of which Dr. Sri Ramamoorti was a Board member representing Grant Thornton LLP.

In this paper we use a primarily “behavioral lens” (cf. Ramamoorti, 2008; Ramamoorti & Olsen, 2007) to try to understand the state-of-mind and motivations of the C-level suite/white collar offender before, during, and after the perpetration of management fraud. We offer a useful conceptual approach called “A-B-C Analysis” to understand the incidence of fraud from individual and group perspectives, as well as more macro-oriented, cultural/contextual levels.

It is our hypothesis that fraud occurs either because of an individual criminal’s calculated/intentional betrayal of trust, a duo or team of “bad boys” who push ethical envelopes, and/or an organizational/social/national culture of passivity, indifference or accommodation that is tantamount to condoning such behaviors. We have called it the Bad Apple, Bad Bushel, or Bad Crop Syndrome: the so-called ABCs of white collar crime. Our interdisciplinary review of the literature, spanning (social) psychology, sociology and criminology, psychoanalysis and psychiatry, and anthropology, as well as our collective experience as practicing fraud examiners, investigators and consultants, have yielded some rich insights including that:

(1) Motivation for Fraud is Under-Hypothesized in Extant Literature: The motivation for fraud is under-hypothesized by the so-called “fraud triangle” consisting of perceived opportunity, perceived pressure, and rationalization (ACFE Fraud Examiners Manual, 1995; Cressey, 1953), and that there exist other motivations such as those based on “fraudster’s emotions” (e.g., revenge, social status comparisons, “crimes of passion” etc.), mastery of a situation or technique (e.g., a “catch-me-if-you-can” game), “self interest or group interest,” “noble cause corruption,” etc. This expanded set of cognitive, conative, affective, and other motivational variables underlying the perpetration of fraud is better accounted for by psychologist Michael Apter’s reversal theory (Apter, 1997, 2001, 2007a & 2007b). Fraud is frequently committed by manipulating human emotions.

(2) Standard Legal Definition of Fraud is Undesirably Narrow: The present legal definition of fraud as including “intent” or “scienter” as a key element may be undesirably narrow and constraining in adequately addressing the fraud problem; after all, you cannot “improve a (fraud detection) process without first understanding it.” This finding has potentially significant future consequences for not only re-appraising the standard definition of fraud (e.g., Black’s Law Dictionary, 1979) but also for criminology and law enforcement. We need a richer vocabulary and a deeper understanding of the underlying behavioral motivations for white collar crime.

(3) Unpacking “Greed” has Explanatory Value: There is considerable value to unpacking the common sense explanation for fraud, viz., greed, pure and simple. Without further delving into the meaning of the folk psychology term, “greed,” why it manifests itself in different ways, in different times and in different cultures, it can only be called “labeling” and naming something does not and cannot constitute a valid and credible explanation. In this connection, the research stream in social psychology on “counterfactual thinking and reasoning” appears to have considerable explanatory promise and must be further explored (see Roese & Olson, 1995).

Towards the end of the paper we provide a list of research questions that could be useful to academic researchers in crafting a responsive research agenda that exploits insights from the behavioral sciences. Two appendices deal with special topics: Appendix 1 illustrates the value of taking an evolutionary psychology approach; Appendix 2, “Greed Takes the Blame,” is a provocative editorial that explores “greed” as the prevailing conventional wisdom in accounting for fraud; and Appendix 3 suggests that academia is recognizing there may be more to finance than just rigorous economic foundations, incorporating behavioral insights is inexorable.

Click here to download the IFP White paper Bringing Freud to Fraud

Click here to download the IFP White paper Bringing Freud to Fraud

A.B.C.’s of Behavioral Forensics: Applying Psychology to Financial Fraud Prevention and Detection

Get practical insights on the psychology of white-collar criminals—and how to outsmart them

Understand how the psychologies of fraudsters and their victims interact as well as what makes auditors/investigators/regulators let down their guard. Learn about the psychology of fraud victims, including boards of directors and senior management, and what makes them want to believe fraudsters, and therefore making them particularly vulnerable to deception. Just as IT experts gave us computer forensics, we now have a uniquely qualified team immersed in psychology, sociology, psychiatry as well as accounting and auditing, introducing the emerging field of behavioral forensics to address the phenomenon of fraud.

ABC Book Cover Page

Ever wonder what makes a white-collar criminal tick? Why does she or he do what they do? For the first time ever, see the mind of the fraudster laid bare, including their sometimes twisted rationalizations; think like a crook to catch a crook! The A.B.C.’s of Behavioral Forensics takes you there, with expert advice from a diverse but highly specialized authoring team of professionals (three out of the four are Certified Fraud Examiners): a former accounting firm partner who has a PhD in psychology, a former FBI special agent who has been with investigative practices of two of the Big Four firms, an industrial psychiatrist who has worked closely with the C-level suite of large and small companies, and an accounting professor who has interviewed numerous convicted felons. Along with a fascinating exploration of what makes people fall for the common and not-so-common swindles, the book provides a sweeping characterization of the ecology of fraud using The A.B.C.’s of Behavioral Forensicsparadigm: the bad Apple (rogue executive), the bad Bushel (groups that collude and behave like gangs), and the bad Crop (representing organization-wide or even societally-sanctioned cultures that are toxic and corrosive). The book will make you take a longer look when hiring new employees and offers a deeper more complex understanding of what happens in organizations and in their people. The A.B.C. model will also help those inside and outside organizations inoculate against fraud and make you reflect on instilling the core values of your organization among your people and create a culture of excellence and integrity that acts as a prophylactic against fraud. Ultimately, you will discover that, used wisely, behavioral methods trump solely economic incentives. With business fraud on the rise globally,The A.B.C.’s of Behavioral Forensics is the must-have book for investigators, auditors, the C-suite and risk management professionals, the boards of directors, regulators, and HR professionals.

  • Examines the psychology of fraud in a practical way, relating it to aspects of fraud prevention, deterrence, detection, and remediation
  • Helps you understand that trust violation—the essence of fraud—is a betrayal of behavioral assumptions about “trusted” people
  • Explains how good people go bad and how otherwise honest people cross the line
  • Underscores the importance of creating a culture of excellence and integrity that inoculates an organization from fraud risk (i.e., honest behavior pays, while dishonesty is frowned upon)
  • Provides key takeaways on what to look for when hiring new employees and in your current employees, as well as creating and maintaining a culture of control consciousness
  • Includes narrative accounts of interviews with convicted white-collar criminals, as well as interpretive insights and analysis of their rationalizations
  • Furnishes ideas about how to enhance professional skepticism, how to resist fraudsters, how to see through their schemes, how to infuse internal controls with the people/behavioral element, and make them more effective in addressing behavioral/integrity risks
  • Provides a solid foundation for training programs across the fraud risk management life cycle all the way from the discovery of fraud to its investigation as well as remediation (so the same fraud doesn’t happen again)
  • Enables auditors/investigators to engage in self-reflection and avoid cognitive and emotional biases and traps that lead to professional judgment errors (e.g., overconfidence, confirmation, self-deception, groupthink, halo effect, availability, speed-accuracy trade-off, etc.)

Ever since the accounting scandals surrounding Enron and WorldCom surfaced, leading to the passage of the Sarbanes Oxley Act of 2002, as well as the continuing fall out from the Wall Street financial crisis precipitating the Dodd-Frank Act of 2010, fraud has been a leading concern for executives globally. If you thought you knew everything there was to know about financial fraud, think again. Get the real scoop with The A.B.C.’s of Behavioral Forensics.

You can get your copy from amazon by clicking the below link:
http://www.amazon.com/A-B-C-s-Behavioral-Forensics-Psychology-Prevention/dp/1118370554