Did you know that if you’re between 31 and 45 years old; working in management, finance and accounting, operations and production, marketing and sales, procurement, or customer service; male; connected with your organization for three to 10 years; educated; and respected by members of the community, then you have the profile of a fraudster? (Fisher, 2015)
The 2018 PwC Global Economic Crime Survey revealed that internal actors were a third more likely than external actors to be the perpetrators of the most disruptive fraud.
The survey showed an increase in the share of economic crime committed by internal actors (46 percent to 52 percent) and in the proportion of those crimes attributed to senior management (16 percent to 24 percent).
In the Philippines, at least two out of three fraud incidents were perpetrated by internal actors, specifically, senior management (24 percent), middle management (37 percent), junior management (26 percent), and other staff members (11 percent).
Fraud is costly to the organization and world economy. The Association of Certified Fraud Examiners asserts that in 2014, approximately five percent of revenues were lost to fraud. That’s equivalent to $3.7 trillion of Gross World Product.
Given the survey results above, it’s likely that these fraudsters are in your own backyard!
Why good people engage in bad behavior
I’ve always been fascinated about understanding what motivates inherently good people to engage in bad behavior. Specifically, I’ve always wondered what goes on in their minds. Psychology, economics, and behavioral economics present some insight.
Is criminal behavior inherited or learned? The Differential Association Theory asserts that criminal behavior is not inherent. It is learned by interacting with others. This aligns with a 2017 PwC study finding where employees often turn sour as a result of their experience during their time in the organization, the most prominent of which is the perception of injustice.
This injustice is not limited to jobs, hierarchy, and industry. It generally arises from poor organizational processes and management practices.
What drives fraudulent behavior? The most popular explanation is the Fraud Triangle which considers three prerequisites to fraudulent activity: opportunity, pressure (real or perceived), and rationalization.
This theory has been enhanced by the Neutralization Theory which asserts that for people to adhere to common beliefs of right or wrong, they must find ways to neutralize their shame that are likewise learned and developed in social groups.
All makes sense so far, right? But what I found most compelling was the story of Toby Groves, owner of one-time successful mortgage brokerage Groves Funding Corp.
His story was featured on National Public Radio (NPR). Toby was a businessman who, in his 20s, promised his heartbroken father he would never get into the shameful situation of his older brother, who was indicted for fraud.
Fast forward 22 years and Toby found himself in front of the exact same judge who sentenced his brother for the exact same crime: a massive bank fraud involving millions of dollars, leading to at least a hundred lost jobs.
So, what happened?
In a World Bank Report entitled Mind, Society and Behavior, we learn that much of our thinking is automatic and based on what comes to mind effortlessly. We often use mental shortcuts. Deliberative thinking, where we weigh the value of all available choices, is actually less common than we think.
So, in Toby’s situation, he was faced with what psychologists called ‘bounded ethicality’, which limits the decision maker’s ability to recognize a range of morally problematic issues. With ‘bounded ethicality’, we are unable to see the ethical big picture that limits our ability to behave ethically.
Moreover, the way a decision is presented changes the way a person views the decision and eventually, the decision they make.
Essentially, the cognitive frame we’re using can lead to cognitive blind spots that make us blind to the fact that we’re facing an ethical problem at all.
When Toby made the first, second, and third decisions, he was using a business cognitive frame rather than an ethical cognitive frame.
Apparently, most of us are capable of behaving in profoundly unethical ways, without even realizing it!
What organizations can do about it
So what does this mean to corporations, organizations, or even governments?
These institutions need to appreciate the contexts and cognitive frames their clients, employees, and citizens face when designing organizational processes, management programs, or policy interventions.
The economist Richard Thaler refers to choice architecture as the ability to design the context or influence the ways in which choices are presented to affect the decisions people make.
Reducing the opportunity for fraud by ensuring strong internal controls are in place, educating employees about red flags, and building a strong corporate culture focused on integrity and ethics can certainly contribute in preventing and detecting fraudulent behavior.
But ultimately, we need to understand the cognitive frames, the context, the way we present options to our employees, customers and citizens in order to elicit the desired behavior or outcome.
Ironically, the psychologist Carl Rogers – who believed in our goal to ‘self-actualize’ and considered a psychologically fully functioning person as someone who lives in every moment without worrying about past deeds or future consequences and who follows his or her own intuition rather than the will of others – just described your typical fraudster. (Thomas, 2012)
Fisher, K. (2015). The Psychology of Fraud: What Motivates Fraudsters to Commit Crime? Texas: Elsevier Inc.
Thomas, D. (2012). The Psychology of Money Launderers. UK: Thomas Reuters.
* * *
Veronica R. Bartolome is a Consulting Principal of PricewaterhouseCoopers Consulting Services Philippines Co. Ltd., a member firm of the PwC network. For more information, please email firstname.lastname@example.org. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.