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Financial fraud — why they do it!

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Financial fraud — why they do it!.

I've always enjoyed reading biographies of successful businesspeople. I'm equally interested in the October launch of a different sort of biography: the story of white collar criminals and their motivations.

Financial fraud is on the rise, and despite best efforts in prevention and governance, most fraud is still detected by chance.

Perhaps understanding the working of a criminal mind might help companies avoid becoming victims.

In his new book, Why They Did It: Inside the Mind of the White-Collar Criminal Harvard professor Eugene Soltes attempts to explain why business executives — people who already have status and wealth — commit financial crimes.

Soltes' book features first-hand observations and self-justifications of a "Murderers' Row" of white-collar crime.

Soltes wrote to four dozen convicted criminals, ranging from Ponzi scheme fraudster Bernard Madoff to Andrew Fastow, of Enron Corp and Dennis Kozlowski, the chief executive and brains behind the $US600 million Tyco International fraud.

In a preview, Soltes summarises some of the common explanations provided by the fraudsters.

  • I'll pay them back. I promise. Bernie Madoff told Soltes "It's like a comedy of errors. To cover the losses, I decided to take in money from hedge funds. I had to commit to a strategy that meant I wouldn't send the money back to investors. I kept taking in more money, figuring that once the market allowed me, I'd be able to fix it."

This is a typical explanation of supposedly well-intentioned fraudsters: eventually their plan will make money and everyone will be repaid. Apparently fraudsters find it easy to rationalise their behaviour: "I am only borrowing the money and will pay it back"; "Nobody will get hurt"; "It's for a good purpose."

  • Oops, I forgot about right and wrong. Soltes quotes Andrew Fastow, the former Enron chief financial officer as saying "If I had the character I should have had, I would have said 'Time out, I can't do it'. But I didn't. If I had, they would just have found another CFO. But that doesn't excuse it. That's like saying it's ok to murder someone because if I didn't, someone else would have."
  • Blame my ego. White-collar fraudsters are typically well-educated, have a high social standing and are respected members of the community. They use their social and cultural background as well as their specialized knowledge and skills to their advantage. In addition, they are usually adept at bending others to their will.

Tyco's Dennis Kozlowski told Soltes "The board would give me anything I wanted. We believed our own press. With myself and others — even the board — you become consumed by your own arrogance and you really think you can do anything."

One of the more interesting behavioural beliefs held by fraudsters is their belief that they were acting in a legitimate manner. Each believed they were performing acceptable business practices within their organisation — that their practices, while aggressive, were legal and even necessary for the survival of the organisation.

Researchers in this area have referred to the so-called fraud triangle, the three key factors that determine whether a person will commit fraud:

  • A perceived pressure facing the person (such as financial pressure, or peer group expectations);
  • a perceived opportunity to commit fraud (inadequate controls and standards); and
  • a person's rationalisation or integrity ("I'm not doing anything wrong").

Soltes' book suggests there might be another overriding factor that drives white-collar criminals. They'll do it because they think they can get away with it.

 

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