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Despite the best efforts of regulators and executives, white-collar fraud continues to dominate headlines, destroy lives, and erode public confidence. From the 2013 conviction of the Dixon, Illinois, comptroller who embezzled more than $53 million, to the 2018 indictment of the prominent pastor and spiritual advisor to two former presidents who sold more than $1 million in worthless bonds, little seems to stem the tide of fraud. Accelerating globalization and the emergence of technologies such as cryptocurrency have only made things worse. In 2018, a UBS trader was charged with manipulating futures prices through "spoofing," and the SEC accused the CEO of a tech startup of defrauding investors with trumped-up claims about the capabilities of a revolutionary bloodtesting device. While the technological complexities have changed, the core of fraud remains inherently human (Sridhar Ramamoorti & William Olsen, "Fraud: the Human Factor," Financial Executive, July 2007, http://bit.ly/2tgiC3G); Eugene Soltes, Why They Do It: Inside the Mind of the White-Collar Criminal, PublicAffairs, 2016), and any antifraud program that ignores this human component is doomed to fail.
The goal of this article is to help gain better insight into the minds of fraudsters in order to fight fraud more effectively. What were these people thinking, and why did efforts at prevention fail? The answers to these questions may lie in the accounting profession itself. When faced with fraud-related threats, accountants often put too much faith in generic and dispassionate policies and controls, forgetting the psychological complexity that makes people the weakest link in the internal control chain. Accordingly, careful attention must be paid to rationalizations that make fraud possible.
How can anyone comprehend the reasoning of a fraudster? Research shows that individuals who behave unethically usually experience guilt and discomfort before committing the deviant act, and that they try to reduce this guilt and discomfort through rationalization. By understanding the common techniques for rationalization, organizations can design antifraud programs to make rationalization harder and, as a result, make it more challenging for potential fraudsters to commit fraud.
A Missed Direction for Fighting Fraud
Criminologist Donald Cressey's fraud triangle attributes the occurrence of fraud to three crucial elements: a nonshareable financial pressure, an opportunity, and rationalization (Other People's Money: A Study in the Social Psychology of Embezzlement, Patterson Smith...