The ABO Reporter

Future Behavioral Directions of
Fraud and Forensic Accounting 1 Research

D. Larry Crumbley*

There has been little academic research on the behavioral aspects of fraud. Joe Koletar, a former FBI agent, told me a number of years ago that a good accountant must first be an excellent investigator. Look at people and lifestyles first, and then look at the records.

Lee Child in one of his novels says “that ninety-nine percent of the time it’s ninety-nine percent about people. A good investigator is a person with a feel for people.”2

One of the early books on forensic accounting provided an iceberg theory3 about detecting fraud. The top one-third of the iceberg (out-of-the-water) involves structural consideration, such as hierarchy, financial resources, goals of the organization, skills and abilities of personnel, technological state, and performance measurement. But just like an IRS agent, a forensic accountant should be aware of the lifestyles of employees. The lifestyle of an individual may give clues as to the possibility of fraud.

So Bologna and Lindquist believe that fraud auditors should look at the two-thirds of the iceberg below the water. They suggest looking below the water line, at

  • attitudes
  • feelings (fear, anger, etc.)
  • values
  • norms
  • interactions
  • supportiveness
  • satisfaction4

Tracy Coenen, of Sequence, Inc., gives seven examples of an employee mind-set that may be used to spot the behavioral red flags of fraud:5

  • Weak code of ethics. If a person is willing to engage in dishonest behavior in other parts of his or her life, it often follows that the same inclination exists in the workplace.
  • Propensity to work “outside” the system. This means not following the rules that everyone else abides by… not following established job procedures and workplace policies…and repeatedly trying to “beat the system.”
  • Poor work performance. When coupled with rationalization or justification of substandard performance, this can be an indicator of disrespect for the organization which in turn can be a driver of internal fraud.
  • Excessive drive to achieve. Employees who desperately try to improve performance or meet certain targets may find it tough to resist the temptation to circumvent fraud controls.
  • Over-protectiveness of data and key documents. Dishonest employees are often reluctant to share information with co-workers or managers. To conceal their illegal activity, they may go to great lengths to ensure that sensitive documents are never out of their sight.
  • Persistent demoralization. When you spot an employee who shows constant dissatisfaction with his or her status in the organization, job duties, coworkers or supervisors, it’s time to keep a close eye on the person.
  • Being the first one in or the last one out. An employee who looks for ways to be alone in the workplace could pose a problem. Little or no vacations.

The Australian Institute of Criminology states that the risk of fraud is a product of both personality and environmental (or situational) variables. They explain fraud by three factors:

  • Supply of motivated offenders.
  • Availability of suitable targets.
  • Absence of capable guardians (e.g., internal controls).

They believe that some fraudsters wish to make fools of their victims. They take delight in the act itself.6

A 2007 study discovered that the primary reasons for fraud are “pressures to do whatever it takes to meet goals” (81 percent of respondents) and “to seek personal gains” (72 percent). Many respondents indicated that “they do not consider their actions fraudulent” (40 percent) as a reason for wrongful behavior.7

Behavioral psychologists call this rationalization “reframing,” where someone who is about to cheat will adjust the definition of cheating to exclude his or her actions. Dan Ariely says “people who would never take $5 petty cash have no problem paying for a drink for a stranger and putting it on a company tab.”8

Many fraud schemes cannot be effectively found using data-driven approaches and sampling, such as corruption, bribery, and kickbacks. Ramamoorti and Curtis state that searching relevant transaction data for patterns and unexplained relationships often fails to yield results because the information may not be recorded, per se, by the system. Behavioral concepts and qualitative factors frequently allow the auditor to look beyond the data, both with respect to data that is there and the data that isn’t.”9

The 2010 ACFE Report to the Nations provides these sixteen behavioral red flags ranked from highest to lowest.

Behavioral Red Flag

There could be academic research for all of these factors.

A 2002 Ernst & Young Study found that women and older employees are more likely to report fraudulent activities.10 A member of ABO should hook-up with a member of the forensic and investigative accounting (FIA) section and investigate these premises.

I certainly encourage each ABO member to join my FIA section (http://aaahq.org/fia/index.html). We need behavioralists to research in the fraud area. Likewise, please consider sending any forensic accounting manuscripts to me (dcrumbl@lsu.edu) for presentation at our Second Annual FIA Research Conference in New Orleans on March 25/26, 2011. Our dinner speaker will be Sam Antar of Crazy Eddie fame. This convicted felon and former CPA used skimming, money laundering, insurance fraud, and other criminal activities to pull off a half a billion dollar statement fraud. Why don’t the ABO section and FIA section have a combined midyear meeting in the future? Would anyone like to be on my editorial advisory board for the Journal of Forensic and Investigative Accounting (http://www.bus.lsu.edu/accounting/faculty/lcrumbley/jfia/)? Send me a short piece for the AAA Forensic Accounting Educator (http://www.aaahq.org/fia/attachments/FIA-Newsletter-V2N2.pdf).

 


1* Dr. Crumbley, CPA, CFF, CrFA, CFFA, is KPMG Endowed Professor at Louisiana State University. He is editor of the Journal of Forensic and Investigative Accounting, and founder and first president of the AAA’s Forensic and Investigative Accounting section.
For a description of Forensic Accounting, go to “So What Is Forensic Accounting?The ABO Reporter, Fall 2009.

2 Lee Child, Echo Burning, N.Y.: Jove Books, 2001, p.281.

3 G.J. Bologna and R.J. Lindquist, Fraud Auditing and Forensic Accounting, 2nd edition, New York: John Wiley, 1995, pp.36-37.

4 Ibid.

6 Grace Duffield and Peter Grabosky, “The Psychology of Fraud, Australian Institute of Criminology,” No.19.

7 Oversight Systems Report on Corporate Fraud, 2007, www.oversightsystems.com; Managing the Business Risk of Fraud: A Practical Guide, IIA, AICPA, ACFE; http://www.acfe.com/documents/managing-business-risk.pdf, 2008, p. 6

8 S.L. Mintz, “The Guage of Innocence,” CFO, April 2009, p.56

9 S. Ramamoorti and S. Curtis, “Procurement Fraud & Data Analytics,” Journal of Government Financial Management, Winter 2003, Vol. 52, No. 4, pp. 16-24.

10 Ernst & Young, “American Works: Employers Lose 20 Percent of Every Dollar to Work Place Fraud.” (2002) available at http://www.ey.com/global/Conent.nsf/US/Media_Release_-_08-05-02DC

 

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