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


Praise for A.B.C.'s of Behavioral Forensics

"Fraud is an important part of enterprise risk. Although it falls in the finance and accounting function, it is also a people issue. The authors have taken an important step forward in helping organizations by examining issues of relationships, emotions, narcissism, and larger group and organizational dynamics that will help leaders understand and deter fraud."
—Harry M. Jansen Kraemer, former CEO, Baxter International; Professor of Leadership, Kellogg School of Management, Northwestern University

"You will, upon reflection, note that [the authors] have not only addressed the narrower issues of forensics, but the broader issues of philosophy, ethics, and governance. This book can be read usefully at the surface level. Or given more time and thought, a reader will be led to think more deeply about how society is impacted when otherwise good people, particularly our leaders, violate their trust. Reading this book will be a good and profitable use of your time."
—Andrew D. Bailey, Jr., PhD, CPA, CMA, CIA, CFE, Professor Emeritus of Accounting, University of Illinois at Urbana-Champaign

"Sri, Dave, Joe, and Kelly have done a great job of helping us understand the importance of recognizing the very personal and individual human factors that can drive someone to fraudulent behavior. They also provide insights and guidelines that can help us recognize the potential 'fraudster.'"
—Peter Pesce, Partner Emeritus, A.T. Kearney

"With recognizable and pertinent case studies, these exceptionally qualified authors demonstrate how certain human behavioral factors precede and enable a fraud—be it carried out by one person, a colluding group, or by suggestions from leadership. What the authors then do is thoroughly describe these defining emotions, the essential relationship between the fraud perpetrator and the victim, and what can lead an individual to reverse his or her 'honesty course.'"
—Jameson A. Baxter, Chair, Putnam Funds

"Leaders with integrity attempt to define and determine the personality characteristics of truth and honesty in themselves and others. However it's a search often fraught with uncertainty. A.B.C.'s of Behavioral Forensics will help you to be aware of the signals of devious behavior. Most important, it will increase your sensitivity to the importance of the issue. Corrupt activities are often allowed to continue due to our own indifference."
—Duane R. Kullberg, former CEO, 1980–1989, Arthur Andersen & Co.

"Understanding why fraud happens is as important as understanding what happened. A.B.C.'s of Behavioral Forensics offers important insight into the mind of the white-collar criminal. It's good reading for accounting professionals, journalists, lawyers, psychiatrists, and laypeople alike."
—Bethany McLean, Fellow, The University of Chicago; contributing editor, Vanity Fair; and coauthor of All the Devils Are Here and The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron

Dr. SRIDHAR RAMAMOORTI, ACA, CPA/CITP/CFF/CGMA, CIA, CFE, MAFF, CFSA, CGAP, CGFM, CRMA, is currently an Associate Professor of Accounting and Director, Corporate Governance Center, at Kennesaw State University. A former University of Illinois accountancy faculty member, he has worked for Arthur Andersen and Ernst & Young, and is a former corporate governance partner with Grant Thornton. A board member of the Institute for Truth in Accounting and Ascend, he chairs the Financial Executives International's Committee for Governance, Risk, and Compliance.

DAVID E. MORRISON III is a Clinical Assistant Professor of Psychiatry and Behavioral Sciences at Chicago Medical School, Rosalind Franklin University of Medicine and Science. An advisor to the Institute of Fraud Prevention (IFP) of West Virginia University since 2008, he is also a past president of the Academy of Organizational and Occupational Psychiatry, Group for the Advancement of Psychiatry (GAP) member, and a Tomkins Institute board member. He works full time as a principal at Morrison Associates, Ltd., with a career focused on leadership and executive development.

JOSEPH W. KOLETAR, DPA, CFE, is an independent forensic investigator and consultant. He has held senior positions such as principal and director with Ernst & Young and Deloitte in the firms' forensic and investigative practices. Before joining the private sector, Dr. Koletar spent twenty-five years as a special agent in the FBI, the last seven in senior executive positions. He was formerly chairman of the Board of Regents of the Association of Certified Fraud Examiners.

KELLY RICHMOND POPE, PhD, CPA, is an Associate Professor in the School of Accountancy at DePaul University and founder of Helios Digital Learning. She is the creator of the award-winning white-collar crime documentary Crossing the Line: Ordinary People Committing Extraordinary Crimes. Her work has been published in numerous academic journals such as Behavioral Research in Accounting, Journal of Business Ethics, and Auditing: A Journal of Practice & Theory. She also writes for, Newsweek Daily Beast, and PBS's Need to Know. Prior to academia, she worked as a forensic accountant for KPMG LLP. In 2012, Dr. Pope was elected to the AICPA Governing Council for a three-year term.

Foreword xv

Preface xvii

Acknowledgments xxiii

Introduction 1

The Human Factor 2

Trust Violation and Its Consequences 4

This Book’s Approach: The A.B.C.’s of Behavioral Forensics 4

An Interdisciplinary Approach 6

Part I When Fraud Is Committed 9

Chapter 1 Fraud Is Everywhere 13

The Pervasiveness of Fraud 14

On Making (Up) the Numbers 16

A Slippery Slope 19

From Slippery Slope to Broken Windows 21

Fraud Is a Human Act 23

Conclusion 24

Chapter 2 The Sins of Quantification and Other Mind-Set Impediments 27

The Danger of Numbers 29

Data Analysis Is Not Enough 31

Hard Numbers versus Reality 33

Conclusion 37

Chapter 3 Beyond the Fraud Triangle: Toward an Outline of A.B.C. Theory 41

The Relevance of Behavioral Approaches 41

Understanding White-Collar Crime 43

The Fraud Triangle and Other Theories of Causation 45

A.B.C. Theory: A New Fraud Taxonomy 49

Conclusion 53

Part II The Foundations of Behavioral Forensics: Why Good People Do Bad Things 55

Chapter 4 Beyond the Fraud Triangle and into the Mind: The Building Blocks of Behavioral Forensics-- Understanding How the Basics of Human Behavior Tie into Fraud 59

Deception Is a Natural Phenomenon 59

The Mind and the Fraud Triangle 60

Emotions: The Power behind Psychological Defenses 67

Affect’s Two Ties to Fraud: Motivation and Communication 73

Conclusion 76

Chapter 5 “Said the Spider to the Fly . . .”: The Predator-Prey Dance-- Putting Behavioral Science Fundamentals into Motion 81

Emotions, Unconscious, Defenses--Oh My! 82

Relationships: Where Fraud Is Set in Motion 82

The Relationship as an End in Itself: Bernie Madoff 87

Lance Armstrong and His Accomplices 91

Where Is the Humility? 93

The Power of Shame 94

Good to Evil: How a Hardwired Emotion Is Ignored and Manipulated 99

When Shame Is Maladaptive at Work 104

False Pride: With the Threat of Shame Comes Hubris 107

The Predator Bullies the Professionals 108

The Role of Mental Illness 111

Conclusion 116

Chapter 6 The Accidental Fraudster (Bad Apple): When the Apple Turns and Honesty Reverses Course 121

Committing the Crime 121

Beyond Greed 122

Exploiting a Weakness: A Motivational

Theory of the Accidental Fraudster (Bad Apple) 123

New Insights in Behavioral Forensics 127

Disregarding Risk: The Thrill of Being Close to, but Not in, Danger 133

Why Now? Understanding Life-Span Issues in Fraud Reversals 137

Lessons from Executives and Managers on the Couch 139

Conclusion 139

Chapter 7 The Bad Bushel and Beyond: Seeing the Larger Context of the C-Suite 143

Luck and Effort Distinguish Senior Executives 144

Life as an Executive: Excitement, Vigilance, and Caution 147

Trouble in the C-Suite: Overwhelmed, Overpaid, and Overconfident--Narcissism and Beyond 148

The Individual and the Group: Bad Bushels Arise 153

The Science of Persuasion 158

Conclusion 161

Part III A Call to Action 165

Chapter 8 Managing the Ecology of Fraud: What You Can Do on Monday Morning 171

The Financial Markets: The Moral Foundations of Capitalism 172

Helping Senior Executives to Stay on the Right Side of the Line 176

Piercing the Rationalizations 177

Emotional Manipulation 179

On Lies and Misrepresentation 181

The Operational Fraud Triangle 183

What You Can Do Monday Morning 185

Recognizing Tipping Points (of the Mind) 188

Conclusion 191

Chapter 9 The Future of Behavioral Forensics: Developing Psychological Awareness to Complement Financial Fraud Suspicions 195

Fraud: A Global Scourge 196

Fraud Is Not a Problem with an Easy Answer 197

A Psychological Autopsy of Fraud 207

The Future of Behavioral Forensics 209

Afterword 213

Appendix A The Psychology and Sociology of Fraud: Integrating the Behavioral Sciences Component into Fraud
and Forensic Accounting Curricula 217

Appendix B Chapter Supplements 231

Bibliography 247

About the Authors 255

Index 261