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

by Ramamoorti, Sridhar; Morrison, David E.; Koletar, Joseph W.; Pope, Kelly R.

• ISBN13: 9781118370551
• ISBN10: 1118370554
• Edition: 1st
• Format: Hardcover
• Copyright: 2013-09-23
• Publisher: Wiley

Summary

Get practical insights on the psychology of white-collar criminals-and how to outsmart them Understand how the psychologies of fraudsters and their victims interact as well as what makes auditors/investigators/regulators let down their guard. Learn about the psychology of fraud victims, including boards of directors and senior management, and what makes them want to believe fraudsters, and therefore making them particularly vulnerable to deception. Just as IT experts gave us computer forensics, we now have a uniquely qualified team immersed in psychology, sociology, psychiatry as well as accounting and auditing, introducing the emerging field of behavioral forensics to address the phenomenon of fraud. Ever wonder what makes a white-collar criminal tick? Why does she or he do what they do? For the first time ever, see the mind of the fraudster laid bare, including their sometimes twisted rationalizations; think like a crook to catch a crook! The A.B.C.s of Behavioral Forensics takes you there, with expert advice from a diverse but highly specialized authoring team of professionals (three out of the four are Certified Fraud Examiners): a former accounting firm partner who has a PhD in psychology, a former FBI special agent who has been with investigative practices of two of the Big Four firms, an industrial psychiatrist who has worked closely with the C-level suite of large and small companies, and an accounting professor who has interviewed numerous convicted felons. Along with a fascinating exploration of what makes people fall for the common and not-so-common swindles, the book provides a sweeping characterization of the ecology of fraud using The A.B.C.s of Behavioral Forensics paradigm: the bad Apple (rogue executive), the bad Bushel (groups that collude and behave like gangs), and the bad Crop (representing organization-wide or even societally-sanctioned cultures that are toxic and corrosive). The book will make you take a longer look when hiring new employees and offers a deeper more complex understanding of what happens in organizations and in their people. The A.B.C. model will also help those inside and outside organizations inoculate against fraud and make you reflect on instilling the core values of your organization among your people and create a culture of excellence and integrity that acts as a prophylactic against fraud. Ultimately, you will discover that, used wisely, behavioral methods trump solely economic incentives. With business fraud on the rise globally, The A.B.C.s of Behavioral Forensics is the must-have book for investigators, auditors, the C-suite and risk management professionals, the boards of directors, regulators, and HR professionals. Examines the psychology of fraud in a practical way, relating it to aspects of fraud prevention, deterrence, detection, and remediation Helps you understand that trust violation-the essence of fraud-is a betrayal of behavioral assumptions about "trusted" people Explains how good people go bad and how otherwise honest people cross the line Underscores the importance of creating a culture of excellence and integrity that inoculates an organization from fraud risk (i.e., honest behavior pays, while dishonesty is frowned upon) Provides key takeaways on what to look for when hiring new employees and in your current employees, as well as creating and maintaining a culture of control consciousness Includes narrative accounts of interviews with convicted white-collar criminals, as well as interpretive insights and analysis of their rationalizations Furnishes ideas about how to enhance professional skepticism, how to resist fraudsters, how to see through their schemes, how to infuse internal controls with the people/behavioral element, and make them more effective in addressing behavioral/integrity risks Provides a solid foundation for training programs across the fraud risk management life cycle all the way from the discovery of fraud to its investigation as well as remediation (so the same fraud doesnt happen again) Enables auditors/investigators to engage in self-reflection and avoid cognitive and emotional biases and traps that lead to professional judgment errors (e.g., overconfidence, confirmation, self-deception, groupthink, halo effect, availability, speed-accuracy trade-off, etc.) Ever since the accounting scandals surrounding Enron and WorldCom surfaced, leading to the passage of the Sarbanes Oxley Act of 2002, as well as the continuing fall out from the Wall Street financial crisis precipitating the Dodd-Frank Act of 2010, fraud has been a leading concern for executives globally. If you thought you knew everything there was to know about financial fraud, think again. Get the real scoop with The A.B.C.s of Behavioral Forensics .

Author Biography

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 Forbes.com, 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.

Table of Contents

Foreword

Preface

The Human Factor

The Association of Certified Fraud Examiners (ACFE) -- The Report to the Nations

The Typical Fraudster

This Book’s Approach: The ABCs of Fraud

This Book’s Authors

This Book’s Setup

Acknowledgments

About the Authors

Part I Crossing the Line

Chapter 1 Fraud Is Everywhere

The Pervasiveness of Fraud

On Making (Up) the Numbers

A Slippery Slope

Fraud Is a Human Act

In Summary

Chapter 2 The Sins of Quantification and Other Mindset Impediments

The Danger of Numbers

Data Analysis Is Not Enough

Hard Numbers versus Reality

The Bank: An Ingenue Shall Lead Them…Into Fraud

The Plants: “Let’s Manufacture More than Widgets. Let’s Make the Numbers!”

Case Discussion: Challenging Questions

In Summary

Chapter 3 Beyond the Fraud Triangle

Towards an Outline of ABC Theory

Relevance of Behavioral Approaches

Understanding White Collar Crime

The Fraud Triangle

ABC Theory Origins

In Summary

Part II Why Good People Do Bad Things: Foundations of Behavioral Forensics--Psychological Theories, Conceptual Frameworks and Case Studies

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

Fraud Is a Natural Phenomenon

The Mind and the Fraud Triangle:  Pressure, Opportunity and Rationalization

Understanding the “Balance Sheet Basics” of the Mind: The Unconscious, Symptoms and the Defenses

The Case of Health South’s First CFO, Aaron Beam

Accounting, Finance and What It Means to the Mind

Psychological Defenses: The Roots of “Rationalization” Are Compromises We Make within Ourselves

The Power behind Psychological Defenses: Emotions

Emotions as a Problem or a Threat to Understanding the Rational World of Accounting

Emotions Play a Role at Many Levels in Fraud

The Mind Is Relevant Today: From Freud to functional-MRI (fMRI) to FACS--Peeking into the Brain

Affect, Our Hard-Wired Emotion, Has Two Ties to Fraud: Motivation and Communication

The Next Step: Looking at the Dance between the Bad Apple and the Victim(s)

In Summary

Chapter 5 …said the Spider to the Fly
The Predator/Prey Dance--Putting Behavioral Science Fundamentals into Motion

Emotions, Unconscious, Defenses… Oh My!

Relationships Matter: Where Things Are Set in Motion and Fraud Takes Place

The Phisherman: The Affective Dance of Fraudster and Victim

The Fraudster, the Victim and the Lyrical Seduction of Emotion

The Relationship as an End in Itself: Bernie Madoff

Why Don’t They Leave the Predator? A Deeper Dive into the Crime that Binds Fraudster and Victim

Lance Armstrong and His Accomplices

Where Is the Humility?

The Alarms Go Off: Beyond Fear, Excitement and How Shame Plays a Role

Good to Evil: How a Hard-wired Emotion Is Ignored and Manipulated

Inside the Mind of the Internal Predatory Fraudster: Shame and Emotional Manipulation

Shame: A Powerful Inborn Tool for Learning Is Also the Interpersonal Engine for Fraud

The Healthy and Adaptive Function of Shame in the Workplace

Shame as a Driver for Better Performance

When Shame Is Maladaptive at Work

Maladaptive Shame Defenses: How Bad Apples Shame Others to Perpetrate Fraud

False Pride: With the Threat of Shame, Comes Hubris

The Predator Bullies the Professionals

What Role Does Mental Illness Play?

Monsters in the Nursery

Subclinical Psychopathy: Does It Play a Role in Recruiting, or Small-time Frauds?

In Summary

Chapter 6 The Accidental Bad Apple
When Honesty Reverses Course

Committing the Crime

Crossing the Line: A Theory of Accidental Bad Apple Motivation

We All Choose to Ignore Rules

The Dynamics Inside the Mind of the Fraudster Who Accidentally Crosses the Line and Stays Over: The Reversal

Beyond Greed: More Ideas on Motivation

New Insights on Behavioral Forensics from Motivational Reversals in a Bad Apple

Seeing the Insights

Case Examples of Accidental Bad Apples Reversing

Disregarding Risk: The Thrill of Being Close to, But Not In, Danger

It’s Only a Game: The Role of a Protective Frame of Mind that Makes Rules and Repercussions Disappear

Beyond The Milgram Experiment Mindset

Where Is the Milgram with the Phisherman? Same as with the Fraudster – ABSENT!

Why Now? Understanding the Lifespan Issues that Play a Role in Fraud Reversals

The Psychological Conflict of Midlife May Provide the Fraud Triangle “Pressure”

This Business Downturn Can’t Stop Me Now, I’ve Come Too Far!

Counterpoints

Lessons from Executives and Managers on the Couch

In Summary

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

Luck and Effort Distinguish Senior Executives

Interviewing Executives

Problem Solving: Putting Executives through Industrial Grade Assessments

What Life is like as an Officer: Excitement, Vigilance and Caution

Trouble in the C-Suite: Overwhelmed Overpaid and Over-Confident--Narcissism and Beyond

Narcissism: Beyond Self-Love

The Power of the Narcissistic Leader Turns to Harm

Psychopathy and Anti-Social as a Related Concept in the Leader

Defining Narcissism from Afar

Charismatic Leadership

Narcissistic-Like Traits: Comparing and Contrasting Three CEOs

Moving Into the Bushels and the Crops

On the Emerging Science of Persuasion

In Summary

Part III A Call to Action

Chapter 8 How Can We Resist Being Manipulated?
Professional Skepticism, Lie Detection, Common Sense and What You Can Do Monday Morning

The Financial Markets: Moral Foundations of Capitalism

The Operational Fraud Triangle

Emotional Manipulation

Taking Action to Avoid Fraud

Helping Senior Executives with Staying on the Right Side of the Line

Is it Legal?

Is it the Right Thing to Do?

On Lies and Misrepresentation

What You Can Do “Monday Morning”

Regarding the Psychology of Fraud

Only the Paranoid Survive

Affinity Risk

Sorites Paradox, or the Tipping Point

Fraudsters Shoot Big, then Bigger

Risk Appetite for Danger

MISR Leads to Fraud, then MISERY

Relative Value of Money

Cognitive Dissonance

In Summary

Chapter 9 The Future of Behavioral Forensics
Developing Fraud Awareness and Information Integrity

A Culture of Cleverness

The Information Integrity Framework

The Future of Behavioral Forensics

Afterword

Appendix I The Psychology and Sociology of Fraud: Integrating the Behavioral Sciences Component Into Fraud and Forensic Accounting Curricula

Appendix II

Supplement to Preface:  2011 ACFE Video: “Inside the Fraudster’s Mind”

Supplement to Chapter 3: Greed Takes the Blame by David M. Freedman, Senior Editor, The Value Examiner

Supplement to Chapter 3: Michael Grayson Poem

Supplement to Chapter 5: Sample Phishing Email -- “The Case from the Inbox”

Supplement to Chapter 7: Executive Assessment

Supplement to Chapter 8: Ken Fisher on How to Smell a Rat

Supplement to Chapter 8: On the Psychology of an Unindicted Co-conspirator Sought by Government as a Cooperating Witness

Supplement to Chapter 8: Fraudster Modus Operandi--Convicted Felon Samuel Antar on the Art of Spinning

References

Index