How the Study of Fraud Seduced Me

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COMMENTARY

As readers of Psychiatric Times™, you all are well educated and likely familiar with the story of how, when asked why he stole from banks, Willie Sutton famously said, “Because that’s where the money is.” It is a clever quip, but unfortunately, it is apocryphal. In his book Where the Money Was: The Memoirs of a Bank Robber (1976), Sutton denies having said this, but concedes that, “If anybody had asked me, I’d have probably said it.”¹

Fraud traps people like that: It sounds too good not to be true. Barry Minkow of ZZZZ Best fraud notoriety observed that, “Fraud is the skin of truth stuffed with a lie.”²

In the past, we have focused only on the overt economic consequences of fraud. It is clear now that the covert “psychology of fraud” is an even more important dimension we need in order to truly understand fraud.

The way fraud entered my professional life was quite dramatic. It forever changed the arc of my career as a psychiatrist. It is fair to say that just as victims are seduced by fraudsters, as an organizational psychiatrist, I have been seduced by the study of fraud—a complex, labyrinthine topic that is utterly fascinating.

The Story of My Seduction

In the summer of 2001, I developed a workshop to manage the emotions of feedback, alongside an experienced leadership development program director, for 60,000 employees worldwide. Unfortunately, it was not to be. In less than 1 year, this massive international organization of more than 80,000 individuals would cease to exist. What happened in the course of its collapse piqued my interest in fraud and white-collar crime.

The organization was Arthur Andersen. Beginning in fall 2001, this almost 90-year-old giant accounting firm was exposed and enmeshed in a fraud perpetrated by Enron, an energy company based out of Houston, Texas. Enron was illegally hiding financial losses and withholding them from Andersen.³ Ultimately, Andersen lost its license to practice accounting—but more importantly, it lost its credibility as an audit firm when it was accused of shredding Enron’s audit workpapers.

What Is Known of the Incidence and Types of Fraud

From an organizational psychiatry perspective, fraud can have significant implications for the mental health of all who work within organizations. Since 1996, the Association of Certified Fraud Examiners (ACFE) has released its biennial global survey of fraud, Report to the Nations (RTTN). The Table shows summary data from the May 2022 RTTN.⁴

Table. An Overview of the Incidence, Costs, and Types of Fraud⁴

As noted in the Table, the long-tenured employee is the costliest when it comes to fraud. These individuals are best characterized as “wolves in sheep’s clothing.”⁵

However, also of substantive interest are members of the C suite, particularly the chief executive officer (CEO) and the chief financial officer (CFO). As these individuals are the corporate leaders responsible for setting the tone from the top and implementing internal controls within the organization, the ACFE RTTN surveys identifies the CEO and the CFO as among the most expensive when it comes to fraud.⁴

Indeed, these highly placed individuals who occupy seats of power also have access to assets, as well as the ability to override controls and risk management safeguards in place. These are the equivalent of “foxes guarding the henhouse.”

Leaders, especially those in the C suite, must be held accountable for managing the individuals in their organizations and for creating sustainable value creation strategies, and organizations that are fraud-resistant. Because these and other leaders oversee the execution of plans, are responsible for risk, and are visible to so many both inside and outside the organization, their mental health is critically important.

Who Exactly Commits Fraud—and Why?

One of the most frequently asked questions about fraud behavior is, “What is the profile of the fraudster?” To address this question, I was invited by ACFE/University of West Virginia’s Institute for Fraud Prevention (IFP) to assemble a team to explore the human side of fraud in the early 2000s. At this time, I was part of an interdisciplinary team assembled by my colleague and regular coauthor, Sridhar Ramamoorti, PhD, to explore the human side of fraud. He contributed significantly here, in fact.

Our multidisciplinary team sought to address fraud in new ways at the IFP, especially the novel but welcome perspective of an organizational psychiatrist. Ultimately, we recognized that profiling had limited usefulness and was even a dead end. What was more important was to understand how and why fraud was committed.

Because fraudsters can be either short- or long-standing employees, and because they also work in groups, we began to address several new questions related to fraud, including:

• What makes fraud victims susceptible to fraudsters?
• Fraudsters often do not see themselves as greedy—so, how do they see themselves?
• Because fraud is so expensive when perpetrated by senior executives, how can we understand fraud in the C suite better?
• Does it make sense to see fraud as perpetrated by a single individual, or is it worth our time to study fraud less like we would a serial killer and more like gang behavior?
• Is profiling the right solution for detecting fraudsters?

In dialogue with ACFE leadership and the IFP, we developed a taxonomy out of the concept of the “bad apple.” We began to look at not only the “bad apple,” or the fraudster, but also the “bad bushel” and “the bad crop.” This led to our paper,⁶ which in turn led to our book, A.B.C.’s of Behavioral Forensics.⁷

One problem became our focus: Why do these employees commit fraud? We found that employees who commit fraud often fall into 1 of 2 categories:

1. The accidental or situational fraudster: the employee who thinks “the organization can afford this” or “it is just money.” (These thoughts usually involve numerous rationalizations.)
2. The predatory fraudster: the employee with predatory intent who deliberately stalks their victims and can even create opportunities to commit fraud.⁵ (Many of these predatory types have little or no conscience, and hence, do not need any rationalizations.)

Choosing to break the law, or the potential to do so, is another subject of interest. In exploring this further, we found that reversal theory (RT), pioneered by psychologist Michael Apter, PhD, conceptualizes fraud behavior quite well by explaining that everyone breaks rules (the law), and it allows for motivational states to change over time.⁸

As our colleague from law enforcement, Joe Koletar, DPA, CFE, notes, everyone breaks the law when they go 1 mile per hour over the speed limit. His point is that all of us, despite being aware of the law, have the potential to choose to break the law.⁹

The RT model provides 2 further pertinent reasons⁸:

1. There are more motivational states for investigators to explore related to “getting into the mind of the fraudster.” Considering “greed” as the primary motivation to commit fraud blocks rather than allows access into the human mind.
2. These motivational states can change based on one’s sense of danger (ie, risk perception).

The RT model explains how individuals can take significant risk while ignoring the natural alarms. We do so through the use of a psychological “protective frame,” in which we feel insulated from dangerous situations if we are able to feel protected by physical or psychological distance from harm.⁸ This explains why we can be excited in a horror movie or in the presence of sharks in a shark cage.

As it applies to fraud, this explains why the Enron energy traders, for instance, could do the harm they did to the citizens of California who went bankrupt—and even lost their homes in many cases—when they could not afford their electricity bills: These Enron traders, based in Houston, Texas, were far removed from directly experiencing the psychological harm inflicted on these citizens.

Similarly, Patrick Kuhse, who illicitly made $3.89 million when he was deputy bond trader for the state of Oklahoma in the early 1990s, said he felt that individual citizens of the state probably suffered very minor losses and relied on this “diffusion of harm” logic to argue that it was a victimless crime.^10,11 This protective frame model generally explains the “victimless” rationale of those who commit fraud inside their own organizations: These individuals literally do not see the harm done to trust, to opportunity, and, of course, to the reputation of the organization.

Clearly, in certain cases of predatory fraud (eg, phishing or other scams done intentionally through social manipulation), the fraudster knows the harm they are causing. In this sense, their intentions are more pathological and fit that of a psychopath. This fits the behaviors of leaders who sell their own stock while telling employees to retain theirs (eg, the late Ken Lay at Enron), and of those who brazenly lie to investors, customers, and even patients.

As we explored motivations further, another individual came into focus: the victim. Our early models sought to highlight the need to understand this person, who is often forgotten in the pursuit of “the fraudster” profile. In our book, A.B.C.’s of Behavioral Forensics, we used cases and common experiences to describe the dynamic dance between the predator and the victim.⁷

Fraud involves violation of trust and therefore requires the cooperation of the victim. However, it is important to understand that fraud is not a victimless crime. Employees suffer when the business underperforms in accidental fraud, and in predatory fraud, the crime requires the cooperation of the victim.

A Role for Psychiatry: Shame Incompetence

An important conceptual piece explains most of what we see in fraud comes down to emotional incompetence and, in particular, shame incompetence (Figure 1).¹²

Figure 1. Compass of Maladaptive Shame Defenses¹²

On the outside, many high-profile fraudsters appear to be shameless, or at least not “shame-phobic.” Many of these fraudsters pursued a larger-than-life and very public personae—but beneath the surface, there was much more going on. Some research suggests that these individuals may not have a healthy self-esteem. Current concerns have been voiced about an idealization of billionaires and other signs of wealth (eg, social media influencers), and our approach to behavioral forensics notes that the victims of C-suite fraud are active in the fraud because of their adulation.

In the case of Enron, when the organization was failing at the very end, the corporation’s leaders famously and charismatically addressed rooms full of employees and encouraged them to hold onto their stock while, privately, they were selling their own shares. Elizabeth Holmes, former CEO of Theranos, did the same not only with Theranos employees, but also with investors and the US military.

These behaviors are not unlike those of authoritarian leaders as they reinforce their power and fulfill their capacity for theft and abuse of the government—or, in this case, the organization.¹³

From a twinge of self-consciousness to profound humiliation, the effect of shame is readily understood and seen in the fraud dynamic. It is adaptive as we repair and reintegrate when the inevitable ruptures to relationships happen. It is maladaptive when, as may often be the case with fraudsters, it moves our self-esteem further away from reality.

Here are examples of the predator’s lack of shame:

1. “Why would they question my results? Don’t they see I work so hard? In fact, I never take a sick day and often work holidays!” (This is probably to conceal the fraud that they are committing.)
2. “How can I show up at the country club, the CEO roundtable, or on the analysts’ call without numbers representing solid performance, as the company is me and I am the company?” (“Fake it ‘til you make it” has been the motto of many a Silicon Valley CEO, including Elizabeth Holmes.)
3. “I’ve worked so long for modest pay while others I know have lived a good life. The company makes enough money and hasn’t noticed me, so they won’t notice this going to me. Besides, I will pay it back.” (This type of self-justification allows them to sleep at night unperturbed.)

All of these are influenced by shame, and all are different motivations, per Apter’s RT model.⁸ To build on this, we modified the shame compass to include the extreme outcomes that may be associated with maladaptive shame defense: the dismissal of data and the dismissal of self (Figure 2).⁷

Figure 2. Extreme Outcomes Associated With the Shame Compass⁷

In some cases, the self-dismissal of this modified shame compass ended in suicide after the fraud was exposed. For example, J. Clifford Baxter, former vice chairman of Enron, committed suicide in the wake of Enron’s fraud scandal.¹⁴ Ian Gibbons, chief scientist at Theranos, also committed suicide.¹⁵

As psychiatrists, we see maladaptive defenses every day. In our patients, we see the distorted self-esteem of mania and dual diagnosis. We know we can be “conned.” As professionals, we have seen the overly confident peers who bully departments for more influence while those who are impaired with “imposter syndrome” never fully develop professionally. However, although we know this clinically and personally, most psychiatrists do not have a model of emotions that helps. We need to use such a model to help our patients and ourselves.

There is a growing body of literature on members of the “dark triad” of personalities: narcissists, Machiavellians, and psychopaths/sociopaths.¹⁶ When in powerful corporate positions, these types of individuals—who fall under the antisocial personality disorder classification in the DSM-5—have a propensity for committing fraud.

Epstein and Ramamoorti argue that, unlike individuals who require incentives or pressure, as well as rationalization to justify any unethical, immoral, or illegal behaviors, individuals within the “dark triad” of personalities—who have little or no conscience and low or non-existent empathy—only need opportunity to commit fraud.⁵ Psychiatrists can play a key role in better understanding such abnormal personalities, learning how these individuals manipulate emotions, and learning how—and why—they choose to perpetrate fraud.

Concluding Thoughts

So, what is the next frontier in the fight against white-collar crime—one in which psychiatrists can play a significant role if they choose? When studying fraud further, we need to focus on the behavior—not the person—and to start seeing emotions as data. If we in psychiatry can better understand who commits fraud and why, we may be in a better position to prevent future instances of fraud, as well as to help those who are affected by fraud.

Dr Morrison is a clinical assistant professor of psychiatry at Rosalind Franklin University’s Chicago School of Medicine, and past president of the Academy of Organizational and Occupational Psychiatry. He is also a member of the Group for the Advancement of Psychiatry (GAP)–Committee on Work & Organizations; Institute for Fraud Prevention (IFP); Tomkins Institute of Applied Studies of Motivation, Emotion and Cognition. He is a co-author of A.B.C.’s of Behavioral Forensics and Psychiatry of Workplace Dysfunction, and a regular contributor to the B4G™ blog, bringingfreudtofraud.com.

Dr Ramamoorti is currently an associate professor of accounting at the University of Dayton and the managing principal and CEO of The Behavioral Forensics Group™ LLC. He is also a regular contributor to the B4G™ blog, bringingfreudtofraud.com.

References

1. Sutton W. Where the Money Was: The Memoirs of a Bank Robber. The Viking Press; 1976.

2. Granelli JS. Con man on how not to be taken to cleaners: fraud: former ZZZZ Best whiz kid Barry Minkow, fresh from prison, tries to make amends on lecture circuit. The Los Angeles Times. October 13, 1995. Accessed November 5, 2022. https://www.latimes.com/archives/la-xpm-1995-10-13-fi-56692-story.html

3. The fall of Andersen. Chicago Tribune. September 1, 2002. Accessed November 5, 2022. https://www.chicagotribune.com/news/chi-0209010315sep01-story.html

4. Occupational fraud 2022: a report to the nations. Association of Certified Fraud Examiners. May 2022. Accessed November 5, 2022. https://legacy.acfe.com/report-to-the-nations/2022/

5. Ramamoorti S, Epstein BJ. Today’s fraud risk models lack personality: auditing with ‘dark triad’ individuals in the executive ranks. The CPA Journal. March 2016. Accessed November 5, 2022. https://www.cpajournal.com/2016/03/16/todays-fraud-risk-models-lack-personality/

6. Ramamoorti S, Morrison D. Bringing Freud to fraud: understanding the state-of-mind of the C-level suite/white collar offender through “A-B-C” analysis. Accounting Faculty Publications. 2009;71.

7. Ramamoorti S, Morrison DE, Koletar JW, Pope KR. A.B.C.’s of Behavioral Forensics: Applying Psychology to Financial Fraud Prevention and Detection. Wiley; 2013.

8. Apter MJ. Reversal Theory: The Dynamics of Motivation, Emotion and Personality. Oneworld Publications; 2006.

9. Koletar J. We all break the law. Bringing Freud to Fraud. March 10, 2015. Accessed November 5, 2022. https://bringingfreudtofraud.com/?p=358

10. Bodor J. Ex-broker details descent into crime. Telegram & Gazette. October 6, 2005. Accessed November 5, 2022. https://www.telegram.com/story/news/local/north/2005/10/06/ex-broker-details-descent-into/53171451007/

11. Mintchik N, Riley J. Rationalizing fraud: how thinking like a crook can help prevent fraud. The CPA Journal. 2019. Accessed November 5, 2022. https://www.cpajournal.com/2019/04/15/rationalizing-fraud/

12. Nathanson DL. Shame and Pride: Affect, Sex, and the Birth of the Self. W W Norton & Co Inc; 1992.

13. Post JM. Leaders and Their Followers in a Dangerous World. Cornell University Press; 2004.

14. The Associated Press. Police say former Enron executive committed suicide. The New York Times. January 25, 2002. Accessed November 5, 2022. https://www.nytimes.com/2002/01/25/business/police-say-former-enron-executive-committed-suicide.html

15. Carreyrou J. Bad Blood: Secrets and Lies in a Silicon Valley Startup. Knopf; 2018.

16. Paulhus DL, Williams KM. The dark triad of personality: narcissism, Machiavellianism, and psychopathy. J Res Pers. 2002;36(6):556-563.