Understanding Executive Deviance
Related to Fraud
Nancy Pasternack, CPA, CFE, CIA
KPMG Forensic Advisory Services
Washington, DC
Foundational Concepts in Economic Crime
Offenses
Deviance defined by Webster:
Different or unacceptable behavior
behavior that is sharply different from the norm or the accepted
standard
Deception defined by Webster:
Practice of misleading somebody
deliberately making somebody believe things that are not true
Why does deviance and deception work (Ford, 1996):
People’s belief in inherent goodness of others
Promises and hope of positive financial investments and results
A little is good but more is better
Hope of life being better
Trust based
Culture based
Deviant behaviors by some
executives are often those same
behaviors which have been rewarded
within a particular culture for
generations (Anderson, 2004)
Criminology Theories (ACFE, 2006)
Rational Choice
Predictability
Routine Activities
Available targets, absence of guardians, presence of
offenders
Social Process
Social control
Affiliations
Social Learning
Absorbing information
Differential Association
Criminal behavior is learned
Are Personality Disorders Possible? (DSM-IV)
Anti-social Personality Disorder (APD) –
Lack of planning; Impulsivity
Disregard for others
Adult criminality
Juvenile delinquency
Upbringing is important as to where APD will lead
Prison, politics or business
Higher rates of APD in inner city then rural
Five times higher with males than females
Other Types of Possible Personality
Explanations (Hare, 1993)
Sociopaths and Psychopaths
Distortions of reality
Lack of feelings toward others including family
Self love, abandon emotion
Charm, deceive and manipulate to gain trust
Seemingly trusting appearance
Narcissistic – core psychopathic feature
Grandiosity in fantasy or behavior
Believes others are envious of him
Smart People Acting Foolishly (Sternberg)
Unrealistic Optimism – one is so smart he does not
worry about outcomes
Egocentrism – one’s own interests are the only ones
that are important
Omniscience – belief that one is all-knowing
Omnipotence – belief one can do anything because of
power he holds
Invulnerability – illusion of protection
Egos and Business Executives
The identity of an executive and the business he/she
controls can often become one in his/her mind
Owners/founders may be more interested in preserving
the business
Hired executives may be more interested in their
reputations and compensation packages
Rationalization
If an executive engages in economic crime he/she must
maintain non-criminal self concept
Rationalizations of Executive Deviance
(Cromwell, 1996)
Closing the gap; living the dream
For my family
For the company
Because of employees
Social standing, entitlement
Over-billing clients and employers (doing more than
my share)
Passive – hapless pawns
Sustainability is Key
Watch for warning signs in the environment that a
company may not be sustainable:
High, fast growth companies
Certain industries such as technology
Labor or talent shortages
Dependence on commodity pricing such as energy
Investor perceptions
Regulations
Demand for product
Competition
Top 10 Reporting Challenges from Financial
Executives International
Internal controls
Uncertain tax positions
Extensible Business Reporting Language (XBRL)
Fair value measurements
Servicing assets and liabilities
Complexity in financial reporting
Derivatives
Pensions
Business combinations
Earnings per share
Typical Denials of Rogue Executives (O’Neal,
2001)
Denial of criminal intent – securities fraud, antitrust
cases, tax evasion
It was good for the company
It is industry practice; there was no intent to commit a
crime
The prosecutors are seeking career advancement
Denial of a crime taking place – fraudulent statements
I’ve committed no crime.
I was setup by associates
I’m the real victim here
Someone else recorded this
Endnotes
Alalehto, Tage. (2003). Economic Crime: Does Personality Matter? International Journal
of Offender Therapy and Comparative Criminology, 47(3), 335-355.
American Psychiatric Association. Diagnostic and Statistical Manual of Mental
Disorders. 4th ed. (DSM-IV). (1994). Washington, DC: American Psychiatric Association.
Anderson, Richard J. and Terrell, Michael E. (2004). Too Good to Be True: CEOs and
Financial Reporting Fraud. Consulting Psychology Journal: Practice and Research, 56
(1), 35-43.
Association of Certified Fraud Examiners (ACFE). (2006). Fraud Examiners Manual.
Austin, Texas.
Cromwell, Paul, (1999). In Their Own Words. Criminals on Crime. Los Angeles, CA:
Roxbury Publishing Co., 97-103.
Ford, Charles V., M.D. (1996). Lies! Lies! Lies! The Psychology of Deceit. Washington,
DC: American Psychiatric Press, Inc.
Hare, Robert D., Ph.D., (1993). Without Conscience. The Disturbing World of
Psychopaths Among Us. New York, NY: Pocket Books, 103-110.
O’Neal, Scott, (2001, March). Interviewing Self-Confident Artists. The FBI Law
Enforcement Bulletin, 70(3).
Sternberg, Robert J. (2004). Why Smart People Can Be So Foolish. European
Psychologist, 9(3), 145-150.
Willer, David, Lovaglia, Michael J., Markovsky, Barry. (1997, December 1). Power and
influence: A theoretical bridge. Social Forces, 1.
Willott, Sara, (2001, May 1). Snakes and Ladders: Upper-middle class male offenders
talk about economic crime. Criminology.
Questions?
Nancy Pasternack
KPMG Forensic
Washington, DC
(202) 533-6263
NPasternack@kpmg.com
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