Bringing Freud to Fraud
Accounting professor examines human behavior and psychological motives behind financial fraud
KENNESAW, Ga. (Nov. 6, 2013) — Great minds think alike, but so do criminal minds, and rather than scrutinize financial statements or pore over computer manipulations, one college professor says to understand financial fraud – a white-collar crime – you have to understand the psychology behind it.
“Understand the motivation – psychologically – and you’ll better understand a person’s desire to swindle, cheat or steal,” said Sridhar Ramamoorti, associate professor of accounting in the Michael J. Coles College of Business at Kennesaw State University. He’s also a certified public accountant (CPA) and a certified fraud examiner (CFE) with a Ph.D. in psychology, who has been studying fraudulent behavior in the white-collar workforce for nearly 20 years.
Ramamoorti has written a new book on the subject, “The A.B.C.’s of Behavioral Forensics,” along with three colleagues in the anti-fraud field, including an organizational psychiatrist, an FBI veteran-turned-forensics investigator and an accounting professor.
There are many levels of fraud, according to Ramamoorti. “But the soft underbelly of fraud is all about the people behind it, predator and victim, and their unconscious, their emotions, their psychological defenses,” he said.
The book looks beyond the instruments used to commit the fraud, exploring instead what makes a white-collar criminal tick and uncovering the motivation behind the crime.
“Accountants only look at how a fraud was committed, through financial transactions or computer evidence, but psychologists – behavioral forensic experts – look at why a person commits fraud,” Ramamoorti said.
“For decades, white-collar crime has been unfairly hoisted onto one profession, and that’s accounting,” he added. “So much psychology is involved. Fraud is more about human behavior than accounting principles.”
So why is it that good people do bad things? The answers lie beyond just greed, Ramamoorti said.
“The motivations are many and how behavior manifests itself provides definitive clues,” he said. “People learn how to rationalize questionable behaviors.”
The book discusses the A.B.C.’s – the bad apples, bad bushels and bad crops – a theory he penned with the authors after extensive research studying C-suite level professionals and interviewing convicted felons. Individuals (the “apples”), a department or group (the “bushels”) or the entire organization or industry (the “crop”) can fuel a toxic culture where fraud is endemic and even rewarded.
In fact, Ramamoorti says a toxic culture can become a breeding ground for fraud in an organization, and setting the proper tone at the top is critical in building a corporate culture of integrity.
With the prevalence of fraud on the rise, more regulations are being established, and even the honest people must now follow regulations put in place because of fraudsters, he explained. “Everyone and everything becomes suspicious, adding frustration and unnecessary costs to doing business,” he added.
As Ramamoorti straddles the two fields of accounting and psychology, he says that one needs the other in order to prevent fraud. The typical psychologist can’t understand the mechanics of financials and how they can be manipulated, and the typical CPA has focused on understanding numbers more than human behavior, he explained.
“It takes a multidisciplinary team – a motley crew, so to speak – to address the complex problem of fraud,” he said. “It’s more than just the detection of fraud; it’s understanding what motivates one to commit fraud.”
Released in September, “The A.B.C.’s of Behavioral Forensics: Applying Psychology to Financial Fraud Prevention and Detection” can be purchased on amazon.com or wiley.com. Ramamoorti and his colleagues also have a new academic blog based on their research, which can be found at www.bringingfreudtofraud.com.
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-- Tiffany Capuano