;)
Directors may draw inspiration for the oversight of fraud deterrence programs from an unlikely source: Sam Antar, CFO for the electronics chain Crazy Eddie who was convicted of fraud in the 1980s and went to prison and now speaks about how to prevent it, said, “My normal is not your normal.”
Antar along with Jonathan Marks, partner and leader of the fraud, ethics, and anti-corruption practice with Crowe Horwath, were guest speakers at the fraud prevention educational program organized by the Center for Audit Quality, Financial Executives International, and The Institute for Internal Auditors and NACD.
The event was one of a series of projects sponsored since the fall of 2010 by an official anti-fraud collaboration supported by the four organizations. Anti-fraud endeavors launched or planned include an initial anti-fraud report, a fraud literacy exam, fraud case studies, a webinar series on skepticism and convening all participants in financial reporting to discuss roles and expectation gaps. For each project, one organization takes the lead and the others support the effort. At this meeting, hosted by FEI at the offices of Crowe Horwath on June 28, there were many “aha” moments, but the following were most instructive in shaping effective ways to deter white-collar crime:
- Most fraud is caught by accident or tip.
- Fraud is all about distraction, so a focus on people and transactions is critical.
- Understanding culture and the business is as important or more important than mastering the intricacies of the Foreign Corrupt Practices Act or other anti-bribery law.
- Seventy percent of fraudsters have a profile that combines personal pressure with arrogance or greed.
One accounting expert said both successful senior executives and fraudsters share some psychological traits. For example, creativity and cleverness intersect both groups; the key is to be able to identify the “random actor.” There are some characteristics that could signal an individual is prone to unethical or illegal behavior such as an excessive attitude of superiority, resentment toward top management, egocentric, volatile, deceptive and acting without a conscience. These individuals also are generally outgoing, friendly and passionate, which makes negative traits easier to hide.
The harsh reality is that just one of these random actors can sway others. Fraudsters seek out those people who share their social backgrounds and who are fairly easily manipulated. Think about Bernie Madoff—he was a master of spin, garnered credibility through philanthropy and his association with Nasdaq, and was a genius schemer, concealer and converter.
As the fraud prevention discussion turned to the role of ethics, an interesting definition surfaced: Ethics is what you do when no one is watching. That said do you know the 10-80-10 rule of ethics? According to a number of research studies, the work population is 10 percent ethical 24/7, 80 percent ethical based on the situation and 10 percent downright unethical. In sum, when there are loose links between ethics and compensation, be prepared for the ethics flood gates to open among the unethical 10 percent and the dam to spring leaks in the 80 percent.
Directors and senior compliance executives cannot stop all fraud, but they can vastly improve deterrence. The best cost/benefit deterrence investment to date is still a dedication to red flag training: A red flag is an observable act or concealment strategy that causes pause. Red flags come in all shapes and sizes—from data manipulation, backdating, lax controls and lack of originals, to unusual timing of transactions, segregation of duties, random actor behavior and a failure to reconcile accounts. It was strongly suggested that the auditing profession, boards and top management focus more attention on the 10 percent who are unethical rather than the remaining 90 percent. This selective attention on the company’s random actors and gatekeepers should prove wise in both the short and long term.
Antar noted that white-collar crime is a dark, murky world where the weapon of choice is not a gun but a pen. In this alternate world, there is no right or wrong, and our sense of fair play and morality is a huge weakness. Fraudsters are world-class builders of false walls of integrity. Fraudsters are successful today because they are shrewd, driven by misguided ambitions and typically are able to sell anyone, from Wall Street to you, on hopes and dreams.
Lastly, Antar shared a politically incorrect but probably sage piece of advice to the group: Profile gatekeeper executives looking for signs that they may be random actors—or else.
My colleague Chris Clark, the publisher of NACD Directorship, did a great job covering this event. As he says, it “put the Freud in fraud.”