Freud and Fraud

On this episode, we’re putting Freud to fraud and getting inside the minds of crooks. Today’s white collar criminals have decades of technological evolution at their fingertips, creating new opportunities for fraudsters to inflict crippling loss to organizations. Which means it’s time to update and expand the elements of the traditional Fraud Triangle, to account for this new and vastly different world. The Fraud Pentagon Donald Cressey created the original concept of the Fraud Triangle way back in the 1950s to explain why someone might decide to commit fraud. The three original elements of the triangle are Pressure, Opportunity, and Rationalization, but we need to be gravitating more toward the advanced meta-model of fraud which also considers the act of concealment strategy and the conversion piece. This introduces two new elements to the Fraud Triangle, expanding it into the Fraud Pentagon: Arrogance, especially unchecked arrogance, enables individuals to see themselves as superior or entitled to the point where policies and laws simply do not apply to them. Competence contributes in two ways: a greater understanding of procedures expands on the Fraud Triangle’s Opportunity element, but it also enables them to create a wall of trust that shields them from suspicion. Get inside the mind of a fraudster Let’s take a look at Sam Antar, the CFO of Crazy Eddie. For Antar, arrogance was not only the foundation on which Crazy Eddie was built, it was the soil on which the seeds of fraud were planted. Most people aren’t willing to start a public company for the main purpose of defrauding the public, and as far as this fraudster goes, it takes a real amount of arrogance to do that. His actions also perfectly represent the two ways a fraudster can use competence to steal. He knew the business of accounting and how to socially control the situation to Crazy Eddie’s advantage. He was a nice guy. He knew he had to get people to like him, trust him, and respect him to lower their levels of skepticism. If you’re nice to people, they’ll be nice to you — like looking away or not asking the tough questions. What you can do By utilizing all five elements, you’re going to be more able to identify potential risks beyond legitimate individuals who simply have arrogance and competence as part of their persona. First, start with a hands-on cultural assessment to determine the ethical pulse of your organization. Next, make it known to your board and ethics team that you have zero fraud tolerance within the organization, including at the top. Finally, make periodic checks to monitor the pressure points and values that affect individual behaviors. Final thoughts We need to pay more attention to the human element of fraud. In doing so, we’ll understand fraud a lot better and be able to build more effective controls. Learn more about your ad choices. Visit megaphone.fm/adchoices