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The Anatomy of Fraud and

Corruption

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The Anatomy
of Fraud and
Corruption
Organizational Causes and Remedies
Tomas Brytting
Richard Minogue
Veronica Morino

Tomas Brytting, Richard Minogue and Veronica Morino 2011


All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, electronic, mechanical, photocopying,
recording or otherwise without the prior permission of the publisher.
Tomas Brytting, Richard Minogue and Veronica Morino have asserted their moral rights
under the Copyright, Designs and Patents Act, 1988, to be identified as the authors of this
work.
Gower Applied Business Research
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British Library Cataloguing in Publication Data
Brytting, Tomas.
The anatomy of fraud and corruption : organizational causes and remedies.
1. Problem employees. 2. Organizational behavior. 3. Commercial crimes. 4. Employee
crimes. 5. Commercial crimes Prevention. 6. Employee crimes Prevention. 7. Business
ethics Study and teaching. 8. Employees Training of.
I. Title II. Minogue, Richard. III. Morino, Veronica.
658.3'045dc22
Library of Congress Control Number: 2010940031
ISBN 9780566091537 (hbk)
ISBN 9780566091544 (ebk) II

Contents

List of Figures
List of Sketches
List of Tables
About the Authors
Preface
The Issue

xi
xiii
xv
xvii
xix
xxiii

Part I The Anatomy


Chapter 1

Introduction to Part I The Anatomy


Definitions of Fraud and Corruption

3
4

Chapter 2

Six Cases of Fraud and Corruption


Case 1: Rose
Case 2: Build-IT
Case 3: Judgement Day
Case 4: Babylon
Case 5: Mad Max
Case 6: Lapis Lazuli

7
8
10
12
14
17
19

Chapter 3

Is Fraud and Corruption Natural?


The Art of Deception
Our Corrupt Biology
Summary

25
25
26
29

Chapter 4 The Social Construction of Fraud and Corruption


Social Constructivism
Can Fraud and Corruption be Anything?
Moral Relativism
Cultural Differences
Failing to Define Fraud as Real
Summary

31
31
34
35
38
40
43

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The Anatomy of Fraud and Corruption

Chapter 5`The Social Deconstruction of Fraud and Corruption


Not Knowing Norms and Values
The Fraud Triangle
Not Knowing the Facts
No Moral Blame
The Myth of Amoral Business
Does Power Corrupt?
Common Sense is Dangerous
Inadequate Communication
No Mobilization
Summary

45
46
48
53
56
60
64
65
69
73
77

Chapter 6

Working With a Corporate Psychopath


The Thin Line between Excellence and Fraud
The Corporate Psychopath
The Silent Suffering of Others
Summary

79
80
84
86
89

Chapter 7

Trust in Organizations
Common Values a Double-Edged Sword
Blind Trust
Cynicism
Summary

91
91
92
94
94

Chapter 8 The Closing of Mindsets


Chapter 9

The Social Reconstruction of Fraud and Corruption


Establish Normality as the Norm!
Habits and Praxis
Investigate!
Moralize!
Communicate!
Mobilize!
Summary

97
99
100
103
104
111
114
115
118

Part II Exploring the Remedies

121

Chapter 10

123

Introduction to Part II Exploring the Remedies

contents

Chapter 11

vii

The Case for Experiential Learning


Teaching Awareness
Experiential Learning
The Expected Learning Cycle (or Typology of 
Fraud from a Pedagogical Perspective)
Summary

127
127
128

Chapter 12

Using the Drama Metaphor as a Training Tool


Fraud and Acting
Drama as a Training Tool
Role Playing
Summary

139
139
144
146
147

Chapter 13

Establishing the Norm


149
Code of Conduct
149
Moralize
150
Risk Appetite
152
Understanding Integrity
153
Communicating Integrity Policies and the Code of Conduct 157
Writing the Code of Conduct
159
Objectives and Benefits of Awareness Training
160
Summary
161

Chapter 14

Who Gets What Training?


Communication is the Key
Different Groups, Different Needs
Getting Started
Summary

163
163
164
174
177

Chapter 15

Cultural Factors in Training


National Culture
Local Environment
Company Culture
The Value of a Strong Internal Culture
The Local Company in an International Group
The One Company Town
Ethically Challenged Industries
Acquired Companies
Organizational Levels
Communication Difficulties due to Cultural Differences
Summary

179
179
180
181
183
183
184
185
186
186
187
189

132
137

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Chapter 16

The Anatomy of Fraud and Corruption

The Design Process


Organization
Ten Steps for Designing a Successful 
Fraud Awareness Training
Summary

191
191

Chapter 17

Workshop Techniques
The Business Case for Workshop Training
Attitude
See the Fraudster in your Heart
Structuring the Workshop
Presentation Tactics
Brainstorming Techniques
Case Studies and Group Work
Dramatic Techniques
Dealing with Workshop Saboteurs
Summary

205
205
206
207
207
209
210
212
213
215
218

Chapter 18

Multimedia Interactive Techniques


What Fits Best?
From e-Learning to Multimedia
Multimedia Fraud Awareness Training
The 73855 Rule 
Participants Involvement
Interaction, Customization and Branding
Learning Cycle Applied to Multimedia
The Value of Employees Feedback
Workshop and Self-training: an Integrated Approach
Summary

219
220
221
222
223
223
225
226
228
230
230

Chapter 19

The Theatre Experience


Drama in Education and Theatre in Education
Planning a Theatre Performance
Printed Materials
Summary

233
233
234
236
241

Chapter 20

Organizational Resilience to Fraud


The Limits of Prevention
What is Organizational Resilience to Fraud?
Reporting Incidents

243
243
244
245

195
202

Bibliography
Index

contents

ix

Ready to Listen
Recognizing the Symptoms
Dealing with Informants
Incident Management
Communication of Results

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249
250
252
253
257
263

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List of Figures

4.1
4.2
4.3
5.1
5.2
5.3
5.4
5.5
9.1
9.2
11.1
11.2
13.1
13.2
15.1
15.2
16.1
16.2
16.3
16.4
17.1
17.2
18.1
18.2
18.3
18.4
19.1
19.2
20.1
20.2

Perceived public sector corruption


Requirements to establish deviant behaviour as a social fact
Factors stopping fraud and corruption from being recognized 
as social facts
Concepts explaining the social deconstruction of fraud
The Fraud Triangle
Four categories of rationalization
Rationalization as a balancing act
The slippery slope
Appeals for the reconstruction of fraud and corruption
Dramaturgical elements that make a play work
Relationships between the fraudster, the target and the victim
The Experiential Learning Circle as described by Kolb
Exaggerated policy statement
Honest policy statement
Advertising blooper
Caution moose crossing
Broad or narrow training
A fraud response organization
Reaching consensus
The design process
Recommended percentage of time for various workshop activities
Mixing the participants for group work
Passive and active learning
Skills and knowledge learnt applied to the Learning Cycle
A dilemma game in multimedia training 
Responses to a perception question 
Lack of Evidence programme
Newspaper distributed at the end of the performance
Maturity cost curve
Process for handling incoming written complaints

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41
42
46
49
58
59
63
100
108
132
134
154
159
179
181
192
192
193
194
208
212
224
227
228
229
237
240
244
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List of Sketches
12.1
12.2
13.1
14.1
15.1
16.1
17.1
18.1
19.1
20.1

The agents contract


The whistleblower
Starting to dig
The innocent fraudster
The out-of-office meeting
Counterattack
The legal department
Its none of my business
The truth comes out
Epilogue

141
145
151
175
188
199
214
225
238
255

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List of Tables
5.1
5.2
12.1
14.1
14.2
18.1

The Prisoners Dilemma


The Bystanders Dilemma
Comparing the actor and the fraudster
Employee statistics for XYZ company
Training variations plan
Components of multimedia training

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143
167
168
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About the Authors


Tomas Brytting
Tomas Brytting is Associate Professor, DBA at the Stockholm School of
Economics. He is presently Director of Research at the Institute for
Organizational and Worklife Ethics at Ersta Skondal University College in
Sweden. Tomas Brytting has been lecturing, writing and giving advice on
business ethics issues for more than 20 years. In Sweden he regularly appears
as media commentator on business ethics and has published almost 200 texts
on the subject.

Richard Minogue
Richard Minogue BSc, CPA, CIA graduated from the Business School of
the University of Notre Dame, Notre Dame, Indiana where he specialized
in accounting. He has worked for 35 years in internal auditing, financial
management and fraud risk management; performing investigation, litigation
support and awareness training assignments in dozens of countries and on six
continents. He holds the William S. Smith Certificate of Excellence awarded
by the Institute of Internal Auditors. Richard Minogue currently works as a
consultant for fraud prevention, detection and investigation.

Veronica Morino
Veronica Morino has a BA in Sociology of Work and a Masters Degree in
Organisational Science from the University of Rome. After initially helping
organizations address dysfunctional issues, she broadened her expertise in the
area of inappropriate and illegal behaviour. She worked as investigator into
international fraud and corruption for some years and became increasingly
convinced that prevention is far more cost-effective than investigation. In the
last five years she has specialized in the development of successful anti-fraud
and corruption programmes for global companies.

Reviews of The Anatomy of


Fraud and Corruption
In choosing to explore the Anatomy of Fraud and Corruption, this
book gets into the veins and tests the blood, ensuring that the heart
of the organization is working properly. It provides an excellent insight
on how to perform remedial surgery on relevant processes where
required, and is a useful reference tool for any investigator, irrespective
of experience.
Simon Scales, Director Global Investigations, TNT Express

A highly instructive and readable mix of psychological, sociological and


first-hand practical insight into how fraudsters disrupt and damage
organisations, the authors proceed to offer a clear route to effective
prevention, which makes highly innovative use of dramatic narrative.
If the aim is truly to raise awareness of the fraud and corruption threat
amongst staff, this is definitely the book to read.
Timon Molloy, Editor of Fraud Intelligence

The most captivating and original textbook I have read about fraud and
corruption. Drawing upon a range of non-traditional disciplines such
as literature, conflict resolution and psychology, the book is not only
enlightening but also entertaining. I look forward to putting the ideas
into practice.
Pall A. Davidsson, Director and founder of Ethikos, 
the Icelandic Centre for CSR

Preface
We are all touched by fraud and corruption. The goods we buy are dearer, the
environment is dirtier and our pensions are smaller as a result. The world is
poorer. There are undoubtedly some winners, at least as measured in financial
terms, but their winnings are small compared to the total losses. Fraud and
corruption are the enemies of productivity. Fraud and corruption could be
described as highly wasteful processes whereby benefits are transferred away
from people who deserve them to others who dont. They violate our idea of
justice and thereby also contribute to businesses often undeserved reputation
of being thoroughly cynical. In spite of the importance of the problem, business
schools and management continuing education programmes have until very
recently largely ignored fraud and corruption as risk areas that might be
managed. Certainly most managers working today never received formal
training to help them adequately deal with these problems on a practical
level. Experienced practitioners seldom find the time to think about how their
experience could be used for training others in how to recognize patterns and
signs of fraudulent practices. The ambition of this book is to help fill this void.
Most of the worlds wealth is controlled by organizations, each made up
of people; owners, directors, managers and other employees working in a
coordinated manner towards their respective common goals. Organizations
(or you could say, its stakeholders) are often victimized by fraud. Similarly,
organizations are often involved in serious corruption, for example paying bribes
in order to obtain business or accepting bribes in exchange for favouring particular
contractors or suppliers. Directors, managers and employees are responsible
for protecting the organization against fraud and avoiding corruption, but at
the same time directors, managers and ordinary employees are often (but not
always) involved as perpetrators or accomplices. The fox is guarding the chicken
coop. This is the inherent dichotomy of management fraud.
In this book, we will be mainly concerned with fraud and corruption in the
organizational perspective. We will discuss how to prevent or reduce it. From
the studies that have been done, it appears that despite massive efforts in the
area of internal control, little or no progress has been made in managing these
risks. There is of course a measurement problem; you cant measure what you

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The Anatomy of Fraud and Corruption

havent detected yet. Any real reduction in fraud and corruption would only be
apparent after a delay of some years. But there is no evidence to indicate that
the disease has been cured yet. Fraud and corruption seem to be impervious to
control efforts. Are we lacking something in our approach?
We suspect so. Certainly organizations should continue to improve
their checks and balances, their internal controls, to make it more difficult to
conduct unauthorized transactions. But much more effort is required to educate
employees, including managers, so that they will understand the risks, be able
to competently solve the dilemmas, recognize the danger signs and abstain from
the temptations themselves. That is not to say we can make dishonest people
honest, probably we cannot. But we can ensure that the people guarding our
chickens are enlightened, that they are aware of the risks and conscious of
what is appropriate and what is not. We need to motivate our managers and
employees, and cultivate a culture that is both resistant and resilient to fraud
and corruption. An organization equipped with effective internal controls and
a majority of motivated and risk-aware employees will be much more able to
resist fraud attempts by the intractable minority. The organization that has also
prepared itself for the eventuality of fraud and corruption incidents will be more
resilient, able to absorb the shock and bounce back when incidents do occur.
The concepts of the control environment, tone at the top, soft controls
and so forth are not new. But we believe that the need to develop a control
environment that is both resistant and resilient to fraud and corruption is not
well understood. We wish to contribute with this book to a better understanding,
both theoretical and practical, of this concept. On the theoretical side, much has
been written about why people commit fraud or break the rules in general. We
will build on this work with an examination of the organizational, as opposed
to the individual, psychology. What are the structural and cultural elements in
an organization that are likely to enable fraud? How can we recognize them?
How can we change them?
On the practical side, approaches for raising fraud awareness within
organizations have begun to appear, although the total awareness effort is
dwarfed by efforts spent on developing and maintaining internal controls and
on performing fraud investigations. In many organizations the entire fraud
awareness programme is limited to a warning paragraph in the code of conduct
posted on a rarely visited internal web site.
As authors, we have worked from both ends, the theoretical and the practical,
and attempted to bridge the gap in between. The need is there. Universities and

Preface

xxi

schools have not been able to provide students with the practical knowledge
and tools they will eventually need to fight fraud. Managers, also lacking this
know-how, find themselves reacting to fraud rather than preventing it. We
found that a theoretical study of fraud in the organizational perspective has
provided valuable insight into why some of the practical methods we have
already tried work, while others do not. We believe that applying the methods
we describe to increase resistance and resilience will lead to a significant
reduction in the frequency and severity of incidents and major cost savings
for the organizations that adopt them. The theoretical content is to be found
mainly in Part I, where the main text was written by Tomas Brytting and the
more practical applications in Part II of this book, written mainly by Richard
Minogue and Veronica Morino. The two parts of the book were written in close
consultation between the authors. Then, as we each learned from the others, we
together refined our theories and developed our practical guidelines into what
we hope is a coherent whole.
We have included, by way of example, six fraud narratives based on real
cases of fraud or other kinds of dishonest conduct. The narratives themselves are
fictional and were written specifically for this book (a very special thanks goes
to Nigel Iyer who so generously offered to give them both literary forms and
qualities). The names and other facts have been changed, but the stories reflect
the essence of what actually occurred. We refer to these stories throughout the
book and compare them to our theory.
We refer often to fraud and corruption together, although they are two
distinct activities. Traditionally they are also treated as separate problems.
Perhaps it is because fraud is seen as a business problem, while corruption
is seen as a political one. Stock exchange regulators and internal auditors are
concerned with fraud, while the United Nations, the Organisation for Economic
Co-operation and Development (OECD) and Transparency International are
concerned with corruption. This separation ignores the fact that the private
sector is the major source of corrupt payments to high-level public officials.
We have chosen to treat fraud and corruption together and interchangeably,
because in the organizational perspective that we are examining, they share
many similar characteristics, and they can be addressed with the same methods.
For the sake of simplicity, we do not concern ourselves with legal distinctions
between fraud and theft, embezzlement, misappropriation, corruption,
extortion, money laundering, larceny, wilful neglect, gross negligence and so
forth. Our intention is to examine misbehaviour at a general level.

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We also gratefully thank Nous Design, who prepared all of the diagrams
and pictures for this book, as well as Erik Blennberger, Jorgen Hansn and
Robert Minogue for their valuable advice, comments and corrections. Finally
we would like to thank our editor at Gower, and all those who contributed with
their help and support.

The Issue
it is necessary to know well how to disguise this (hypocritical)
characteristic, and to be a great pretender and dissembler; and men are so
simple, and so subject to present necessities, that he who seeks to deceive
will always find someone who will allow himself to be deceived.
(Machiavelli, 1532/2004)

Niccol Machiavelli (14691527) thought he knew all about power, and gave
the managerial wannabe a piece of good advice: trust no one because no one
trusts you. Cheat if you can because others will cheat on you! Some say he
showed future managers the road to success. But at the same time, and maybe
unintentionally, he also revealed to the rest of us several profound insights
into the logics and dynamics of fraud and corruption. It is a bit disappointing
though that we still havent learnt this lesson of his. Half a millennium later
(Machiavelli wrote his book in 1513) we seem to lack enough awareness and
knowledge to protect ourselves from fraudulent characters. The statistics are
indeed uncomforting.
The Association of Certified Fraud Examiners (ACFE, 2008) in the US
reports that fraud and corruption, one way or the other, is touching practically
every organization:
Participants in our survey estimated that U.S. organizations lose 7% of
their annual revenues to fraud. Applied to the projected 2008 United States
Gross Domestic Product, this 7% figure translates to approximately
$994 billion in fraud losses. [Emphasis in original]
PricewaterhouseCoopers (2007) reported that 43 per cent of all corporations 
worldwide have had experience of significant fraud. On average, these
companies lost 1.2 million USD per year plus costs for taking care of the
problems once discovered.
Adding to the problem is the fact that fraud and corruption most often is a
hidden form of crime. According to ACFE, almost 70 per cent of the fraud cases
in private companies were detected by accident, or through some form of tip.

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Thus, it seems that regular internal control systems are highly inadequate to
combat fraud and corruption.
Treating fraud and corruption as a form of crime has certain implications.
First and foremost, the main focus is on the perpetrators. Who are they? How
is the scam set up? How do we collect evidence? How can we secure and regain
the money that was stolen? Fraud and corruption becomes an issue of criminal
investigation.
Our main focus is not to support fraud investigators. Hopefully they will
find this book useful, but primarily this book has three other target groups.
Firstly Bystanders; you who witness, suspect or feel what is going on, we
think you are the key people when it comes to detecting fraud and corruption.
Unfortunately, you might also be fraudsters in spe if you dont watch out for
warnings signs. Our aim is to increase your awareness of the risks and your
knowledge to deal with them. Secondly, Designers of Organizations; both
organizational culture and structure are crucial ingredients in the complex
process that eventually leads to fraud and corruption. Our ambition is to
make you understand how corruptive organizational processes work so that
you can ensure your organization is resistant to fraud and corruption. Finally,
Trainers; you who need to train employees to be more aware and to recognize
the warning signs in order to put fraud and corruption under control. We
supply ideas and tools for you.

Part I

The Anatomy

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Introduction to Part I
The Anatomy

There is nothing either good or bad, but thinking makes it so.


Hamlet, II, ii, 50

As the American philosopher of science Abraham Kaplan (1964) explained:


A theory is a way of making sense of a disturbing situation so as to allow
us most effectively to bring to bear our repertoire of habits, and even
more important, to modify habits or discard them altogether, replacing
them by new ones as the situation demands.
These words provide us with inspiration for a theoretical start of this
book. Without a proper theory, working with fraud prevention might be quite
disturbing. The fact that managerial fraud not only exists but that it is also a
common phenomenon raises some fundamental questions:

Even though every society and culture condemns fraud, individuals


with corrupt or fraudulent personalities keep reaching high
positions in these cultures and societies. Why?

Why do highly trusted and wealthy high-status individuals in society


suddenly risk everything by engaging in fraud and corruption?

Why is it so hard for people in the vicinity of fraud and corruption


to realize what is going on?

Is managerial fraud and corruption an expression of an underlying


personality disorder or is it the work of an immoral criminal mind?
Is there a difference?

The Anatomy of Fraud and Corruption

Is managerial fraud and corruption an individual phenomenon


in the first place, or is it rather an inevitable (or even necessary!)
dimension of any competitive business organization?

Why do we call fraud unethical and not simply irrational, illegal


or inefficient business practice?

The present level of understanding, or rather the lack thereof, is truly


disturbing. What is managerial fraud and corruption all about?

Definitions of Fraud and Corruption


The OECD, or Organization of Economically Developed Countries (OECD,
2002) has suggested the following definition of corruption:
The active or passive misuse of the powers of Public officials (appointed
or elected) for private financial or other benefits.
It is understood to include everything from the paying of bribes to civil
servants and the simple theft of public purses, to a wide range of dubious
economic and political practices in which business people, politicians and
bureaucrats enrich themselves. Corruption comes in many guises in fact. Bribery,
extortion, fraud, trafficking, embezzlement, but also nepotism and cronyism
(giving privileges to long-time friends) are all different manifestations of it.
However, some of these practices may not always be meant to benefit
individuals directly. One might for instance bribe someone on behalf of ones
employer in order that the company receives beneficial treatment. If we take
the OECD definition literally that would not be seen as an act of corruption.
But, on the other hand, who would do such a thing without looking for some
sort of private benefit as a side effect?
Literally (from Latin) corruption has to do with the misrepresentation or
distortion of texts. This brings the meaning of the term closer to the modern
usage of the term fraud as described in the Oxford English Dictionary (2008):
Criminal Deception; the using of false representations to obtain an
unjust advantage or to injure the rights or interests of another.

Introduction to Part I The Anatomy

This dictionary definition adds a clear moral dimension to the term.


Explicit and implicit references are made to moral values such as: Truth, Justice,
Rights and Interests of others. These are core values in all discussions of both
corruption and fraud. Thus fraud and corruption are not only unwanted, illegal
or abusive. It is the infringement of these moral values that renders the practice
of fraud and corruption the epithet: immoral or unethical.
The International Standard on Auditing issued by the International
Auditing and Assurance Standards Board (IAASB, 2008) defines fraud in a way
that specifically mentions management and those charged with governance as
possible perpetrators, placing fraud in an organizational context as:
An intentional act by one or more individuals among management,
those charged with governance, employees, or third parties, involving
the use of deception to obtain an unjust or illegal advantage.
The Institute of International Auditors (IIA, 2010) presents an even more
specific definition:
Any illegal acts characterized by deceit, concealment or violation of
trust Frauds are perpetrated by individuals and organizations to
obtain money, property, or services; to avoid payment or loss of services;
or to secure personal or business advantage.
The IIA definition requires a fraudulent act to be illegal but not necessarily
intentional. However, in most countries illegality would include the requirement
of intent. But another interesting consequence of this definition is that, by
including illegality in the definition, specific acts might be fraudulent in one
jurisdiction, not fraudulent in another. This relativistic hint is something that
we will return to later.
The IIA definition is useful for this study also because it states that
organizations, and not only individuals, may act deceivingly. It will become
clear that it makes sense to include, like IIA does, organizations in the
discussion about fraudulent or corrupt acts, even though the criminal code
normally requires the fraudster to be human. You cannot put a company in
jail. It may also be argued from a strictly philosophical perspective that only
human beings can be analyzed as moral subjects (for a philosophical discussion,
see for example Wolgast, 1992). However, we will not enter deeply into that
question here. For our purposes, it makes sense when studying the anatomy

The Anatomy of Fraud and Corruption

of fraud and corruption to study also organizational structures and cultures.


They may sometimes hide or even support fraud and corruption. Also, the
countermeasures we will propose in Part II may sometimes best be targeted to
the organizational level rather than the individual.

Six Cases of Fraud and


Corruption

2

I could a tale unfold whose lightest word would harrow up thy soul,
freeze thy young blood make thy two eyes, like stars, start from their
spheres, thy knotted and combined locks to part and each particular hair
to stand on end ...
Hamlet, I, v, 15

We begin with a narrative of six cases of fraud, as described from the point of
view of either the fraudsters themselves or other persons close to the events.
While these cases are based on real events, the narratives themselves are
constructed. Some of the common dynamics of managerial fraud are illustrated
in the cases, including:

knowing about misconduct but not daring to come forward;

the hesitation to prosecute;

the slippery slope;

the seduction by strong managers of weak colleagues and


subordinates;

the inability of bystanders to draw correct conclusions; and

the (sometimes) narcissistic personality of the fraudster.

We will examine these phenomena in the following chapters.

The Anatomy of Fraud and Corruption

Case 1: Rose
Dear Tom,
Since you are also heading up new business ventures I thought I would tell you the
following story from when I was Director of Sales for the Nordic and the Former Soviet
Union markets.
When it all came to a head way back in August 2002, we knew we were losing money, I
had been expecting something like this. Criminals, the lot of them, I thought! We should never
have opened a company or had delusions that we could break into the former Soviet Union
so easily. First we had the problems with organized crime gangs in Odessa threatening our
people and telling us that we dont even own our plant now this. I could not believe it. A
three-page letter packed with ludicrous accusations against Jimmy, our Managing Director,
who we sent out there less than 18 months ago to set up our operations. Then its followed
by 50 pages of documents, so-called evidence most of which are in Russian or some other
language which I could not make head or tail of. Of course I called Vladimir, our lawyer who
represents us in Moscow, and he said he would look into it.
Less than 48 hours later, Jimmy turned up in my office, heavens knows why, swearing at
me, as if I personally had accused him of all those crimes, most of which I didnt understand
anyway. Anyway I managed to calm him down and then thankfully Vladimir calls and tells
us both that he has found out that the allegations are coming from the former local Finance
Director in Kiev who Jimmy had sacked a few months ago because he suspected he had
links to that Odessa mob. It seemed like our young Finance Director was just trying to scare
Jimmy. So thats that; or at least I thought then.
However more letters kept on coming and just around year end I went to see Internal
Audit to ask if they could put this one to bed, you know, cover my back. We had lost so
much money out there this year by shutting everything down, that I did not want to be the
only one taking decisions and carrying the can. They said they would look into it.
When they came back to me, I found what they had to say very hard to accept. They
said that they had intelligence that Vladimir is the one with links to organized crime and
shouldnt be messed with. I thought we had checked him out but apparently no one ever
did (or could!). It turns out Vladimir and Jimmy have plundered our operations, our plants,
our customers and even our brands into a shadow company they set up and there is not that
much we can do about it. This so-called young Finance Director was apparently trying to
warn us and save what he knew was in fact a profitable business we just did not know
that!

Six Cases of Fraud and Corruption

Its then I make my next big error of judgement. I simply couldnt, and wouldnt believe
the auditors. They said we had lost a lot but there was a chance we could get out of this
one. Instead I stalled and asked for more evidence. I knew Jimmy well and was convinced
that he was one of us, that he would never betray us!
But I was wrong and in the end it felt good to walk into the Head of Audits office
and admit it. I was quite surprised how pleasant he was. He said if he had been in my shoes
he would have found it hard to believe too, but he was paid to be a cynic!
We both agreed that the people you least expect to be stabbed by are your friends, et tu,
Brute?
I hope you take this for what it is meant to be a note of caution.
Your friend,
Matt

10

The Anatomy of Fraud and Corruption

Case 2: Build-IT
By Rebecca Thole
14 May 2010
The public prosecutor yesterday filed
criminal charges against David Kyle,
a former regional manager of Build-IT
Limited. In an apparently related matter,
Build-IT last year reported to the European
Community anti-trust commission that one
of its regional divisions had participated
in a cartel arrangement which effectively
controlled contract awards within its
geographical area. The arrangement took
place, according to their report, without
the knowledge or approval of higher
management. In a press release at the time
Build-IT stated that it does not condone
such activities and that those responsible
would be held liable.
Sources that wish to remain anonymous
because they are not authorized to speak
to the media have told us that suspected
illegal behaviour was reported more
than three years ago during an internal
training programme at Build-IT group
headquarters. No actions were taken
at that time, but in planning stages of
a second workshop it was decided to
follow-up the earlier suspicions as a
pedagogical case study, to bring more
of reality into the course. It was soon
discovered that key Build-IT employees,
including regional manager, David Kyle,
had secret financial interests in companies
working for Build-IT on a sub-contractor
basis, and were using their authority to

authorize overcharging; a clear conflict of


interest. As the investigation continued,
an internal whistleblower appeared who
was able to show that systematic bid
rigging was taking place in collusion with
competitor companies. Kyle, who had
resigned but was still working for BuildIT on a consultant basis, was apparently
the organizer of the cartel. During the
investigation it was discovered, among
other things, that Kyle and other managers
had purchased valuable parcels of real
estate from a major sub-contractor for less
than 10 per cent of the true value.
Using an unfinished settlement agreement
with Build-IT as a cover, investigators had
arranged an in-depth interview with Kyle
in which he voluntarily supplied all details
of the cartel arrangement. He apparently
believed that Build-IT would never report
itself to the anti-trust commission, and
would therefore also not report his role.
He turned out to be mistaken on both
counts.
Kyle had a long and successful career
within the industry and within BuildITs parent company. His recent success
was perhaps the result of the cartel,
which worked as follows. Bidding
companies cooperated in a club in which
all significant contracts were distributed.
If someone outside of the club gave a

Six Cases of Fraud and Corruption

competitive bid, the manager of Build-IT


was notified, waiting in his car during the
opening of the bids, ready to supply an
updated offer on the spot.
According to our source, Kyle apparently
claimed that bribes had been paid before in
other large projects, and did not consider
that he was acting against company policy

11

in arranging the cartel; on the contrary he


was proud of his achievement.
Build-IT confirmed to this reporter that
they have turned the whole investigation
over to the police and the anti-trust
authorities, but would not comment
further. David Kyle was not available for
comment.

12

The Anatomy of Fraud and Corruption

Case 3: Judgement Day


Initial statement by Jamie Stevenson (written and provided voluntarily) to
Allan Donaldson in April 2010.

I was hired in May 2007 as Director of Human Resources at Acabas


Technology Services with particular responsibility for the development
of new management training programmes. With my experience and
qualifications I was attractive to the headhunters, and at the same time I
needed a new job.
The truth of the matter is that I desperately needed to change job as things
were getting hot at my previous employer. My debts and alimony payments
to two ex-wives were piling up. I owed a lot of money to Tim Johnstone, the
owner of a supplier of IT and e-learning services, and he convinced me to
buy more services in return for him settling some of my debts. It was at first
easy enough, but recently people were asking questions since Johnstones
companys work was poor quality.
I did not lie to the headhunters about anything. They simply never asked
any questions about my background or debts. They did very little checking
to earn their 50,000 fee.
In my new position I continued to purchase services from Johnstone. It
was even easier than before. As a senior director I had sole responsibility
for my cost centre and my bosss approval was automatic. Johnstone has
several companies all operating from the same address, which is actually
just a farmhouse. I visited it only once some years ago.
During the last nine months I was able to order about 1.8 million of
work from Johnstones companies, mainly design of e-course programmes,
training material, web-platforms and related material. I believe that this
material is either stolen from other companies, or created for a fraction of
what it is charged out at. This, I believe, was also the case at my former
employer.
My main concern was to ensure that his invoices got paid. I had an
approval threshold but this was easy to circumvent. Johnstone would split

Six Cases of Fraud and Corruption

13

the amounts each month across several companies. Our shared services
centre never asked any questions as long as the invoices matched
purchase orders.
It started getting difficult when Johnstone asked for more and more and I
told him that I was unable to as people would notice. By then I was beginning
to feel both owned by and afraid of Johnstone. I was visited in my home by
some rough and pushy people who insisted that I buy the artwork they were
selling. I knew that this was a threat from Johnstone. In the end I am glad
that somebody blew the whistle as I felt I had no way out.
From what I can recall I have received the following benefits from
Johnstone during my employment here:

A vintage car (Rolls Royce)

Payments to my second ex-wife

Cash

New Apple PowerBook

Renovations to my house in Provence

Payment of my credit card bills

Trips to Kiev to visit girlfriends

This is a full and complete statement to the best of my knowledge.


I would like now to cooperate with the company to resolve the matter in the
best possible manner.

Jamie Stevenson

14

The Anatomy of Fraud and Corruption

Case 4: Babylon
Memorandum Strictly Confidential
From: <James Brooke> Chief Financial Officer
To:

<Eli Silverton> European Division Director

Re:

Babylon case

Date: 25 May 2009


We have now completed our investigations into the Babylon case and the
activities of the Small Talk Marketing Agency. Based on the full investigation
report, I have prepared this summary of my assessment of the case.
Summary
As you well know, your division has been using Small Talk or similar
companies owned by Michael Ashgarde for 19 years. Ashgarde has been
providing us with exhibition and events during this time. We calculate that
over the years the volume of services has risen from 50,000 per annum to over
10 million euros. Today we account for over 95 per cent of Small Talks revenues,
mostly through your division. Even though Small Talk has been shown to be far
more expensive than alternative suppliers, the employees in your exhibitions
department have been strongly recommending the company across the group.
The situation is not good, and we have taken legal advice which I would like to
discuss with you. The main observations from the investigation are:
1.

Small Talk works like an internal department within your division.


They decide how the events are taking place and most worryingly,
how much we are to be charged.

2.

Small Talk has few staff but use a network of sub-contractors which
they mark up heavily, between 200 per cent and 1000 per cent. They
also use illegal labourers paid in cash.

3.

They carry no liability insurance.

Six Cases of Fraud and Corruption

15

4.

Your own staff acts as a sales force for Small Talk and Michael
Ashgarde. They handle the many quality complaints, and defend
the company. Nobody questions Ashgarde. He has taken over much
of the work that your staff should be doing themselves.

5.

Purchase orders to Small Talk are routinely created after the fact,
when the work is finished and invoiced. Approved budgets are also
modified after the fact, eliminating variances. Ashgarde himself
used the term living budgets.

6.

We have no formal contract with Small Talk and the work has never
been put out to competitive tender. Our procurement department
has been totally excluded.

7.

Small Talk can claim ownership over all the designs and intellectual
property, for what they are worth, related to our events and
exhibitions.

Whilst it seems that we have given Ashgarde and his company a licence
to print money we are still not sure how this situation came about. It started
long before you or I joined the company. We have good grounds to believe
former senior management, including the person we have talked about from
many years, are still involved as hidden owners. The exact relationships and
amounts will be difficult to prove. There is however clear evidence that people
in your department have received benefits such as paid vacations or other gifts
in violation of policy.
Proposed next steps
I would like to discuss with you a full re-tender of the contract(s) for events
and exhibition services. The tender process should be run independently by our
central purchasing department. Whether Small Talk would be invited or not is
a matter for discussion.
This may cause protests within your department which you will have to
deal with. I know you think highly of the manager in charge and I believe she
will protest strongly. But frankly, we have to bring the situation under control
and if employees cannot accept that then they are welcome to seek employment
elsewhere. I look forward to discussing this matter with you Thursday.

16

The Anatomy of Fraud and Corruption

Nearly a year later

From: Guy Laroche


Sent: 10 May 2010 16:23
To: Eli Silverton
Cc: James Brooke
Subject: Exhibitions and Events contracts
Attachment: EandEServicesCOSTS.xls
Eli (and James),
You asked for a review of the Exhibitions and Events contracts and cost
comparisons show they measure up over the past three years.
I am pleased to say that since we changed our main supplier costs have
dropped by 47 per cent with an improvement in quality. This is substantiated in
the attached report and customer satisfaction survey.
I think we should meet, all three of us together with Anne Lamont who is now
heading up our E&E department to review the situation. In the meantime, if
you have any further questions then please do not hesitate contact me.
Regards,
Guy Laroche
Manager Central Procurement

Six Cases of Fraud and Corruption

17

Case 5: Mad Max


From the diary of an internal auditor
17th February
Today was supposed to be my birthday but it was hijacked by Mad Max! The day
started gently enough with the external auditors and then WHAM-BANG-SLAM
Max is in my life. I reckon hes a nutcase but I cant help thinking there is some truth
in what he says! Ive had my eye on our operations in that part of Europe for some time,
but still find it hard to believe the off-the-scale things Max implied are happening. I just
wish these whistleblowers could be less emotional about it all. Okay, hed been fired by
the regional manager for raising the alarm and had been without a job for three months,
but still. If I dont get the CEO, who I hardly know, to authorize a full-scale investigation
starting tomorrow its going to be all over the newspapers. Ruddy threats!
9th April
Sorry I have not been able to write for a while. A lot has happened in two months,
and not least I have been travelling and had several meeting and countless phone
conversations with Max. He is calmer now and less vitriolic; maybe he even trusts me
a little. Anyway from our own deep investigations combined with deciphering Maxs
ranting we have now concluded the following:

A culture where senior managers (including the top man himself) have
claimed for BIG private purchases (clothes, holidays, family dinners at
posh restaurants and so on) on their travelling expenses.

Several members of the management have their own companies (offshore


and difficult to trace) which are invoicing certain suppliers.

At least three members of the management (including again, our top man)
have secret ownership in at least three suppliers AND two major sales
distributors. No wonder they were getting such a good a deal!

People who speak up get fired (Max was not the only one) and sometimes
offered money to shut up.

The head of marketing has authorized several hundred thousand euros of


fake invoices to a company owned by her boyfriend.

18

The Anatomy of Fraud and Corruption

Our top man and the head of purchasing has bought land from a developer
at a knock-down price, as a reward because they managed to move our
regional Head Office to the expensive premises owned by the same property
developers.

Our local management and some of the former managers seem to own the
travel agency which everyone at the company uses.

They seem to have acquired a pot of black money (from our Head Office!?)
which they are using for sweetening and bribing all sorts of people.

I think Ill stop there. It looks like we could prove all of these in a court of law but the
top management have decided it is time to interview the main offenders first, so I am going
to have to plan for that. Maybe they got a little worried about my last two findings.
5th June
Today was interesting. We interviewed five key managers, including the top guy. They
were interviewed separately and simultaneously. I can tell you, they all were happy
to talk voluntarily, except you-know-who. It was amazing. Four of them confessed to
being involved in fraud and have been dismissed. Only Mr Big denied everything and
became very nasty indeed. He thinks everyone worships the ground he walks on; it
must have been a shock for him. But we had so much evidence against him that our
legal advisors told us we could sack him, so we did. A caretaker regional manager and
team have flown out from Head Office and will start tomorrow. Our job will be to clear
up the rest of the mess.
5th November
Everything has gone full circle now. The company is doing well now and the new
management have had a baptism by fire. I am pleased that this case is over but my
happiness is tinged with a little frustration that we never really got to the bottom of it (or
should I say the top). Since the people we fired are not retaliating then we have decided not
to pursue criminal action against them as that may be too costly and drag on.
And what about Max? Well hes still mad. He feels that the people who wrecked
his life did not get their dues and now hes harassing us, threatening to go to the
newspapers. Maybe he just wants money; I guess thats part of it.

Six Cases of Fraud and Corruption

19

Case 6: Lapis Lazuli


From: Susan Miles [mailto:susan.miles@lazulilapis.org]
Sent: 15 October 2009 13:03
To: Joseph Marks
Subject: Quick question
Good morning Mr Marks,
Thomas asked me to move some of the expenses of this month from Trend to
Slim. Since Im new here I was wondering whether this is allowed.
Best Regards,
Susan

From: Joseph Marks [mailto:joseph.marks@lazulilapis.org]


Sent: 15 October 2009 13:35
To: Susan Miles
Subject: RE: Quick question
Susan,
If Thomas asked you to do that he probably knows what hes doing. So please
just proceed as requested.
Regards,
Joseph

From: Susan Miles [mailto:susan.miles@lazulilapis.org]


Sent: 16 October 2009 15:10
To: Joseph Marks
Subject: Re:Re: Quick question
Dear Mr. Marks,
Thanks for letting me know that. There are also some other things I would
like to ask you about. I have been looking for the contracts for our main

20

The Anatomy of Fraud and Corruption

sub-contractors but I couldnt find all of them, several seem to be working


without written contract. I asked Mr. Chambers but he said that we have been
doing business with those suppliers for years and that they are all approved
and certified. Im not sure that would be sufficient if project liability issues
would arise, what do you think?
Regards,
Susan

From: Joseph Marks [mailto:joseph.marks@lazulilapis.org]


Sent: 24 October 2009 07:35
To: Susan Miles
Subject: RE: RE: RE: Quick question
Hi Susan,
Let the quality auditors worry about those things. Forget about it, we are so
behind on everything that we should focus on what needs to be done.
Regards,
Joseph

From: Susan Miles [mailto:susan.miles@lazulilapis.org]


Sent: 16 November 2009 10:22
To: Joseph Marks
Subject: Accounts
Good morning,
Mr. Chambers dropped by and told me to adjust some of the figures in the
accounts. He said that we have some new projects coming in and I can include
some of the future revenues already now he explained how to do it but Im
not comfortable with this sort of thing do we have any guidance from the
Head Office?
Susan

Six Cases of Fraud and Corruption

21

From: Joseph Marks [mailto:joseph.marks@lazulilapis.org]


Sent: 18 November 2009 22:03
To: Susan Miles
Subject: RE: Accounts
Susan,
I was told the same thing and that I should make sure that you understood
correctly how to do it. It is not the first time and Im pretty sure the Head
Office doesnt know and doesnt want to know anything about it. They are only
interested to hear we are making profits. This is nothing new, it happens every
year.
Regards,
Joseph

From: Susan Miles [mailto:susan.miles@lazulilapis.org]


Sent: 19 November 2009 12:46
To: Joseph Marks
Subject: RE: RE: Accounts
Well,
If we keep on reporting good results, it is not so strange that the Head Office
doesnt question maybe I shouldnt be saying it but cant you see its all a
charade? We are not making money at all, suppliers are all over the place and
behave as if they own the company. Mr. Chambers just smiles to everyone and
invites them out for lunch, with Thomas nodding to anything he says. You are
my boss and you certainly know more than I do You must see it too
Susan

22

The Anatomy of Fraud and Corruption

From: Joseph Marks [mailto:joseph.marks@lazulilapis.com]


Sent: 29 November 2009 05:55
To: Susan Miles
Subject: RE: RE: RE: Accounts
Ok, fair enough
Do you have a private e-mail address?
Cheers
Joseph

From: Susan Miles [mailto:susan.miles@lazulilapis.org]


Sent: 30 November 2009 09:20
To: Joseph Marks
Subject: RE: RE: RE: RE: Accounts
Of course I do! Now tell me what you were you doing sending e-mails at 5:55
on a Sunday morning, dont you have a life?
Use my gmail account: susan1973@gmail.com
S.

From: Joseph Marks [mailto:joseph.marks@lazulilapis.org]


Sent: 30 November 2009 09:22
To: Susan Miles
Subject: RE: RE: RE: RE: RE: Accounts
It is just that I couldnt sleep. Thats all.

Six Cases of Fraud and Corruption

23

From: Joseph Marks [mailto:joseph.marks@hotmail.com]


Sent: 5 December 2009 23:03
To: susan1973@gmail.com
Subject:
OK, you asked for it. But since you seem to question so many things I really
dont want you to go through the same I have been going through in the last
three years. You might think that Im blind but I can assure you that this is not
the case. I am actually more than aware of all the things youve been telling me
and those are just a small part of what is going on.
In 2006, as part of an expansion strategy Lapis Lazuli made some large
acquisitions. This led to very heterogeneous development and Lapis ended up
inheriting bad habits both from the local cultures and the way the business was
run by the acquired companies. I was manager of one of the acquired companies
and I knew we were definitely not running the business in accordance to the
Head Office guidelines. I discovered a series of fraud schemes including conflict
of interest (involving among others Adrian Chambers), nepotism and collusion
with suppliers.
Honest employees were pushed into a corner by Adrian and his entourage. He
was the former owner of some of the acquired companies, and was encouraging
and supporting that way of conducting business. I tried to talk to Thomas but
I soon found out that he knew all this and was part of the game. I sent an
anonymous e-mail to the reporting channel of the Head Office. After some
time I received a reply saying that some investigators wanted to talk to me.
We arranged a meeting, but I was too nervous and decided not to show up. I
mean, did I really have any evidence? You know how things work, one word
from Adrian and that would have been the end of my career. I simply couldnt
go.
Since then things have gotten worse and worse: corruption to public officials
(politicians) in order to get major contracts; false reporting; adjustments or
inflation in the balance sheet; expenses deliberately booked in wrong projects
to make loss projects look profitable; preferential treatments to suppliers;
unnecessary outsourcing of business to sub-contractors who where in collusion
with the management; unofficial cash salaries to employees and more.
Ok, now, Ive told you. Call me a coward if you will but do I really have a
choice?

This page has been left blank intentionally

Is Fraud and Corruption Natural?


In the beginning was Fraud, and Fraud was with Man. And Fraud was Man.

The Art of Deception


The art of deception is by no means unique to humankind; in fact the ability to
deceive is a basic survival tool for much of the animal kingdom. Horned toads
inflate themselves with air in order to exaggerate their size. Countless animals 
and some plants as well! are adept at camouflaging themselves, either to
appear less edible or to capture prey more easily. While these primitive forms
of deception are not the result of a lengthy mental process, but adaptations
that have evolved over many years, they do illustrate the value of deception in
getting what you want.
Capuchin monkeys are able to learn deceptive practices in a human training
environment, such as intentionally making an incorrect choice in order to fool a
competitor (Premack and Woodruff, 1978). But real deception requires animals
with more advanced brains.
True deception requires a Theory of Mind ability, that is to say the ability
to attribute mental states; beliefs, intents, desires, pretending, knowledge and
so on, to oneself and others and to understand that others have beliefs, desires
and intentions that are different from ones own.
Recent research suggests that chimpanzees are capable of real deception. In
a test where a chimpanzee was required to use deceptive techniques in order
to snatch food from a human competitor, the chimps feigned indifference, and
based on an understanding of what the human could see and hear, or not see
or hear, intentionally planned and carried out their deception (Melis, Call and
Tomasello, 2006).

26

The Anatomy of Fraud and Corruption

Our closest cousins, the chimpanzees, are capable of real deception, but
we are still talking about fairly simple deception, based on a desire to get
immediate gratification. The scientist observer, who has the advantage of being
able to see the big picture, can see through the chimps deception without effort.
Human deception is at an entirely different level of sophistication. We are all,
relative to lower species, masters of deception. As young children we attempt
to manipulate our parents, and when we are out manipulated we study their
tricks. We learn to bluff and keep a poker face when needed. In competition, we
allow our adversaries to underestimate our capability. All war is deception as
Sun Tzu said in the ancient Chinese book on the art of war.
The perennial presence of corruption begs for an explanation. We all
know about the tools used to combat corruption: good upbringing of children;
rewards for honesty; punishment for theft and lies; teaching of professional
ethics during training; surveillance systems at work; legal enforcement;
stigmatization of thieves and fraudsters. But still greed prevails! We also know
that few things are as efficient in binding people together as sharing a secret or
having a common enemy. That shared secret might be the occasional borrowing
of the company car for private errands, private netsurfing during working
hours, or pinching paper and pencils for the kids, knowing that the others
do the same. What is acceptable at the peer level certainly varies depending
on the organizational and regional culture, but to the extent it is accepted the
common enemy is The Rules, The Law or The Superior. Therefore, on a small
scale, corruption and petty theft in a place of work may actually create positive
feelings and ties of trust and confidence among staff. It may even increase the
emotional affiliation with ones place of work and increase the effort and care
put into it. Perhaps this is an attempt to pay back a debt? For whatever reason,
corruption, to a certain degree, may in practice be seen as fair and may even
increase productivity. Then why fight it with all possible means, risking a good
atmosphere? Is implementation of a zero-tolerance policy towards fraud and
corruption really worth the cost? Isnt some degree of fraud and corruption
part of our nature?

Our Corrupt Biology


To cut the sociobiologists story short: the survival of the fittest is something else
than the survival of the most virtuous and law abiding. Or in the words of the
Swedish businessman, Marcus Storch (2006):

Is Fraud and Corruption Natural?

27

It is profit seeking that makes the business leader to think in a long-term


perspective, to care about his reputation, to pay his bills and to keep the
agreements he has entered into.
So, if deception and fraud is profitable, and you can get away with it, why
abstain?
Market mechanisms and our selfish genes dont care much about moral or
legal arguments. Rather, the genetic influence is highly pragmatic and supports
whatever strategy may cause financial or reproductive success (Dawkins, 1976;
Wilson, 1975). They make us as opportunistic and egoistic as we can possibly
get away with. They have developed an ability in all of us to tell lies, break
promises and steal, successfully. From this simple logic some people draw the
conclusion that the mechanisms behind The Law of the Jungle, or The Market,
have given rise to Man The Fraudster.
In practice, however, genetically induced behaviour is less predictable than
this rather vulgar interpretation of a Darwinian market society might suggest.
Sociobiologists have long struggled with the empirical fact that cooperation
and trusting others, which may be harmful or even deadly for the individual,
is so common. To engage in fraudulent competition is, in fact, not the dominant
human trait. One explanation is that certain types of apparently altruistic
cooperation, such as showing trust in another person or helping others without
any immediate individual rewards, is beneficial for the group; at least in the long
run. For instance, the group is a more successful hunter than each individual by
himself. You scratch my back and I scratch yours. Reciprocity pays (Axelrod,
1984). And because this also implies reproductive advantages if you look after
my kids and I look after yours they will all survive human nature contains
both opportunistic, fraudulent drives and an ability to cooperate with others.
In fact, we are quite skilful when it comes to developing sophisticated trustful
cooperative strategies. The conniving and egoistic fraudster we carry within
ourselves is balanced by a reciprocal team player.
There is a risk of course that fraudulent individuals, the thieves or free
riders, might exploit the fruits of that cooperation, and it happens in all societies.
This will not be in the interest of the larger group. So in all human societies we
also find an ability to suspect and detect fraud and a tendency to punish and
isolate fraudsters.

28

The Anatomy of Fraud and Corruption

Thus, fraudulent behaviour is, according to these biologically-based


theories, nothing abnormal or awkward but rather a strategic option that we all
carry with us as part of our behavioural repertoire. Normally we only expose it
under extremely controlled conditions, like when making jokes, during games,
in sports or on the stage, situations in which we may expose considerable
deceptive skills. In our daily lives, however, our fraudulent abilities are
counterbalanced by social cooperative strategies designed for the common
good of all. If we are guilty of malicious fraud, we keep it well hidden.
Moral and legal social norms can therefore be seen as tools developed and
sustained by a group of people in order to gain some control over its individual
members. This control will never be perfect (that would create an intolerable
and probably paralyzing situation). But as the individual performs a form
of genetically influenced cost-benefit calculation of fraudulent versus honest
cooperation, social norms will have a significant influence on the outcome.
This constantly ongoing tug-of-war between self-centred impulses and
socially disciplined attitudes implies that we will never be able to design and
manage a company that is totally without fraud and corruption. They are
inevitable consequences of allowing execution of individual free will within
a group.
This also means that fraud should not be understood as a kind of
incompetence on behalf of the fraudster, as an incomplete socialization of norms,
or as a deterioration of norms. Fraud is rather a combination of normal social
competencies plus various deceptive competencies, like the ability to perform an
act convincingly, that is, the ability to lie and pretend (Arvidson, 2007).

The local general manager, Mr Big himself, met regularly with group colleagues
and superiors to discuss strategies, sales campaigns, products, financial results
and other aspects of the business. Within this group, he played the part of
the loyal manager and was respected and admired by all for his outstanding
success in his market. No one suspected he was running the business for
his own personal benefit, that the accounts were false and the apparent
success unsustainable. Any visitors, whether VIPs or lowly auditors were
treated royally and left with a favourable impression. Even as the inevitable
collapse approached, Mr. Big was calmly negotiating his own early retirement,
as someone who had achieved every goal and wanted to move on to new
challenges. (Example from Case 5, Mad Max, p. 17).

Is Fraud and Corruption Natural?

29

We will intentionally associate the fraudster with an actor on stage, and


make use of the drama metaphor frequently in this book. It allows for the
inclusion not only of the main character, The Fraudster, but also of other
characters, and of things like a seemingly well-known plot, a scene and an
audience. It maintains the social character of fraud and it also suggests one
reason why our reaction towards skilful fraud sometimes is ambivalent. It
doesnt take a perverted mind to become fascinated and impressed by the
impudence and nerve of characters like Frank Abagnale or Bernie Madoff. We
even make popular movies about their lives such as, Catch me if you can in
the case of Abagnale. Perhaps we will see a film about Madoff soon. And it is
not uncommon for skilful fraudsters to receive a kind of admiration from the
general public, especially if they are clever, bold, come from lower levels in
society and steal from the already rich. We appreciate a good act, although we
hate being involuntarily deceived ourselves.
Remember also that a fantasy on a stage morally speaking is something
radically different from fraud. Fraud implies a malicious violation of moral
values such as justice, and the rights and interests of others.

Summary
The ability to deceive is crucial for all living creatures. The law of the survival
of the fittest supports the development of deceptive capabilities, but requires
also abilities to detect and punish swindlers and thieves. Thus, fraud is not a
form of incompetence, rather the opposite. It is natural and sometimes even
admired. This explains both its frequency and hardness.

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The Social Construction of


Fraud and Corruption

In the corrupted currents of this world offences gilded hand may shove
by justice.
Hamlet, III, iii, 57

Fraud has traditionally been understood as something that criminal individuals


commit. From a legal perspective, out of which most thinking around fraud
has grown, this comes naturally; someone, and not something, can and should
be prosecuted and made to pay for the crime. However, it is possible that we
miss some important insights into the nature of fraud if we focus solely on the
perpetrator and ignore the role played by the organizational structure or by the
social system surrounding the fraud.
Researchers have found that when we are looking for explanations behind
human behaviour, we systematically overestimate the importance of factors on
the individual level, like: personal values, attitudes and character. On the other
hand, we systematically underestimate the influence coming from factors on
the organizational or social level such as: incentive systems, social norms and
access to information. This tendency is attributed to the Austrian psychologist
Fritz Heider (1958/1982) and is so common that it has been given a name:
the Fundamental Attribution Error. In this book we shall try to avoid that
mistake. One way of doing that is to use a complementary social constructivist
perspective.

Social Constructivism
Social constructivism comes in many different versions (Barlebo Wenneberg,
2001), a complication which we will not deal with in any detail here. However,

32

The Anatomy of Fraud and Corruption

it is appropriate to clarify what we understand with the concept and how we


will use it.
We see it as a critical perspective in the sense that it sets out to investigate
social facts that are otherwise regarded in a common sense way. For example,
in some countries, putting a banknote in your passport before handing it over
to the guard at the border might not be seen as a criminal act. In fact it might be
seen as a friendly gesture, like tipping. In other countries, it is a necessary but
still in fact a trivial bribe. In some countries, the same act can in fact be seen as
a serious criminal offence.
The example shows that a fraudulent or corrupt act is not fraudulent or
corrupt by its nature. Generally speaking, social facts are not always facts, as in
the more physical sense. It is more appropriate to see them as constructs (Berger
and Luckmann, 1966). From a social constructivist perspective, human behaviour
and the acts of individuals are neither accepted at face value, nor are they seen as
natural in the sense that they cannot be otherwise. Instead, the way we act and
the way in which we understand the actions of others, is seen as influenced by
the opinions and understandings of other people. We are social beings and our
comprehension of the social world is therefore a social artefact.
Fraudulent and corruptive phenomena are not in any simple sense existing
out there somewhere, waiting to be discovered. Instead, what counts as fraud
or corruption in a society are those acts and events that are interpreted as
fraud and corruption. They are determined, most often unconsciously, in the
heads of the members of the society.
When iPhones were launched in the market only a few were distributed in the
beginning and since the demand was very high they were very soon sold out.
The managing director wanted to get two iPhones for his children and heard
that there were a couple left on sale in a town that was 450 km away from
his hometown. He rang his secretary and told her to find a way to get hold
of these two phones. The secretary did not question this unusual request (it
was not the first time) and added it to her task list. She learned that one of
the managers was going to have a meeting in that town the following day and
asked him whether he could go and buy the two phones. The manager replied
that his day was really packed and he was not sure to get the time, but that
he would try. He then asked whether he had to use the company credit card
or his own credit card and claim the expense. He was told to use his own card.
Only during the subsequent investigation, when confronted with the story,

The Social Construction of Fraud and Corruption

33

did the secretary and the manager realize that this was theft of company time
as well as fraud, since it was then found out that the managing director had
paid for only one of the phones while the other was registered as company
phone. (Example from Case 6, Lapis Lazuli, p. 19).
Saying that fraud is wrong because the law prohibits certain acts and calls
them fraud, is a circular reasoning at best. It does not explain why we have
called them illegal in the first place. A specific act will be defined as fraud in a
society when there is a certain degree of consensus about it. If few people dare
to challenge that view, or if they fail when trying, the subsequent common
understanding might be formalized as a law. The law then should be seen as
nothing but a formal expression of a social consensus or as a majority view; and
just as this understanding might differ from society to society, so may the law.
Of course, most people talk about, and experience reality as something
external to them, as something that seems to have an independent existence.
But one could argue that the only things we have, in order to make judgements
and decide on what to do, are internal sense perceptions and mental
interpretations. What people do, their actions, are wholly dependent on these
internal interpretations and not on external facts.
For instance, someone might notice as a fact that the company in which he
is employed has a positive cash flow and interpret that cash flow as a solution
in search of a problem. For him a suitable problem is the financing of a new
private summerhouse in Greece. The rest is a question of implementing a fraud
scheme that will match the solution with the problem. Is his problem real or
false? In fact, that question is irrelevant. The important thing is whether he acts
in accordance with this notion of the world.
Now, our interpretation of facts is seldom strictly individual. Instead there
is a strong tendency in groups to think and react as a collective. For instance,
some interpretations people make may not work as a basis for common action.
Some may raise opposition from powerful sub-groups. Some may even be so
divergent, wild or crazy that their proponents will be put aside, for example,
sent to jail or be hospitalized. Social constructivists therefore use the expression
that reality is negotiated.
The most radical of them would even doubt the existence of anything we
could call objective facts or reality. Instead they would argue that what we
call reality is in fact a negotiated social construction. Fraud then, as well as

34

The Anatomy of Fraud and Corruption

normality, is what we decide it to be! They take a rather trivial observation to


an extreme; that different individuals perceive and act differently in situations
that might look similar for an outsider or from a distance, and say that what
objectively might be the case is unimportant or forever beyond our reach. The
only things that exist are the interpretations people have in their minds. We
will not go to that extreme here, and it is not necessary in order to make good
use of some of the advantages of the social constructivistic perspective.
If we treat the experiences of fraud as something that is constructed, more
or less arbitrarily, by people interacting in a specific social setting, it becomes
apparent that we also must include situational or organizational factors in
the analysis. We have to understand the social construction of fraudulent or
corrupt behaviour as a process that takes place within, for example, certain
organizational structures. This might lead to a better understanding of what
really goes on in the company before and after fraudulent acts are discovered. It
also motivates us to think about how to proactively change these organizational
settings to reduce the likelihood of fraud.
The intention behind using a social constructivist perspective is not to
blame the organizational design, its designers or bystanders for the crime,
whilst letting the perpetrators go free. Rather, the intention is to find more
creative ways for companies to successfully prevent the development of both
fraudster personalities and fraudulent acts.

Can Fraud and Corruption be Anything?


As the Australian philosopher Raimond Gaita (1991) said: There are some things it
is evil even to believe, and that good and evil may be an illusion is one of them.
Are the definitions of fraud and corruption all arbitrary then? Are there
no limits to this relativism? Saying that fraud and corruption are more or less
arbitrary social constructs seems, according to Gaitas statement, to be a rather
awkward account of things when we consider our own spontaneous reactions
towards them. Fraud and corruption, like many forms of deception, evoke
deep moral sentiments in us, such as repulsion, anger and a desire for revenge.
We know for a fact that it is morally wrong. Moreover, we know that the major
part of our society reacts in the same way. It seems a bit farfetched then, or even
corrupt, to argue that fraud is something in my head and not something that
takes place out there in the real world.

The Social Construction of Fraud and Corruption

35

However, the fact is that many people who live close to a fraudster dont
have these reactions. They may agree on the common definition of fraud in their
society, and they would probably also confirm that fraud does exist; somewhere
else. But they may still fail to identify the specific events taking place around
them as fraud. Or more precisely, with the same knowledge, outsiders would call
it fraud. However, insiders often seem to prefer to live in a world where fraud,
as something morally wrong, does not exist. The same goes with corruption. The
people in the vicinity dont seem to realize what is going on.
The tricky and philosophical question becomes: are they then making an
incorrect construct or is it simply eccentric? Is there a right or wrong here, or is
it all matter of taste?

Moral Relativism
This comes close to asking whether also moral classifications in general are
arbitrary, which is the basic idea behind moral relativism. What gives some
of us the right to tell others that they are behaving in an immoral way? Or,
that their interpretations of fraud and corruption are wrong? Isnt that showing
disrespect for other value systems than our own? Arent respect and tolerance
some of the most fundamental values of the modern society?
By raising these questions moral relativism warns, and rightly so, against
letting our moral reflection turn into bigotry or chauvinism. But, on the other
hand, these objections also illustrate quite clearly the inherent paradox with
moral relativism: it cannot do away with the idea of objective values. We all,
relativists and non-relativists alike (apart from hardcore cynics) seem to embrace
respect and tolerance as basic values. Respect for each individuals search for
moral guidance and for meaning in life lies also at the heart of the relativist.
This reference to respect is also one strong point from which we may condemn
fraud. The fraudster does not show respect for others; other individuals, a
company or community, and this ought to also upset the relativist. Fraud always
means that someone has been deceived, and that someone has suffered an unjust
disadvantage. As trivial as this statement may seem, it reflects a fundamental
starting point for any moral reflection. Any social construction of reality will
not do. All constructions or interpretations must be able to withstand a moral
evaluation. Some are better than others. Not every social construction of reality
should be accepted. Some may even be wrong and harmful.

36

The Anatomy of Fraud and Corruption

We said earlier that our interpretation of the world around us is most often
spontaneous, unconscious and in line with those of others around us. This can
explain why we judge, or fail to judge, certain acts as corrupt or fraudulent.
And it explains why these judgements may differ between social groups or
societies. But it is not the same thing as saying that this reference to the social
construction of fraud and corruption is a valid moral argument. It does not
provide morally valid reasons for our judgements. When asked why we as
individuals condemn fraud and corruption, referring to a social consensus is
not adequate. Moral relativism might be a relevant perspective when describing
and explaining fraud and corruption in society but it cannot be used as a
normative frame of reference on the individual level. Doing that would turn us
into full-fledged opportunists.
A further argument against moral relativism, in this specific context, is that
the serious category of fraud which we will be examining here, managerial
fraud, is condemned in all cultures, even among criminals. You may betray
others but not your own people. There is, in fact, honour even among thieves
and thieves will also punish a deceitful gang leader. No relativism here.
If highly trusted persons use their position intentionally to mislead
colleagues, co-workers and superiors in order to make private use of public
resources, that kind of behaviour will not be tolerated anywhere and has not
been accepted at any time in history as a social norm. It is for instance illegal.
Moreover, it is always and everywhere morally condemned. This is a kind of
cultural knowledge which we all have and which we should not forget. A social
construction of actual fraud that does not carry with it this moral condemnation
would simply not work; it wouldnt succeed in defining fraud properly.
To put it even more precisely: if we find a course of events in which
highly trusted persons use their position intentionally to mislead colleagues,
co-workers and superiors in order to make private use of public resources,
and if this behaviour is called fraud in the surrounding society but without
a component of moral condemnation, that label would no longer convey the
essential characteristics of the situation. The word may be correct but its implied
meaning would be incomplete. Fraud without its pejorative undertones is not
fraud anymore at least not in the meaning of the word as it is used in this
book.
This suggests that fraud in general and managerial fraud in particular touch
deep cultural values, values so basic that we might even suspect that they are

The Social Construction of Fraud and Corruption

37

necessary for the survival of human society as we know it. And still, as we have
just seen, fraud is common in every historical period, geographical region and
cultural sphere. It is as if fraud is something deeply engrained in the human
nature, but condemned at the same time, similar to the concept of an original
sin. Therefore, we ought to treat fraud and corruption as something constructed
by, or perhaps better, inherited from both our nature and our culture.
In a culture such as the modern western world, individualism and respect
for others are woven together. We want to be seen as tolerant, even towards
unusual or odd lifestyles. We distance ourselves rather than fight against the
acts and lifestyles of other people that we see as behaving differently. Even if
we disapprove of what they do, we turn our backs and remain silent, minding
our own business or humbly abstaining from the risk of making an ill-founded
judgement. Sometimes we might even refer to moral relativism, meaning
respect. Since early childhood we have been taught that running with slander
and gossip is something bad and to be avoided. It has become a sign of good
behaviour not to judge others. However praiseworthy this might be, it can
also enable an atmosphere in which fraudulent behaviour arises and remains
unchallenged. The distinction between good behaviour and cowardice is not
always clear.
Fraudsters profit from this. They often use rationalizations to explain or
justify their acts: its nothing compared to what others have done; its for a
good cause; Im entitled to it, and so on. What if we, for a moment, accept a
relativistic standpoint, namely that the fraudsters do act in good faith? If this is
how they perceive things, not as committing criminal offences but performing
legitimate acts, then the issue of fraud becomes not a moral issue, whether the
act was good or bad, but rather an issue of power. One interpretation of the act,
as immoral fraud, is here being challenged by the actors interpretations of the
same act as something morally defensible. Whose interpretation will win?
Moral relativists would argue that calling someone a fraudster is an
arbitrarily negotiated classification; a social convention, albeit the majoritys.
In another social setting, the negotiation may turn out differently and the
actor would be called something else, Robin Hood, for instance, and may even
be regarded as a virtuous human being. So, whether private use of public
resources will be defined as acceptable or unacceptable, as fraud or not fraud,
will depend on power relations in the specific social group or community.

38

The Anatomy of Fraud and Corruption

Cultural Differences
In some countries, more than in others, we find a more lenient or even cynical
attitude towards the private use of common resources, in particular with respect
to people in power.

Figure 4.1

Perceived public sector corruption

Source of Data: Transparency International (2007)

The correlation between poverty and corruption is generally accepted


and often demonstrated. The costs of corruption are borne by the poor and
powerless, while the benefits are enjoyed by the rich and powerful. The rich
beneficiaries include both the local power brokers who receive bribes in return
for their corrupt decisions, and corrupt bribe payers who obtain lucrative
advantages in return for the bribes they pay. The poor and powerless are forced
to pay bribes for basic services they are anyway entitled to receive. They are not
corrupt, but the victims of extortion and have little choice in the matter. The
corruption is on the receiving end.

The Social Construction of Fraud and Corruption

39

Paradoxically, the corrupt, rich and powerful bribe payers might be


nationals of countries that enjoy a low level of perceived public sector corruption.
When an oil company receives valuable concessions, or an industrial supplier
obtains a lucrative infrastructure project through corrupt means, they demand
a better deal than they could have obtained through fair competition. The
bribe payer and the bribe recipient both benefit. The local population, who are
denied a fair share of the benefits of their national resources, and who must
subsidize the higher infrastructure costs, pay the cost of the corruption. With
market forces ineffective, local economies cannot develop and its people are
trapped in poverty.
However, research by the American Professor of Government Eric Uslaner
(2008) also shows that there is an even stronger statistical correlation between
level of corruption in a country and the distribution of wealth in that country:
the higher the level of equality, the lower the level of corruption, and cynicism.
His research suggests that corruption is being created and reproduced in a
vicious circle where unequal distribution of rights and wealth is a crucial part.
Inequality in a society reduces the general level of trust in that society. In
order to take care of themselves, the less fortunate, or groups that see themselves
as discriminated against, develop a high in-group trust instead of general trust.
Society thus becomes divided. It is us versus them and different ethical rules
apply depending on whom you are dealing with, us or them.
There are some countries with wide inequalities that nevertheless enjoy a
relatively low level of corruption at the same time, for example: Hong Kong,
Singapore and Botswana. One explanation could be the large-scale economic
stimulus and anti-corruption programmes that have been launched in these
countries. These programmes have succeeded partly because they could create
a kind of in-group trust in the national government in order to counter an
external threat: China in the case of Hong Kong and Singapore, Zimbabwe and
South Africa in the case of Botswana. In Eastern Europe, probably for historical
reasons, people tend to believe that economic wealth comes from corruption
of some kind, and not from hard or skilful work. Any reference to the wealth
creation capacity of the market system is therefore viewed with scepticism.
Democracy seems to correlate with lower levels of corruption, but increased
democracy, for example in Eastern Europe, does not automatically or quickly
lead to lower levels of corruption. The reason seems to be that both corruption

40

The Anatomy of Fraud and Corruption

and trust are very stable social phenomena that can survive for long periods of
time, even after a change in the economic or political system.
Very few people would argue that fraud and corruption have a positive
impact on economic development. Nevertheless, cultural differences show
themselves particularly in fraud awareness training. Therefore we will return
to these issues in Part II.

Failing to Define Fraud as Real


So far we have said that the social construction of fraud can give different results
in different societies. But what is it, more precisely, that has to be present in order
to create a common understanding of what fraud and corruption is, and to get a
common consensus around the importance of detecting and preventing it? The
two American sociologists Earl Rubington and Martin Weinberg (1968) suggest:
For deviance to become a social fact, someone must perceive an act,
situation or event as a departure from social norms, must categorize
that perception, must report that perception to others, must get them
to accept this definition of the situation, and must obtain a response
that conforms to their definition. Unless all these requirements are met,
deviance as a social fact does not come into being.
Perhaps this explains why fraudulent and corruptive acts are so difficult to
spot and so difficult to deal with in organizations. They never come into being
as social facts, as it were. If, or when they did, they would be dealt with. Fraud
and corruption as social facts implies a common normative understanding of
what these acts are: that is, as illegal, immoral or forbidden in the codes and
rules of the organization or profession in question.
The requirements mentioned in the quote could just as well be reformulated
in a way that describes what is needed in order to detect and fight fraud and
corruption successfully. It would take:

Knowing norms and values; acquaintance with relevant social norms


and values.

Knowing the facts; the possibility and ability to know about the act,
situation or event. (Fraudulent and corruptive practices are special

The Social Construction of Fraud and Corruption

41

in the sense that they are hidden. Obtaining knowledge of the act,
situation or event probably comes by accident, from a tipster, or
as a result of deliberately looking for it. Occasionally, they may be
spotted through regular monitoring systems.)

Judgemental ability; the capability to categorize these acts, situations


or events as departures from relevant social norms and values.

Communication; being able to report that judgement to others and


getting the others to accept the definition of the act, situation or
event as fraudulent or corrupt.

Mobilizaton; obtaining adequate action from, or together with,


others.

Figure 4.2

Requirements to establish deviant behaviour as a social fact

And, just as Rubington and Weinberg described, Unless all these


requirements are met, deviance as a social fact does not come into being 
meaning: fraud and corruption will not be adequately detected and dealt
with.
The fact that fraud and corruption are so common could therefore be
understood as a failure in a society or in an organization to construct incidents
of fraud as social facts.

42

Figure 4.3

The Anatomy of Fraud and Corruption

Factors stopping fraud and corruption from being recognized


as social facts

It is hard to imagine that a lack of knowledge about norms and values


could create fraud and corruption, or stop it from being detected. Especially
at the managerial level, fraud and corruption do not take place because the
perpetrator and/or bystanders are unfamiliar with, or forgot the relevant
social norms and values. At least on the managerial level, the cultural code,
national, industrial or organizational, must surely be well known. The fact that
the fraudulent acts are deliberately hidden or camouflaged, or that monitoring
systems are manipulated, also implies that cultural ignorance is not the case.
Therefore we will assume that cultural knowledge, in that sense, is not a
significant problem. But in another sense, the development of, and thus also
the knowledge of, corruptive sub-cultures, may be instrumental in supporting
fraud and corruption. In that sense, we might say that cultural or sub-cultural
knowledge, or conflicting norms and values, can be a requirement in order to
obscure fraud and corruption and to make it admissible, or even commendable.
We will later refer to this phenomenon as Differential Association (Sutherland,
1949/1983).
Knowing the facts is often a problem. That the acts themselves are
deliberately hidden is of course a problem in itself, but more intriguing are the
cases in which bystanders tend to ignore facts at hand, or maintain unawareness
of fairly obvious facts. The reason might be a lack of competence, but other
explanations are also possible.
Cultural knowledge may not always be lacking, but cultural awareness
could be. For several reasons relevant norms and values sometimes lose their
motivating power. They are suppressed, forgotten, weakened or made passive

The Social Construction of Fraud and Corruption

43

through a number of mechanisms, some of which will be presented below. This


inhibits the judgemental ability of both fraudsters and bystanders. In effect,
what we are talking about here is the (in)ability to make moral judgements.
Reluctance to report and talk about fraud and corruption might result
from a lack of whistleblower protection schemes, ethical hotlines and other
communication channels, but also to non-technical factors like not being brave
enough, not being a legitimate speaker in the others opinion, not speaking
the kind of language necessary to get the relevant others to listen and be
convinced, and not being able to listen to the others reactions and arguments.
If internal communication channels are unavailable or unusable, fraud will not
be reported in the organization.
Finally, if one gets the others to respond in terms of action, mobilization,
this is evidence that the fraudulent or corruptive act now has become a social
fact. This means that the group has come to a mutual interpretation of the
situation, an interpretation that includes its condemnation and motivation to
act against it. Fear is a major obstacle in this regard. Actions of domination by
others, who do not wish to see action, might also inhibit counteraction.
We will deal with all of these factors in some detail in the next chapter.

Summary
What we experience as facts may not always be there. Sometimes we disagree
whether things really happened or not. Sometimes we refuse to see things
as they really are. Perception is tricky and some theorists therefore suggest
that we should treat our experiences of the world, including that of fraud
and corruption, as a social construction. This does not have to imply total
relativism, but it gives us some useful clues on how to detect and prevent fraud
and corruption.
We need to have knowledge about common norms and values, and also
knowledge of actual fraud and corruption taking place. Moreover we need to
be able to judge that as something unacceptable and unethical. This has to be
communicated to a larger group of people and trigger countermeasures. If any
of these steps are missing, fraud and corruption will continue.

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The Social Deconstruction of


Fraud and Corruption

while seeing they do not see, and while hearing they do not hear, nor
do they understand.
Matthew, 13:13

Suspicions of fraud and corruption may never reach consciousness or


they may dissolve into thin air. In that sense, fraud is sometimes socially
deconstructed.
It might be fruitful to think about fraud and corruption as a kind of
deconstruction of norms about honesty, trust and responsibility. Or, to put it in
other words, individuals, groups of individuals or whole societies sometimes
fail to construct adequate conceptions of fraud and corruption. These failures
are in effect equivalent to undetected fraud.
By talking about the deconstruction of fraud, we dont necessarily mean to
associate ourselves with post-modern philosophy. The formulation is rather
an attempt to capture some ideas about how social psychological mechanisms
sometimes allow, or even support fraud and corruption, and to find some
ideas about how to disarm them.
We will use the following scheme to structure this discussion. We will
also return to it later when we deal with the reconstruction of fraud and
corruption. Mobilizing skills will also be discussed in detail in Part II of this
book.

46

The Anatomy of Fraud and Corruption

Figure 5.1

Concepts explaining the social deconstruction of fraud

Not Knowing Norms and Values


Cultural knowledge, that is to say acquaintance with relevant social norms and
values, is not genetically inherited. One has to be introduced to these norms,
to be socialized, in order to understand what fraud is. That is a prerequisite
for spotting and combating fraud and corruption. Whether these norms and
values are national, industrial, organizational or professional, they have to be
learnt. And, as we have already argued, societies and groups differ when it
comes to norms and values.
One of the most influential theories of fraud and corruption was already
presented in the 1930s by the American sociologist Edwin Sutherland and
again published in his classic White Collar Crime (1949/1983). It was called the
Differential Association Theory and stated that criminal behaviour (presumably
including fraudulent behaviour) was something learnt.
criminal behaviour is learned in association with those who define such
criminal behaviour favourably and in isolation from those who define
it unfavourably, and a person in an appropriate situation engages
in such criminal behaviour if, and only if, the weight of the favourable
definitions exceeds the weight of the unfavourable definitions.
At first sight, this quote might seem trivial; crimes are committed when
people think, or construct a reality, in which it is better for them to commit crime

The Social Deconstruction of Fraud and Corruption

47

than not. So what? But the quote also says something more and something less
trivial. It portrays the criminals definitions as phenomena on the social rather
than the individual level. It suggests that criminal behaviour is learnt together
with others.
One might argue whether this is correct when it comes to managerial
fraud. Here we are dealing with persons that hold a high social status, that are
very well integrated into society and that in full honesty may both recognize
and condemn criminal acts, including fraud and corruption. The fraudster is
normally an individualistic person, even with a conviction of being above other
people. Even though he often acts in collaboration with someone else, isnt it
a little bit farfetched to view him as belonging to a kind of criminal gang, or
a sub-group in society in which fraud is defined favourably; as challenging,
as something that strengthens internal social ties, or as something that may
render internal social status in the group?
These objections should not bring us back to an individualistic perspective
on fraud and corruption. The Differential Association Theory is supported
by the fact that the same fraudulent behaviour spreads rapidly within an
organization or group.
The management team reporting to Mr Big were aware of many of his illicit
activities; it was impossible not to see and indeed they had to cover for him on
many occasions. They were all somewhat afraid of him, but where well rewarded
for their loyalty with cash, company-paid vacations and other benefits. They
also supplemented their earnings with frauds of their own; who was going to
complain? As long as it was within reason, that is to say not noticed by group
headquarters, it was acceptable. (Example from Case 5, Mad Max, p. 17).
There are also several instances in which actual cases of misconduct cannot
be isolated to a certain individual but is being spread as a sub-culture in the
organization, like a kind of social rot or moral decay.
A relatively new manager in the company had heard some rumours about
sub-contractors in collusion with employees but he was not in the habit of
listening to gossip. His main focus was getting the job done. On some occasions
he had questioned the companys choice of sub-contractors, particularly
when alternatives seemed to be cheaper and faster, but was told there were
logistics reasons that he was not aware of. On the occasion of the company
Christmas party, his superior approached him

48

The Anatomy of Fraud and Corruption

Michael: Is your wife working?


Alex:
Well, she used to but right now, with two small children and all the

rest
Michael: I see maybe an extra income could be something for you
Alex:
Im not sure I get it
Michael: How can I explain lets say that your wife could set up a company

that could become one of our sub-contractors?
Alex:
Well, I dont know, I would have to talk to her Im not sure she

would want to work now, maybe when the kids are bit bigger
Michael: No, no, this is not what I meant. She would just be the registered

owner of the company; we would run the whole thing for her
Alex:
We who?
Michael: Me, you, the others
Alex:
What?
Michael: She wouldnt work but she would be in the payroll of course, get her

monthly salary, pension and all the rest
Alex:
I cant believe it!!! What makes you believe that I would?
Michael: I dont know, I just thought that since you are the only one left
Alex:
the only one left?
Michael: Who do you think the owner of Acfa services is?
Alex:
I dont know, I would have to look at who signed the contract
Michael: Bobs first child and Karls sister-in-law is behind AFM logistics
Marks wife is the one officially running
Alex: Enough, I dont want to hear any more of this
Michael: Do what you want but I warn you you wont have an easy life if you

keep on running things your way (Example from Case 6, as told by

a branch manager of Lapis Lazuli).
Finally, the relevance of an organizational perspective on white-collar
crime is also supported by the observation that the same kind of criminality
can persist in a company after the original perpetrator has been removed or
brought to justice. It often takes a deeper cut in the organizational pyramid and
a deliberate change in culture over time to make it finally disappear.

The Fraud Triangle


Through interviews with managers convicted of fraud, the Differential
Association Theory has been developed in more detail. Since it was proposed
by Sutherlands colleague Donald Cressey (1953/1973) students of fraud have

The Social Deconstruction of Fraud and Corruption

49

used a model called the Fraud Triangle in which fraud is understood and
explained as an overlap between Need, Opportunity and Rationalization.

Figure 5.2 The Fraud Triangle

A perceived need for money or advantage is evidently a necessary


prerequisite for fraud. However a question arises as to what constitutes a need
in general, and a need so urgent that fraudulent and corruptive behaviour
follows, in particular; that question is highly dependent on the individuals social
environment. It will get its answer by reference to something sociologists call
the relevant others. They are the people that an individual compares himself
with. Feelings of fortune, success, wealth or poverty, will depend on who the
relevant others are. They set the standards with which the individual evaluates
their own life situation. Differential Association implies that the relevant others,
and their needs, may be of another kind and of another magnitude than those
which are accepted as a norm in society on a more general level.
An investigation in 2009 by The Daily Telegraph into the expenses of British
Members of Parliament (MPs) blossomed into what Prime Minister Gordon
Brown called The biggest Parliamentary scandal in two centuries. To the shock
and anger of the general public, MPs had been abusing expense privileges and
allowing taxpayers to pay for all kinds of personal expenses, everything from
flat screen televisions to shipments of horse manure. MPs also refurbished
homes at taxpayer expense, sometimes more than one home.
The abuse was widespread, with hundreds of parliamentarians implicated.
The expenses were not public information until leaked by an indignant

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The Anatomy of Fraud and Corruption

employee. Parliamentarians defended themselves claiming they were just


following the rules, but since Parliament also created the rules their protests
were not convincing. Cabinet ministers all denied wrongdoing, and some
suggested the Daily Telegraph was conducting a smear campaign; they only
claimed what they were entitled to. There is no question however they would
have preferred the details to remain secret!
Thus need might arise from some crisis, financial or otherwise, or might
simply be a greedy desire for more wealth, status or power.
However, fraud also demands a possibility to cheat, combined with a
low possibility of getting caught, that is, a proper opportunity, created for
instance by weak internal control systems, power to override systems, inside
information, privileged access to resources, and so on. A potential fraudster
will perceive an opportunity when he believes he can commit a fraud with
either an acceptably small risk of getting caught, or an acceptably low risk of
punishment if caught.
Finally, a cognitive element is added to the triangle; rationalization, or in
Sutherlands words, how the weight of the favourable definitions exceeds the
weight of the unfavourable definitions. We will have much more to say about
rationalizations later. Here, we just want to point out that rationalizations may
also be of a kind that is accepted only within a specific sub-group of society,
a sub-group that may accept or even engage in fraud and corruption. If an
individuals identity is tied to such a sub-group of relevant others, fraud may be
committed even though they have excellent knowledge about cultural norms
and values on a more general level. Such knowledge per se is not enough to
curb fraud.
We need also to introduce here a certain kind of fraudster that we might call
innocent. The innocent fraudsters have been trapped in a peculiar sub-culture,
honestly believing that what they do is approved by management and aligned
with local traditions. One could say that the innocent fraudster is an example of
how fraud, looked at from the outside, has been totally deconstructed within a
local sub-culture, losing its restraining effect.
Investigator: (Towards the end of the interview) so in summary, you have

for four years made his (the general manager) travel expense

reports, and included all these personal items?

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51

Jacky: Yes, because he told me to.


Interviewer: Did you know they were personal?
Jacky: Of course, but he is the general manager. He decides what the

company should pay!
Interviewer: And during the last year, you have spent most of your time

working on his private projects that have nothing to do with the

company?
Jacky: I am his assistant, I help him however I can.
Interviewer: And you deleted files from his computer, even though you were

told not to enter his office while the investigation was going

on?
Jacky: He told me to do it. He is still the general manager, I report to

him.
Interviewer: Are you loyal to him?
Jacky:
Totally.
Jacky was the 25-year-old assistant to the general manager in the Mad Max
case. She had worked for the company since the age of 19, her first and only
employer after finishing school. (Example from Case 5, Mad Max, p. 17).
The three corners of the Fraud Triangle take on a slightly new meaning
when we treat them as interpretations rather than as objective facts. We might
get a better understanding of fraud if we treat financial needs as a subjective
experience that develops over time and in relationship or in comparison with
some significant others; opportunity not as a given fact but as a deliberately
designed (and camouflaged) artefact of a criminally bent or morally corrupt
mind, and rationalizations as never openly confronted assumptions about
common norms and values. In that sense, some fraudsters, to the best of their
knowledge, may see themselves as honest people, and can be convinced that
they are entitled to whatever they have taken.
One reason why bystanders who encounter signs of fraud nevertheless
fail to act could be that they too share the fraudsters firm but never tested
assumptions about organizational normality. The acts which they see or suspect
do not appear sufficiently deviant to merit special attention; Everyone is doing
it and so on. This is something we will return to later on.
The Fraud Triangle, understood as an organizational phenomenon, implies
that both rationalizations and experienced needs are formed in interaction with
others. The form of this interaction, as well as its content, will therefore be

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The Anatomy of Fraud and Corruption

influenced or even determined by organizational factors. Fraud would then


no longer only be a question of individuals committing crime. It would also be
about an organization making it possible or probable.
When thinking about it, it seems rather nave to picture opportunity
as something the fraudster suddenly discovers and is seduced by. Rather,
especially if we talk about fraud committed by senior managers with years
of experience in the company, the scam often has a sophisticated design and
is cleverly camouflaged. It takes specialized knowledge and special or even
deviant fantasies to achieve that. It may look as if the organization has, at least
to some extent, been consciously redesigned into an opportunity for fraud.
Accordingly, it is not always the opportunity that makes the thief. Sometimes it
can be the other way around.
How could I know? I mean, he was the engineer with the knowledge. He told
me that those valves were of a better quality and therefore more expensive. I
did some research and confirmed they were the latest model in the market, the
excellence among all valves. What he hadnt told me was that our machines
were too old to support them! It was not so strange then that they kept on
breaking and we had to repair the machines again and again and of course
he hadnt told me either that the owner of the company in charge of the
repair was a friend of his (Example from Case 2, interview with a product
manager from Build-IT, p. 10).
According to KPMG (2007), need was the primary force behind fraud in
47 per cent of the cases they investigated. Opportunity explained 26 per cent
of the cases. (Every second fraudster took advantage of poor internal control
systems, 36 per cent broke or misused them).
If we accept the premise of the Fraud Triangle, all three elements must
be present for fraud to occur. No matter how great the need, if there is no
opportunity then fraud cannot happen. No matter how perfect the opportunity,
until a perpetrator rationalizes the fraudulent action (or inaction) there will be
no fraud. When, for example, a cashier mistakenly returns too much change
to a cash-paying customer, a perfect opportunity for fraud presents itself, but
some people will in this situation simply point out the cashiers error and return
the money.
The Fraud Triangle does not however require that need, opportunity
and rationalization are present in equal amounts. The overpowering need

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53

experienced by a drug addict looking for money to support a habit will create its
own rationalizations and drive them to find or create opportunities. If controls
are totally lacking, someone will likely find the rationalizations necessary for
fraud.
KPMGs conclusions should therefore be seen as an assessment of which
factor, if any, was most exceptional.
While it was not included in the KPMG assessment, rationalization could
conceivably be the most important factor in some cases. A career fraudster or
criminal might be said to possess an exceptional ability to rationalize their
behaviour. Whatever actions they take can be justified in their own minds. This
ability to rationalize might be said to lead to fraud even when the opportunity
and need factors are slight. Career fraudsters commit fraud because they want
to.
The Fraud Triangle and its balance of factors should help us to understand
why fraud occurs and how we can prevent it. In addition, certain psychological
and social psychological theories can help us understand what kind of forces
and mechanisms we are up against.

Not Knowing the Facts


Maybe the most obvious reason why fraud is not detected and dealt with
is that the facts are camouflaged or hidden, of course. But things are more
complicated than that. Even though most, if not all, facts lay open, bystanders
may be incapable of seeing them.
Perception is not always as accurate as we would like it to be. Sometimes
we dont see things right in front of us. Red flags may be flapping all around,
but we calmly mind our own business. We also have a strong tendency to see
what we expect to be there, or what we want to see. At other times we see
things that arent there.
The concept to see has to be clarified. We might see a car coming towards
us but fail to see the danger. Seeing the danger means that we do not only
register that the car is approaching but also make some kind of forecast and
an interpretation of what could happen if the movement of the car continues.

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The Anatomy of Fraud and Corruption

Seeing, in the latter sense, is obviously a much more complex task. So dont be
surprised if it sometimes does not come about.

Common Ignorance
Half way through the film, the fire alarm goes off and smoke fills the cinema.
What do you do? Run for the door? Dont be too sure. Experiments have
shown that if the rest of the audience have been instructed to stay calm and
to do their best to see the screen through all the smoke you will probably
do the same.
When we face situations that we find difficult to interpret and judge, when
reality is confusing, we have a tendency to postpone our own reaction and
look around for guidance from the others around us. This tendency has been
investigated by the American psychologists Bibb Latan and John Darley
(1970). Even if the situation can be potentially dangerous, we may hesitate.
What do the others do? How do they seem to define the situation? What seems
to be common sense around here? The result may be panic in which no one
can keep their mind together. But the opposite is also possible: common or
Pluralistic Ignorance, in which no one takes any adequate action whatsoever.
Pluralistic Ignorance and/or the psychological phenomenon called diffusion
of responsibility may cause bystanders to lose their ability to discriminate
between normal and deviant behaviour. They become passive bystanders.

Reconstructed Memories
When crossing the street, most people stop if a car comes close. They do not
calculate speed and direction. They do not ponder on the intentions of the
driver, or their own reasons for living another day more. They just stop because
a subconscious impulse takes over. If asked, however, they could probably give
good reasons for stopping but that would be a kind of reconstructed meaning.
They same thing happens in cases of fraud. When asked to explain ones
behaviour, or lack of action, our brain has a tendency to fill in the blanks with
information which seems consistent with our behaviour:

I remember clearly that he gave me permission to put that item on


my expense account.

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55

I had to catch a flight so I didnt have the time to inform my


manager.

That is not what happened. I know. I know youre lying.

These things may be said with the best intentions of speaking the truth but
nevertheless, they may be incorrect.
In one study, a teenager is convinced by trusted family members that he
had been lost in a shopping mall when he was five years old, an event that
in fact had never happened. Days after this brainwashing, the teenager
starts recounting facts and feelings about the episode that were not even
mentioned in the indoctrination! He is embellishing a suggestion, resulting in
vivid memory of an event that never occurred.
This experiment, conducted by the American social ecologist Elizabeth
Loftus and her student James Coan (1994) shows that the brain sometimes
reconstructs false memories. These memories will be stereotypical in the sense
that they confirm common sense images.
They may also confirm our normative expectations, that is, they tend to be
self-reassuring.

Wishful Thinking
If available information is ambiguous, incomplete or full of contradictions, the
interpretations we make will also be influenced by what we would like to be
the case. This psychological phenomenon is called wishful thinking. It can be
defined as an identification of ones wishes or desires with reality. In simpler
terms, what we want will affect what we think we know.
The American psychologist Robert Cialdini (1993) lists several psychological
mechanisms behind compliance and persuasion. For instance:
people at the racetrack: Just after placing bets they are much more
confident of their horses chances of winning than they are immediately
before laying down the bets.
One explanation behind this obviously irrational tendency is social
compliance. We want our behaviour to appear consistent. It looks rather foolish

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The Anatomy of Fraud and Corruption

to bet on a horse whose chances of winning you yourself doubt. Maybe its too
late to withdraw your bets, but you can still adjust what you think you know
about the horse.
It may also be a little late, or at least inconvenient, to change your position
in the company, but you may improve your judgement about your superiors
credibility. Its easy to draw a parallel between wishful thinking and the
difficulties of revealing fraud and corruption.
Contrary to reconstructed memory, wishful thinking has to do with
interpretations of facts present here and now, not with inventing history. Even
more precisely, it has to do with estimating probabilities. What is the probability
that the invoice my superior just signed is a false one? If it is false, then I have
been a stupid fool all this time, relying on him and moreover I probably have
to do something about it! On the other hand, if its genuine, it means business
as usual. Therefore I tend to know for sure that its not false!

No Moral Blame
Being able to discover and put together relevant facts is not enough in order
to construct fraud and corruption correctly. We said before that one specific
quality of fraud and corruption is that they are morally condemned. Therefore
fraud and corruption will remain undetected even if someone notices, for
instance, falsified invoices, unknown suppliers in tax haven countries or large
amounts of cash payments, but does not combine these observations with any
moral blame, or experience it as wrong or bad.

Rationalizations
Donald Cressey (1973/1953) also pointed out that:
Trusted persons become trust violators when they conceive of themselves
as having a financial problem which is non sharable, are aware that
this problem can be secretly resolved by violation of the position of
financial trust, and are able to apply to their own conduct in that
situation, verbalization which enables them to adjust their conceptions
of themselves as trusted persons with their conceptions of themselves as
users of the entrusted funds or property.

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57

These verbalizations are what we normally call rationalizations; creating


socially acceptable arguments for behaviour that, in fact, is caused by
unacceptable motives. From a psychological perspective, using rationalizations
is a way of defending ourselves from feelings of fear and guilt. Successful
rationalization can therefore allow someone to commit serious fraud or acts
of corruption without feeling guilty. They can also function as explanations or
excuses for actions that otherwise would be morally condemned by bystanders
or outsiders. Here are some examples of common rationalizations:

everyone is doing it;

its only fair;

Ive (theyve) no choice;

its just a loan;

no one is hurt;

Ive (theyve) earned it;

they deserve it;

its not a crime;

they dont mind;

its for a good cause.

The actors involved have cultural knowledge of norms and values. They
know how to act deceivingly, and they feel the tension between their acts and
the social norms, but may find rationalizations to blur out their discriminatory
ability.
Below you will find an attempt to categorize some of the rationalizations
commonly used when breaking the rules. The vertical line has to do with the
individual dimension; is the actor consciously breaking a norm or not? The
horizontal line deals with what the actor thinks about the social environment.
Is the relevant group or society lenient towards violations of the norm in
question, or will they defend it?

58

Figure 5.3

The Anatomy of Fraud and Corruption

Four categories of rationalization

In the first quadrant, the subject perceives that they are in an exceptional
individual situation, so that while the applicable norm in itself is valid it
cannot apply. The present situation is so extreme, either due to force majeure,
or implying a right of self-defence, or saving oneself or ones employer from
a financial crisis, that they can detach themselves from the norm altogether.
Similar in experience, but radically different when seen from the outside, is
the situation in which the individual regards themself as above the moral
standards set up by the society. They are detached from the norms by virtue of
their own perceived superiority. This is the logic of the narcissistically disturbed
personality to which we will return in some detail later. The second quadrant,
decadent, describes a situation in which perpetrators see breaches of formal
or institutionalized norms happening around them and use that as an excuse
for doing the same. They know about the correct norm and realize that they are
about to do something forbidden but doubt whether anyone will stop them;
they perceive the environment as corrupt. We describe the third quadrant
as devoid: the fraudulent or corrupt act is not perceived as a violation of a
valid norm by the perpetrators. They are led to that conclusion by looking
around and noticing that the group, or society as a whole, is devoid of any
guilt or shame, and interprets that as giving of a green light to fraudulent acts.

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59

The norm that may seem obvious to an outsider, for instance not to steal, is
simply not relevant from the perception of the perpetrator. Finally, the fourth
quadrant describes a situation in which the perpetrators are in denial: they
know that others will not approve of their actions if they are detected, but
they have created rationalizations that trivialize the crimes. They are not fully
conscious that their rationalizations are lies, that they will not return the money
for instance.
Rationalization is really about changing names. As long as the act comes
with a label attached calling it fraud or corruption the act will be condemned.
However, rationalization changes the name on that label into something
more acceptable, for instance force majeure, common practice or tricks of
the trade. This is exactly where the moral judgement of the actors involved
is put to the test. When they think about different courses of action, do they
look for moral guidance with an open mind? Do they examine the potentially
fraudulent act to see what the proper label should be, or are they just looking
for excuses for engaging in, or remaining passive in front of ongoing fraud or
corruption? Are they struggling with their own motives or are they looking for
explanations with which they can go public?
Let us go back to the Fraud Triangle described earlier. It is possible to
treat the rationalizing of the deviant act as a kind of dynamic balancing in
which an unstable or tense combination of perceived need and opportunity
for fraud and corruption is brought into some kind of harmony by aptly
changing the label.

Figure 5.4

Rationalization as a balancing act

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The Anatomy of Fraud and Corruption

That would come close to saying that when we are considering


rationalizations we are looking for ways to break social norms while avoiding
social blame and feelings of fear and/or guilt. Rationalizations are very
instrumental and deceptive in that struggle.
While we normally think of rationalization as an individual phenomenon,
it must also be examined in the context of the organization and the individuals
peer group. Some rationalizations are more socially acceptable than others, and
we prefer to adopt the ones least likely to be condemned by our peers. This is in
line with the Differential Association Theory discussed earlier. If it is true that
everyone is doing it then it is relatively easy for an individual to rationalize
a violation of the rules. If on the other hand there are no socially acceptable
rationalizations available, then a powerful need, a blatant opportunity or an
exceptional (detached) ability to rationalize are required before we adopt the
socially unacceptable rationalizations.
This implies that if we could eliminate or reduce the availability of
rationalization arguments within the organization, we could reduce the
likelihood of internal fraud and corruption. Several avenues are apparent. If
we could educate and convince employees that fraud and corruption are not
tolerated, they will not be able to rationalize that the environment is decadent
or devoid of shame. If we could raise the awareness of employees regarding
the risks and even on the dangers of rationalization itself, then potential
wrongdoers would be forced to a conscious state and rationalizations of denial
would no longer be possible.
However, we are left with the problem of persons in exceptional
circumstances who have detached themselves from the norms system, and the
narcissists who couldnt care less about it. We cannot easily remove the formers
rationalizations except by addressing the exceptional circumstances themselves,
and these may be hidden to us. We cannot address the narcissists detachment
at all. But by reducing the availability of rationalizations for everyone else, we
can perhaps isolate and identify these difficult cases. These are issues that will
be explored in some detail in Part II of this book.

The Myth of Amoral Business


One way in which fraud and corruption avoid public blame, was called by
the American business ethicist Richard De George (1982/1990) The Myth of

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61

Amoral Business. What this well-spread myth claims is simply that business
is concerned with a highly pragmatic search for profits and individual careers,
and that moral concern is and should be left out of the reflection around
practical business problems. If fraud and corruption exist in businesses, that is
no cause for alarm or action.
The myth does not explicitly say that business is immoral, rather that
business leaders sometimes act without concern for moral aspects, thus
creating scandals along the way. Such scandals are swiftly picked up by the
media, possibly spreading the perception of amoral business. But is this really
what we think about the role of business in society?
De George argues that if we deep in our hearts firmly believed that
businesses do not, and should not care about moral claims, that is to say if we
lived in the Myth of Amoral Business, we would not have these stories in the
press and on TV. Who would then be interested, let alone upset? The fact that
many people do get excited and angry when they hear about bribery, insider
manipulations and environmental damages proves that the myth is not as strong
among the general public as some businessmen or students of business might
think. Nevertheless it is there, and it might be one of the explanations behind
the fact that fraud is not always at the top of public concern or anywhere near
the top of the business agenda. An absence of concern about fraud by those
senior managers and officials who are in a position to do something about it
might lead to the myth being self-fulfilling.
On the one hand, silent and cynical bystanders remain passive because they
believe that corrupt behaviour is the norm among managers and, accordingly,
nothing to be too upset about. Adding to this, managers who live in this myth
might very well be able to commit crime for pragmatic reasons without feelings
of guilt or shame; they have found their socially acceptable rationalization.
Several studies confirm this rather cynical view of moral decay in modern
business organizations, such as that by the American sociologist Robert Jackall
(1988):
Bureaucracy transforms all moral issues into immediately practical
concerns. A moral judgment based on a professional ethic makes little
sense in a world where the etiquette of authority relationships and the
necessity for protecting and covering for ones boss, ones network,

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The Anatomy of Fraud and Corruption

and oneself supersede all other considerations and where no


accountability for action is the norm.
It might be worth also quoting what the Wikipedia article (2009) has to say
about his book:
Named the Most Outstanding Business and Management Book of
1988 by The Association of American Publishers, the book explains how
the structure of corporations work to promote greed, credit-stealing,
problem-hiding, dishonesty, fear, and confusion. Based on intensive
fieldwork inside several large corporations we see exactly how the
greedy and dishonest are promoted while conscientious objectors are
forcibly silenced, ensuring all vestiges of personal morality are shorn
away.
This is an example, as good as any, of the sometimes cynical version of the
Myth of Amoral Business.
Note the use of bureaucracy in the quote from Jackall. The idea seems to
be that it is the bureaucratic norm system that promotes no accountability and
turns moral issues into amoral pragmatic problems. We will return to this idea
later, but first a comment on the covering up of mistakes. Why spend time and
effort on being successful if the appearance of success suffices?
It looks as if managers are occupied with avoiding association with
mistakes and instead are trying to be associated with successes. This tendency
to place greater value on losses than on gains seems to lie deeply ingrained in
human nature. Sustained fraud might therefore be better understood as a series
of attempts to avoid losses, rather than to gain a profit. This theory, which has
been supported with very strong empirical evidence, in combination with the
Myth of Amoral Business, could explain why some people are willing to take
risks far beyond normal levels, risking not only entrusted funds but also their
own career and social status. A small initial step, like a high-risk investment
that failed or a petty theft, could very well start a process of increasingly larger
and more risky deceptive schemes in order to hide or compensate the losses. In
combination with a kind of mental blunting, this process makes up the famous
moral slippery slope down which we might slide.

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63

Figure 5.5 The slippery slope

The notion of the slippery slope has scientific underpinnings. Different


forms of cognitive bias, especially the way we interpret risk and probabilities,
has been investigated by the American psychologists Amos Tversky and Daniel
Kahneman (1979), research that resulted in a Nobel Prize for Kahneman in 2002.
It is not fraudulent to have high prices, if the client is willing to pay. The massive
overcharging that was noted in the Babylon case did not happen overnight,
but developed over many years. At first, two supplier employees who had
gained the trust of their client found it was easy to profit. They took good care
of their counterpart, the manager at Babylon. They made his life easy, by doing
his job, and provided him with personal incentives. The gifts increased, and
so did the size of the invoices. The two employees set up their own company
with the full complicity of the Babylon manager he was theirs.
When did the gifts become bribes, and when did the high prices become
fraudulently excessive? It was so easy. (Example from Case 4, Babylon, p. 14)
After the collapse of Barings Bank, when rogue trader Nick Leeson was
caught he was quoted saying: The first time I asked London for funding,
massive alarm bells should have been ringing. But they didnt, and he fell

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The Anatomy of Fraud and Corruption

quickly down the slippery slope. Increasingly risky deals were designed in the
vain hope of covering for incurred losses. Someone should have stopped me.

Does Power Corrupt?


In 1887, Lord Acton famously wrote in a letter to Bishop Mandell Creighton:
Power tends to corrupt, and absolute power corrupts absolutely. Great men
are almost always bad men. Is it really true that power corrupts? And if so,
how come we find fraud and corruption also among people with less or no
power? When we say that power corrupts do we just mean that the amounts
involved increase with power?
In fact, experiments indicate that people with power may not be more
corrupt, but they seem to be more egocentric: Adam Galinsky et al. (2006)
showed how people in a position of power:

are less inclined to spontaneously adopt anothers visual


perspective;

anchor too heavily on their own vantage point (they are unable to
realize that others do not have their privileged knowledge); and

are less accurate in interpreting other peoples emotional


expressions.

In sum, power seems to reduce our ability to take different perspectives


into account. It has a tendency to reduce our ability to comprehend how others
see, think and feel.
This tendency can be the mechanism through which power corrupts, since it
isolates the individual from the norms of others. It may even create a feeling of
belonging to a special group with special privileges, not accountable to the others
in the less powerful group. The logic of the Fraud Triangle would suggest that
perceived opportunities of fraud open up as power increases. If the costs and
standards of living also increase with power, so might the perceived needs of the
individual. Finally, the different rationalizations the potential powerful fraudster
may use are probably not challenged with the same vigour from bystanders, as
compared to a situation where the fraudster is relatively powerless.

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65

Understanding how power affects individuals must also take into account
how it affects the individuals who are in the vicinity of power. These individuals
form an essential part of the social construction of power in two ways. First, they
may or may not set limits for power by resisting it, or denying its legitimacy in
certain areas of their lives. In one way or the other, power is always something
that is given to someone from a surrounding social group. At least, the group
must passively allow power to be executed. Without any support or obedience
whatsoever, no power can exist. Secondly, the content of power, the ends and
means by which power is executed, will be influenced by others through their
expectations about power and about the execution of power.
Acting from a power position is in some ways like playing any other
social role. Actors will look around for role models and role expectations in
their environment that may supplement their own expectations. These social
role expectations will affect the way in which individuals with power behave.
Conformity to these expectations is probably the most common response, but
exploitation of these social role expectations may also take place. In those cases
we may very well find incidents of fraud and corruption. But sometimes, where
the Myth of Amoral Business is strong, fraud and corruption is exactly what
one has to expect from those in power.

Common Sense is Dangerous


Pluralistic Ignorance, reconstruction of memories, wishful thinking,
rationalizations, untested myths, and extenuating conceptions of power and
several other psychological mechanisms should make us a bit careful when
making and relying on our spontaneous judgements. They should also make us
a bit critical towards what we usually call common sense. Common sense may
refer to some kind of common traditional body of experience and knowledge,
or even wisdom. However, when analyzing managerial fraud and corruption,
we do better when treating common sense as something unreliable.
Managerial fraud is an organizational corruptive process in which
fraudsters and bystanders interact and important parts of this process are
deeply ingrained in the day-to-day small talk in which common sense is being
reproduced. The functions of common sense are described by Peter Berger and
Thomas Luckmann (1966). What, then, is common sense?

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The Anatomy of Fraud and Corruption

Common sense makes everyday life understandable, on the one


hand, but on the other it can hide important aspects of it.

Common sense is knowledge about reality that is never doubted.

If this knowledge was doubted it would not be common sense


anymore.

Common sense makes everyday life work smoothly.

Common sense in action is not visible.

If anything problematic arises in everyday life, common sense will


try to integrate the problem with that which is unproblematic.

The way in which managers rationalize the payment of bribes has been
shown to follow this pattern. One analysis, by the Swedish sociologist David
Wsterfors (2004), of the stories managers tell about bribery and corruption in
Central and Eastern Europe, suggests three different kinds of scenarios: bribes
paid by others are wrong, irritating and they are criticized since they disrupt or
destroy the normal conduct of business. Bribes paid by the storyteller in order
to simplify the normal conduct of business are not bribes, but tactics. They are
never wrong. They are acceptable in a common sense way. Courtships are a
kind of non-bribes and they are used in situations that seem to lie within a grey
zone where the meaning of common sense is unclear.
Students of the process in which formal norm systems, including laws,
rules and regulations, are put into practice (Ekman 1999) have discovered that
small talk is indeed a crucial element. Formal norms tend to be abstract and
must therefore be transformed and translated into concrete actions that also
must reflect practical, real life experiences. This transformation is done through
small talk at work, in which a uniform and often uncritical common sense is
being constructed and reproduced. There are no guarantees that the intentions
behind the formal norm systems will be recognized in this local sense making.
As the saying goes, the problem with common sense is that it is not common.
We will discuss in the second part of the book how to bridge the
communication gap between abstract policies and common sense
interpretations, between intention and actual practice.

The Social Deconstruction of Fraud and Corruption

67

Of special interest is the common sense understanding developed by


individuals with some suspicion or knowledge of ongoing fraud, but who
are not directly involved in it. This piecemeal knowledge and suspicions
of individual witnesses might supply small but vital parts of the whole
picture. But if they indulge in different types of unfounded assumptions and
interpretations, similar to those produced by the fraudster, the bystanders
may turn their suspicion into something they find socially acceptable. Some
of the rationalizations we discussed above create feelings of indifference and
passivity:

they only do the same as all the others probably;

in comparison, what the others do is much worse probably;

this is how they always do it probably;

it is probably none of my business;

I dont see the full picture, its probably OK;

this is an exception probably;

I have no choice probably;

they have to probably;

it is for a good cause probably;

they know what they are doing probably;

this is not a crime probably; and

troublemakers make no career probably.

In this way bystanders and witnesses are able to avoid blowing the whistle
and can ignore how their own passivity might have contributed to or permitted
something criminal. Fear, wishful thinking, group pressure and the like may
push bystanders to invent rationalizations for suspicious situations that can
thereby be made to look reasonable when alarm bells ought to be ringing.

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Note that the word probably is added here, indicating that rationalizations
are assumptions, most often untested. It could also be replaced by the word
hopefully. We have a tendency to believe that normality or common sense
like logic, probably or hopefully, governs the behaviour of other individuals,
but we are not willing to put this assumption to a test. If we did, we might have
to start some kind of investigation and learning process, but we seldom do.
It is much more comfortable to not realize that something might be seriously
wrong. A tragic example of this kind of thinking is the Challenger disaster in
1986 (Vaughan, 1996).
In a famous episode of Candid Camera, two miming artists pretend to carry
a large glass plate across a busy street. People steer away; cars stop even
though they can see that some pass right through thin air.
The budget is without doubt one among the most useful and important tools
for controlling costs. It is a basic internal control. Cost levels are estimated and
approved in advance, and actual expenditures are then measured against the
approved budget, and variances identified and explained.
In Babylon, budgets were required, but controllers accepted the concept of
a living budget finalized only after the project was completed. Just like in
Candid Camera where there was no glass, there was no budget! But it seemed
to be there!
Interviewer: Could you please explain to me how are budgets established

and approved?
Employee: We establish an initial budget for the project, and get it

approved. Then when the actual expenditures come through,

we correct the initial budget if the first budget was wrong. The

final budget always agrees with actual expenditures.
Interviewee: Would you say this a normal way of running projects?
Employee: It works! With living budgets we can finalize resources needed

once the project is completed and in this way we completely

eliminate the risk of error. (Example from Case 4, Babylon, p. 14).
These kinds of rationalizations function as ways of legitimizing the actions
of others that otherwise, without the rationalization, would stand out as
unfair, improper, illegal or inappropriate. But they may also function as a way
of diminishing the importance of oneself: They know better than me. My
suspicions have no value.

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69

Inadequate Communication
If common sense should not be trusted, there ought to be some organizational
mechanism through which it could be challenged. And if suspicions gain
some force, there should be a forum where they can be discussed. One reason
that incidents of fraud and corruption succeed is that despite knowledge of
facts and moral blame, witnesses do not feel that they have anywhere to go
with their suspicions. Of course this is partly a question of installing a proper
organizational design, but it is also a cultural problem. There are also social
psychological mechanisms that inhibit communication around fraud and
corruption.

Moral Muteness
Ask a management team to explain why they have included an antidiscrimination clause in their code of conduct. Ask why they dont discriminate
against minorities or women, for example. Or, ask why fraudulent and corrupt
behaviour is not allowed. You will find this to be a revealing experiment.
Typically, the group will first fall into an embarrassed silence as the managers
try to figure out whether the question is meant to be serious or not and, if
so, what a proper answer might be. After some discussion some in the group
will probably argue that discrimination and fraud is forbidden because it is
illegal. Given some thought, concerns about public image and brand trust
may also be raised. The argument that non-discrimination, in that it brings
diversity, ensures better access to important competences could also appear.
Or that trustworthiness and transparency pay in the long run. The common
theme, however, will be that the company will not engage in discrimination
and corruption because if they did, there would be negative consequences,
ultimately affecting its profits.
The instrumentality in these arguments is quite stunning. One might
expect that someone in the team could argue that discrimination against
minorities or women would be unethical, a violation of basic human rights. But
moral arguments are seldom raised, not even in companies where the level of
discrimination is low or even non-existent. The morally right thing to do could
very well constitute the local social norm, yet the norm is still supported solely
by non-moral arguments. One will seldom find a report of moral concerns
formulated in moral terms in a group of managers.

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This is even more surprising since we might predict that the same managers,
if being asked to state their view on, for instance, the value of human life or
the nature of human beings, would have no problems to formulate a support
of equal human rights and of the importance of living responsibly and with
dignity. But having moral convictions is one thing. Raising moral arguments
in the middle of a management team meeting is another. The Myth of Amoral
Business is too strong for that to happen.
It is as if a humanistic vocabulary and thinking pattern, in which, for
example, all human beings have the same and high value, exists parallel to
another, more instrumental vocabulary and thinking pattern in which it
makes sense to treat human beings as means to commercial ends (Brytting and
Trollestad, 2000). The predominance of the Myth of Amoral Business triggers this
second instrumental thinking pattern but leaves the first, the more humanistic
one, asleep. Therefore, the business climate and the company culture do not
constitute a natural environment for moral deliberations. What is lacking is
some kind of trigger in order for the more morally relevant thinking pattern to
be mobilized.
This phenomenon, moral action in combination with non-moral arguments,
has been discussed in several articles by Frederick Bird, Professor of Religion,
and James Waters, Professor of Management Policy, both Canadian. They call it
the Moral Muteness of Managers (1989). One should discuss this muteness as
a serious weakness connected to what we earlier called reporting possibilities.
That was mentioned as one of the critical steps in the process of spotting and
dealing with fraud and corruption. Normally one would associate reporting
possibilities with whistleblowing or ethical hot lines and so on. But beside these
important but yet extraordinary measures, it is important to underline that in
many organizations, moral muteness in everyday life might be the greatest
obstacle for fraud detection.
The explanations behind moral muteness can be many. Some may argue
that raising moral issues is not in line with the public image of managers as
being strong, decisive, result-oriented and rational individuals. Others would
point to the fact that business leaders neither have the formal training nor the
practical experience to analyze business problems from an ethical perspective.
Of course, fear also plays an important part here (we will return to fear later
when we discuss mobilization). One way or the other, if moral concerns are
never formulated, the business decisions that take place in the resulting moral
vacuum may be less than optimal.

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71

The problem with moral muteness is that it tends to be self-reinforcing.


Moral muteness leads to reluctance in raising and describing issues with moral
dimensions, asking for help in moral dilemmas, or raising moral concerns.
Morally troubling events will be pushed aside and relevant information will
be suppressed. Muteness can therefore eventually also lead to moral blindness
and moral deafness, something that has been examined by Martin Samociuk
and Nigel Iyer (2003). Fraudulent and corruptive behaviour will then neither
be adequately perceived nor reported as the kind of deviant social act it really
is.
The manager had learned that bringing in new and profitable contracts was
all that mattered. The parent company was not concerned about how it was
done. With the help of bribery and with a cartel agreement, the manager
had a long and successful career. The company was one of the largest on the
local stock exchange, and top management was far too preoccupied with
their own bonuses to worry about legal niceties. As long as things were going
well, moral muteness reigned. When the inevitable downturn came and new
management took over, they found a company culture mired in corruption.
(Example from Case 2, Build-IT, p. 10).
How can I know what I think until I see what I say? This phrase, and
the implications of it which are far reaching, has been discussed in detail by
the American Professor of Organizational Behaviour and Psychology, Karl
Weick (1979). In the beginning it seems silly, but it captures in a nutshell the
importance of communication. It is in fact an integrated part of any reflective
process. If we are not obliged to communicate, to put words on our thoughts
and feelings, they never become clear to us. But when we formulate them, when
we hear ourselves spelling them out, it becomes possible to evaluate, improve
or abandon ideas.

Prisoners Dilemma
Another reason behind the difficulties in exposing fraud could be that
bystanders find themselves in a situation resembling the Prisoners Dilemma
(Axelrod 1984). The logic behind this concept is the following:
Two thieves, Peter and Mary, have been arrested and put in separate cells.
The police will interrogate them independently. If they cooperate with each
other and both remain silent they will only have to serve one year each as there
will be too little evidence to convict them of the more serious charges. If they

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give evidence against each other they will each get three years each in prison.
However if only one prisoner talks, that prisoner will go free as a reward, while
their betrayed accomplice will then have to serve five years. Thus, from each
individual perspective, the best outcome would be to betray the other hoping
the other remains silent. There is nothing to lose. But if both reason in this way,
each will betray the other and get three years in prison.
Table 5.1 The Prisoners Dilemma
When interrogated:

Peter stays silent

Peter betrays Mary

Mary stays silent

Each serve one year

Mary serves five years but


Peter goes free

Mary betrays Peter

Peter serves five years but


Mary goes free

Each serve three years

The Prisoners Dilemma is an illustration of trust versus mistrust. It takes


an unusually high level of trust to abstain from the egoistically best solution,
to cheat on the other and hopefully go free, and instead go for the next best
solution, to remain silent and spend one year in prison.
Now, consider the following scenario:
Peter, a mediocre salesman, knows that his superior, an extremely successful
and popular sales manager, transfers considerable amounts of their employers
money into his own offshore company with the help of an outside accomplice.
Peter has already got the reputation of being a rather rigid and unpopular
bureaucratic type in this fast-moving firm and does not want to risk any further
damage to his career possibilities. Peter knows that in order to get the CEO to start
a proper investigation it is vital that Mary, the suspected fraudsters secretary, also
steps forward and verifies some of the things that Peter would like to reveal.
Peter has spoken with Mary and she is also in a difficult situation. She knows
about some illegal business operations that are going on but is constantly afraid
of her superior and his sudden outbursts with anger. If she reports what she
knows to the CEO, and if Peter contributes with the evidence he has, then the
CEO will surely have to look into the matter.
They agree that something has to be done, and that they are the ones that
have to do it, to speak out. But do they dare? After one more sleepless night,
Peter is just about to call the CEO of the company when he realizes that the
situation looks like Table 5.2.

The Social Deconstruction of Fraud and Corruption

73

Table 5.2 The Bystanders Dilemma


Peter speaks out
An investigation will start, the
fraudster will be caught and some
crimes of others might also be
revealed. Peter and Mary will
be praised by some, bullied by
others, but they will probably
keep their jobs when the battle
is over.

Peter remains silent


Nothing will happen to Peter
but Mary might lose her job. No
proper investigation will start. The
control systems of the company
will probably be changed; perhaps
the fraud will stop or be modified.

Nothing will happen to Mary


but Peter might lose his job. No
proper investigation will start. The
Mary remains silent control systems of the company
will probably be changed; perhaps
the fraud will stop or be modified.

The fraud will continue. For


Peter and Mary life will go on
unchanged, but both will continue
to feel unease, guilt and shame
since they have each backed out
of a commitment to the other to
do something.

Mary speaks out

Peter is dependent on Mary and she is dependent on him. The last time
they met she looked really frightened. Will she fulfil her part of the deal?
Peter has a choice; he can play safe and keep his suspicions to himself, go
on with his life and let Mary take the blow, or he can speak out knowing that
two independent witnesses cannot be ignored by the CEO. But if Mary changes
her mind, he will be the only one to speak out. He might be accused of running
with gossip and have to face accusations or disloyalty and CEO denial. Perhaps
the fraudster also will take his revenge. The CEO will not do anything unless
both Peter and Mary come forward with their suspicions.
Although neither Peter nor Mary really know what will happen if they
come forward individually or together, the situation resembles the Prisoners
Dilemma and, in the end, the fear of being alone in accusing the superior could
very well deter each of them from speaking out, thus creating a situation worse
than before they conferred.

No Mobilization
Even if we know what is going on, we know that it is wrong, we have discussed
it with our colleagues and we agree that something must be done about it, still
we may find ourselves paralyzed. Nothing happens. The final evidence that

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fraud and corruption have been identified as a deviant, an unwanted social fact,
is that more than one individual acts in a coordinated way on this knowledge.
Unfortunately in the case of fraud, the obstacles that stop mobilization from
happening are many.

Group Pressure
Our tendency to merge with the group is part of what it means to be a human
being: a group living animal. This reflex may have been necessary for survival
on the African Savannah but it plays tricks upon us in a modern business
organization. This conformity, ingrained in our DNA, is therefore both a curse
and a blessing. If a large majority of a group agrees on a specific solution to a
problem, it is probably rational to go along with it. The probability that all the
others in the group are mistaken and that the single or few deviant got it right,
is low. Anyway, it is safer for each individual to play along, right or wrong,
with the group than to embark on a single and risky journey alone. But what if
the majority is making a mistake? What if the majoritys behaviour is putting
the welfare of the group at risk? Group pressure is not sensitive to issues of
right or wrong, good or bad. It is simply a question of conformity.
Numerous experiments have shown that even if the problem put in front of
the group clearly has one right and one wrong answer, innocent subjects will
conform to the majority even when it goes for the wrong answer (Asch, 1958). It
has even been suggested that the obviousness itself reinforces this conformity.
For example, suppose you find out that your manager obviously and without
any doubt whatsoever is a fraudster. In spite of this, the other bystanders or
your colleagues remain passive. If you then act on the obvious and if you are
the only one to do so that would not only distance yourself from the group.
You would implicitly accuse all the others of being obviously and stupidly
wrong or maybe worse; of being accomplices since the crime is so evident.
That is not an easy thing to do.

Fear
Fear is a strong emotional response to threats of all kinds. Neurologically
speaking, fear implies difficulties to concentrate and to get access to the parts
of the brain where memories are stored. We become cautious and extremely
aware of the immediate present watchfully observing what is going on around
us. Its automatic in the sense that it is nothing we choose. It may be triggered
without any cognitive activity and therefore it is also not rational. It has to

The Social Deconstruction of Fraud and Corruption

75

be, in order to make us run away from a lion or be prepared for a fight fast
enough. Fight or flight, those are the choices. To combat fraud and corruption
fight is of course better than flight. But do we really have a choice? It could
be questioned whether we have access to our rational ability to choose when
we are possessed by fear. On the other hand, if we manage to get hold of our
more rational abilities, we might also find that the reasons for being afraid can
be dealt with through other more sophisticated measures than simple fight or
flight.
It is not the fraudulent or corruptive acts in themselves that trigger fear.
Rather it is the possible anticipated threats coming from the perpetrators, if we
go against them. In the case of management fraud, bystanders and witnesses
are often far less powerful than the persons they suspect. The potential
whistleblower has therefore good reasons to be afraid. No wonder flight is
often the preferred option.
Fear can also trigger fraud. One study suggested that fraud in the financial
sector was not always motivated by greed, rather by fear of losing ones
reputation of being a successful professional (Lindgren and Engdahl, 2008).
Threatened status was said to be a more important fraud motivator than
imagined wealth.

Ruling Techniques
Social psychologists have studied mechanisms through which women are
systematically being marginalized and neutralized in working life and in
society at large. One theory described by the Norwegian Professor in Social
Psychology, Berit s (1983) talks about ruling techniques that are being used
by those (men) who want to maintain their privileges and remain in power.
A clever fraudster might use these and similar techniques in order to make
bystanders remain divided and passive:

making the opponent invisible, pretending not to hear or to see;

denying participation;

withholding or distorting information in order to exclude, or


sabotage performance of opponent;

ridiculing, cracking discriminatory jokes, bullying;

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The Anatomy of Fraud and Corruption

double punishing: damned if you do (for example, too much too


soon) and damned if you don't (for example, too little too late);

silence implies co-responsibility. Voice means treason;

blaming and shaming:

how would you know?

you are not as clever and creative as we are;

it is you who has misunderstood;

you should never have asked;

its your own fault.

When exposed to these ruling techniques, the victims tend to accept and
internalize the underlying norm of superiority and subordination. They accept
it as a correct description of how things are and how they should be. Eventually
discrimination is even experienced as fair. What might have started in a mood
of suspicion, anger and determination, soon turns into self-criticism, silence
and feelings of weakness.
You dont really know how it feels, to be called all sorts of things, to be told in
front of everyone that Im useless, to be shouted in corridors saying that since
I dont seem to be able to do my job I should consider going back to school.
And I just thought I was doing my job I mean what if I hadnt pointed out that
there were some mistakes in the way we were allocating costs? They would
have blamed me if the Head Office but when I asked the question he first
smiled at me, put a hand on my shoulder and then told me that there were too
many things I couldnt understand, that I was too young to even get anywhere
near the experience he had accumulated during his career. I guess I should have
kept quiet then, but I knew they were some mistakes in the balance sheet and I
felt it was part of my responsibilities to let them know. And now my working life
is a nightmare. Im scared of everything, even to go and get a coffee because if
I meet him he will make fun of me in front of the others and the others would
laugh but maybe it is me, maybe it is true, maybe what you learn at university
is not what you are expected to do when you start working for real (Example
from Case 6, interview with an accounting employee from Lapis Lazuli).

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77

And thus the native hue of resolution


Is sicklier oer with the pale cast of thought,
And enterprises of great pith and moment
With this regard their currents turn awry,
And lose the name of action.
Hamlet, III, i, 84
If we knew more about this process, and how to end it, efficient preventive
measures could be designed. And, in fact, we do know how to end it.
The great Danish storyteller Hans Christian Andersen revealed one solution
in his story The Emperors New Clothes (1853/1981). The Emperor is being
swindled into proceeding through town in invisible (no) clothes and nobody
dares reveal the naked truth, except a little child. The Emperor is naked! The
cry of the whistleblower has always been one of the most important ways in
which fraud has been detected. So typical that the whistleblower, in this case a
child, is a character without status or power to protect.

Summary
In this chapter we have presented a survey of some social-psychology
mechanisms that are relevant when analyzing fraud and corruption. They
are common in the sense that most of us not only fall victim to them from
time to time, but also take part in their reproduction. Fraudsters, victims and
bystanders alike may be trapped by them. In other words, they result in a social
deconstruction of fraud and corruption. They may not be seen, condemned,
talked about or counteracted because of these mechanisms.
The problem that this book addresses, managerial fraud and corruption, is
special in the sense that some of the fraudsters carry a lot of power, internally
in their own organization and also externally in the surrounding society. Some
of them make deliberate usage of these mechanisms and are helped by them in
order to steal from the company.
In the next chapter we will deal in some detail with the personality of some
of the worst fraudsters the narcissistically disturbed and with the rather
nasty effects they have on their colleagues.

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Working With a Corporate


Psychopath

Something is rotten in the state of Denmark.


Hamlet, I, iv, 90

The opening quote is a line by Marcellus, a minor character in Hamlet, after


he has seen the ghost in the dark. King Hamlet has been murdered by his
own brother who then took over both crown and queen. The dead kings son
Prince Hamlet now witnesses how moral decay spreads. Denmark has become
an unweeded garden. If his father had been killed in battle or fallen victim of
robbers or maniacs, this would have caused alarm and chaos. The circumstances
would have been investigated and the perpetrators would, if possible, have
been identified and punished. But the ghost of Hamlets father reveals how his
brother, unnoticed, put poison in the Kings ear while he was asleep. The cause
of death was never established and the unsolved assassination has now caused
some kind of norm cancer, not only within the royal court. Slowly the devious
poison has seeped out, in the state of Denmark. Even if the main characters
cannot realize what is going on, Marcellus the bystander, can.
Moreover, the crimes are integrated with the conduct of business, that
is, the right persons, in the right place and in the right context, commit
them. The crimes are covered by the organizations functional normality
and by the legitimacy of the fraudsters.
This is not Shakespeare speaking anymore but the Swedish criminologist
Lars Korsell (2004) who has studied managerial fraud. Shakespeare knew, and
modern research confirms it, that the combination of normality and legitimacy
can create an almost impenetrable protection for the perpetrator, so strong that it
takes extraordinary sources of information and measures to crack it. In the case
of Hamlet, it took a tip from an extraordinary whistleblower, the victims ghost,

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The Anatomy of Fraud and Corruption

which was then investigated and addressed by Prince Hamlet who simulated
mental disorder to disguise what he was actually doing.
The international group was in the right place, with the right product at the
right time. The business plan was just right, and the profits rolled . into the
pockets of fraudsters. The company never knew they had a great thing going,
and they missed the opportunity of a lifetime.
The villain in the story was a trusted company man, from group headquarters
in Western Europe. He painted a false picture of losses and of the difficulties
of doing business in a former Soviet country. He was universally believed;
indeed no one had expected to make a profit! It was decided to shut down
the project. The fraud would not have been discovered at all if not for Dmitri,
a local employee who, like King Hamlets ghost, reported the truth. But even
when evidence was presented, the fraudster for a long while succeeded
to convince top management of his innocence. When the whole situation
was eventually cleared up from the Head Office based in Western Europe,
Dmitri said: Im really happy to discover that not all Western Europeans are
fraudsters as I thought! (Example from Case 1, Rose, p. 8).

The Thin Line between Excellence and Fraud


There is a thin and shaky line to be drawn between criminal behaviour on the
one hand and conduct that is beneficial to the organization on the other. The fact
that companies may have something to gain from near fraudulent behaviour
that goes unnoticed may be a bitter pill to swallow but it is something that can,
hopefully, help us understand more about the reluctance in many businesses to
prosecute fraud. Maybe it can also help us to increase fraud awareness.
The local general manager was considered a true superstar. His sales and
profits were always strong, even when other companies and the entire group
were struggling. There were rumours of unethical practices from time to time,
but they were ignored. The profits were too important; nobody dared to rock
the boat. If bribes were being paid, so be it. And no one dared to raise the
issue that the manager secretly owned a series of suppliers through offshore
companies, after all they all knew that this was not something to prove
(Example from Case 5, Mad Max, p. 17).

Working With a Corporate Psychopath

81

Furthermore, if excellence and fraud have a common or overlapping border,


we might have an argument for not dismissing the fraudster too quickly.
Wouldnt it be better to forgive and forget; make them repent, change, and to
give them an opportunity to come back with a renewed loyalty? This may sound
like a forgiving and optimistic alternative, but the risks are considerable.
KPMG (2007) published an analysis of 360 fraud investigations and found
some interesting patterns:

70 per cent of fraudsters were between the ages of 36 and 55 years


old.

85 per cent of perpetrators were male.

In 68 per cent of profiles the perpetrator acted independently.

In 89 per cent of profiles the fraudsters were employees committing


fraudulent acts against their own employer, whereas 20 per cent
involved complicity with an external perpetrator, resulting in the
conclusion that in only 11 per cent of all profiles the companies
were attacked purely by externals.

Members of senior management (including Board members)


represented 60 per cent of all fraudsters. An additional 26 per cent
of profiles involved management-level persons bringing the total to
86 per cent of profiles involving management. This result highlights
a risk that every company faces: executives are entrusted with
sensitive company information and yet are also often in a position
to override internal controls.

In 36 per cent of profiles the perpetrator worked for their company


for two to five years before committing fraud. In 22 per cent of
profiles the fraudulent employees registered more than ten years
of service at the victims organization. In just 13 per cent of profiles
the fraudster was with the company for less than two years prior to
committing fraudulent acts.

The internal fraudster most often worked in the finance department,


followed by operations/sales or as the CEO.

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The fraudster appears to often be a trusted and successful male manager on


a high level. He operates by himself and over a number of years. Fifty per cent
of the fraudsters in this European study caused a loss of more than one million
euros. A third of the fraudsters acted more than 50 times, 17 per cent acted more
than 100 times and 5 per cent more than 1000 times, before getting caught.
Is it possible for someone like this to regain their trustworthiness as a
manager? Probably not. In order for that to happen, both the fraudulent
personality and the social setting would have to change radically, and that may
be asking too much.
Many of the patterns found by KPMG resemble those found in an earlier
similar investigation made by PricewaterhouseCoopers (2003). Of special
interest in that study were the interviews held with the fraudsters. Forty four
per cent of them were said to have a low temptation threshold, meaning that
they were willing to take risks and break accepted norms in order to make
money. Many, 40 per cent, had a low awareness of wrongdoing and 20 per
cent denied that their fraud had caused the company any losses. Who are these
people? PricewaterhouseCoopers comments:
Criminological research indicates that most fraudsters tend to be risktakers, decisive, extroverted, career or success-oriented individuals.
Paradoxically, it is precisely these traits that are also highly prized in
management recruitment.
If we add to this list of virtues some other traits known to characterize
successful managers, such as negotiation skills, charm and gifts as a leader, we
realize that the fraudster can be a powerful and manipulative person. Where
should we draw the line?

Teleopathy
A rational focus on achieving business goals can go too far. Some managers
can lose grip of everyday moral rules in favour of what the American business
ethicist Kenneth Goodpaster (1994) described as an unbalanced pursuit of
purpose or teleopathy. It means, literally, a pathological fixation on ends, and
has three symptoms:

Fixation; one specific goal gets exclusive and passionate attention.


The obvious notion that in most cases one has to align different

Working With a Corporate Psychopath

83

objectives, or make compromises between contradictory goals, is


forgotten. One single goal, nothing else and no one else matters.

Rationalization; whatever illicit actions taken and means used, they


are rationalized and excused.

Emotional detachment; in order to be able to live with this, emotions


have to be suppressed.

In the end the actor losses control over the goal. The goal has taken
control over the actor and has created a full-fledged teleopath. Unfortunately
companies sometimes prefer to recruit personalities of this type, thereby
installing people in the organization that might engage in fraudulent or corrupt
activities in order to reach their goals.
The cure for teleopathy, according to Goodpaster who coined the word, is
not to move from the frying pan to the fire by being unfocused, irrational and
emotional. Rather, the trick is to find and maintain a balance between these two
versions of dysfunctional single mindedness.
This balance is hard to find if core values and norms are vaguely formulated
or understood. This goes for both the personal and organizational level. On
the personal level, a constant reminder of the authority of ones conscience
is important. Insistence on a reflection on what a balanced enlightened selfinterest would imply is a paramount consideration. A reminder of values other
than economic success and career development is also a healthy suggestion of
the necessity of a balanced lifestyle.
On the organizational level, the first thing that comes to mind is the setting
up of balanced targets and the designing of integrity supporting incentive
systems. Too often unrealistic targets are set forcing employees to the limit, not
only of their capacity, but also to the limits of their integrity and conscience. If
overly generous incentives are tied to these unreal targets, then some will cross
the line. In order to set the balance right corporate values become important.
These should be formulated and supported by the management and
contain statements about the proper balance between work and family life, the
companys attitude regarding part-time and flexi-time employment, parental
leave and so on.

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Like line dancers who fix their eyes on a point straight ahead in order
not to lose their balance, each employee needs a clear point of moral fixation
or benchmark. It helps to keep ones concentration on intrinsic values, such
as health, dignity, freedom and integrity, without being blinded or overly
occupied by the things that are instrumental (for example, money, promotion,
deadlines).

The Corporate Psychopath


Other studies, such as the one carried out by Australian psychologist John
Clarke (2005), describe the fraudster personality as erratic and sometimes even
cruel. They talk about the Corporate Psychopath, that is, business leaders with
a specific personality disorder that also resembles narcissism.
The employee was a big spender, big achiever. Yet while he could charm
customers he could also display remarkable cruelty.
The decision to divorce his wife was planned, and informing her in the
presence of colleagues was intended to humiliate her. The action was not only
cruel, but defies common sense. The colleagues were predictably extremely
embarrassed by the callous behaviour. The action contributed to his reputation
for heartlessness, and there were other dramatic examples.
He tried to arrange to have a loyal employee fired, because of a protest over
excessive and unjustified invoices. The Corporate Psychopath was used to
getting what he wanted. (Example from Case 3, Judgement Day, p. 12).
The official diagnosis of narcissism, as defined by The American Psychiatric
Association (2002) stipulates fantasies of grandiosity in combination with
callousness and a lack of empathy:
Often individuals feel overly important and will exaggerate
achievements and will accept, and often demand, praise and admiration
despite a lack of worthy achievements. They may be overwhelmed with
fantasies involving unlimited success, power, love, or beauty and feel
that they can only be understood by others who are, like them, superior
in some aspect of life.

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85

There is a sense of entitlement, of being more deserving than others based


solely on their superiority. These symptoms, however, are a result of an
underlying sense of inferiority and are often seen as overcompensation.
Because of this, they are often envious and even angry of others who
have more, receive more respect or attention, or otherwise steal away
the spotlight.
The narcissist is torn between an inflated sense of grandiosity and a neverending need of admiration from others. This tension can give rise not only to
energy and decisiveness, but also to erratic behaviour like sudden outbursts of
anger or envy, or deception.
The American psychologist Theodore Millon (1996) proposes six types of
narcissists:

Normal narcissistic type; by nature a competitive and self-confident


person. They may be charismatic and charming, and can often be
an effective and successful leader.

Unprincipled type; the charlatan is a fraudulent exploiter, deceptive


and without scruple. Although people displaying this type of
narcissism might become successful in society and manage to keep,
or appear to keep, their activities within the accepted norms, they
can also be found in drug rehabilitation programmes, jails and
prisons.

Amorous type; described as a Don Juan or Casanova, is erotic,


exhibitionist and seductive, aloof, charming and exploitative, but
reluctant to get involved in deep, mutually intimate relationships.

Compensatory type; has illusions of superiority and an image of high


self-worth, but suffers from an underlying emptiness, insecurity
and weakness. This type is sensitive to the reactions of others and
prone to feeling ashamed, anxious and humiliated.

Elitist type; is a super achiever with an excessively inflated self-image.


The individual is elitist and a social climber, always maintaining
a superior, attitude and seeking admiration. A braggart and selfpromoter; social success only increases these tendencies.

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Fanatic type; is a severely narcissistically impaired individual,


characterized by major paranoid tendencies. The fanatic type holds
on to an illusion of omnipotence, and must continually fight the
reality of insignificance. This narcissist tries to re-establish selfesteem through grandiose fantasies and self-reinforcement. When
unable to gain recognition of support from others, the fanatic type
takes on the role of a heroic or worshipped person with an epic
mission. These people can be found amongst sect leaders, in mental
hospitals if their delusions become sustained and extensive, or in
prison, if their missions counteract those of society.

The Corporate Psychopath is typically a combination of Charlatan, Casanova


and Achiever. If, or when, their narcissism becomes more fanatic, they are more
likely to be recognized as impaired in the organization and neutralized one
way or the other. The compensatory type will probably not make it to the top
in the first place.
By including something called the normal narcissistic type it becomes
clear that all of us need a certain amount of narcissism in order to function
well in society. Self-esteem is a necessary quality. However, sometimes the
organizational culture and/or top management have failed to clarify what is
normal and what is exceptional, abnormal or unethical managerial conduct.
This makes it difficult for bystanders within and outside of the company to
resist the influence of the psychopath and accurately identify what is going on
as inappropriate.

The Silent Suffering of Others


Psychologists such as Lars-Olof Tunbra (2003) and Ingrid Skinner (1995), both
from Sweden, have important things to tell us about how people within the
same environment allow the narcissist to take over their worldview, including
the idea that the narcissist is free of guilt or any other form of flaws.
One explanation of how culture fails to identify the narcissistic manager
is that a sort of cultural splitting occurs. Narcissists are probably very skilled
in projecting their own problems on to their subordinates. Some of them will
then respond by idolizing the manager, falling in line, maybe even creating a
narcissistic sub-culture of their own. Others equipped with a strong conscience
and a tendency towards feelings of guilt, will blame themselves for mistakes

Working With a Corporate Psychopath

87

and weaknesses instead of opposing the narcissist. These two groups will
tell different stories about the manager and give different versions of what is
going on. Unable to reach a common understanding, these tensions may create
conflicts, fatigue, stress and discomfort.
People in the vicinity of fraud may blame themselves if results are wanting
or if the working climate deteriorates. Over time they run out of self-confidence,
motivation and energy. The Corporate Psychopaths own frustrations, projected
on others, create a climate of conflict between subordinates. The narcissist
is above the conflicts and not part of them, yet is the root cause of conflict.
Sometimes subordinates may even doubt their own sanity, thus confirming the
twisted worldview of the narcissist.
Again, holding on to an organizational perspective might bring some
new light to the matter of fraud. The feelings of others may reveal where the
fraudster operates.
One lesson we can draw from Hamlet as a psychological drama, is that
people surrounding the crime experience a loss of energy and joy in life. They
have great difficulties in understanding what has happened and what is going
on. Even those who know, or think that they know the truth, remain passive
and feel badly about it. Fraud, especially managerial fraud, is possible thanks
to the resulting silence of colleagues and subordinates.
He had anonymously reported his suspicions to the Head Office but when
they asked for a meeting he felt too scared to reveal his identity. I might be
able to solve this on my own was what he thought. And the more he tried
the more he was relieved of responsibilities. From being the promising and
talented new head of the whole region he had been gradually demoted and
demoted and now he was not even in charge of any specific area. Your new
position is under construction he was told, just be patient and you will see.
See what? The only thing he could see was that he was not able to focus on
anything anymore, he had sleeping problems and he was not even enjoying
the time he spent with his family. Luckily enough his wife had supported him
all the way and she was the one who suggested he see a psychologist. One
year of therapy had helped him to understand that he was not the problem.
But the situation at work hadnt improved at all. He was seriously considering
looking for another job. (Example from Case 6, p. 19, from an interview with
an ex-regional manager of Lapis Lazuli).

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If open, hidden or perceived threats exist, and if there are no safe channels
of communication where co-workers can report evidence or blow the whistle,
the organization will fall into silence and dysfunction creating discomfort and
stress. This allows for the fraud to continue, and with time it becomes more
sophisticated and difficult to address.
Because it is the manager who is the perpetrator, one should expect that
control of subordinate staff also will be sloppy. The manager is not overly
concerned about the well being of the company. This negligence leads to an
even more widely distributed fraudulent culture. In this environment, the
fraudulent manager may even be able to identify and retaliate against an
emerging whistleblower. Those who do not share in this corrupt environment
will be marginalized and excluded, replaced by more lenient or cooperative
individuals. More and more staff are involved. The camouflage is replaced or
elaborated, layer upon layer. Maintaining the fraud and its camouflage will
occupy the energy of a growing circle of people, which will have a negative
effect on their other obligations.
This dramaturgical process separates managerial fraud from other types of
criminality.
We sense that something is wrong but cannot put our finger on it. We
see it in our daily contacts with one another, contacts that in many cases
have become less friendly, polite and generous. We feel it in our places
of work, impregnated with bitterness, fear and stress that really put us
down. However, what is most affected is our intimate relations with
friends, partner and family, who gives life its richness and meaning.
The character of this pathological state isolates us from one another and
from reality and it stands between us and everything we aspire to get
and to be.
This quote from the American clinical social worker and psychotherapist
Sandy Hotchkiss (2003) describes the kind of working climate individuals
with a narcissistic disorder can cause around themselves. Managerial fraud
could also create these conditions since the perpetrator often seems to expose
narcissistic tendencies.
The needs experienced by the narcissistic perpetrators, and the
rationalizations they invent may also be encouraged by social and organizational
circumstances. Some psychoanalysts argue that unrealistic expectations on

Working With a Corporate Psychopath

89

managers, on both the professional as well as on the personal level, make up


an atmosphere in which the narcissistic personality can flourish. The manager
must have a keen ear and be independent, be informal and enforce rules, mediate
and take a stand, take risks and be infallible. The Swedish psychotherapist Lena
Nevander Fristrm (2005) writes:
It is the narcissistic myth that tells us that the manager is above all
human needs. He has no need for food, sleep, love or a toilet. He mustnt
show a running nose, sadness or be out of form. He must always be on
top. This process is mutual; it works as interplay between the manager
and his social environment and we all entertain the myth.
This interplay should receive more interest from fraud investigators and
from those engaged in fraud prevention. It also suggests an interesting solution
to the problem of detecting hidden fraud: look at the atmosphere! A lot of
things can dampen the mood at work but when looking for explanations as to
why employees are unhappy, ongoing fraud on a higher level might be one of
possibilities to look for.

Summary
A special but common type of fraud perpetrator, especially if we talk about
managerial fraud, is the Corporate Psychopath. He is often intelligent, charming,
confident, decisive and a risk taker. All these character traits are beneficial to
the company, if directed towards corporate goals. When turned egocentric and
combined with deceptive skills and sometimes also cruelty, they become a
major threat. The attractive force of the Corporate Psychopath also affects the
bystanders. They tend to lose self-confidence and creativity when they are in
the vicinity of a fraudster with this kind of personality.

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Trust in Organizations

Sblood, there is something in this more than natural, if philosophy could


find it out.
Hamlet II, ii, 367

Even though social mechanisms may create ill-founded consensus and


dysfunctional behaviour, many companies support them, albeit indirectly and
sometimes unintentionally. Craving for trust may repress healthy suspicions.

Common Values a Double-Edged Sword


It has become quite popular to launch projects with the aim of creating an
organizational culture based on common values, trusting relations, loyalty
and uniform action. These projects promise to replace costly control systems
with a kind of emotional, internalized, and therefore cheap, internal control
based on shared values. Proponents would also claim that these, so-called clan
organizations (Ouchi, 1980), could actually prevent the rise of isolated subcultures with dysfunctional rationalizations of the type we have seen above. So
far so good, but paradoxically enough, the ambition to avoid conflict could also
create a crime generative situation.
The logic is quite simple. Fraud is, by definition, an attack on harmony. It is
conflict writ large! And in an organization where a lot of effort and management
prestige is being invested in creating harmony and commitment, the existence
of fraud is very bad news. The easiest and cheapest way of making fraud
disappear is, unfortunately, silence and wishful thinking.
The ways in which we design organizational systems not only contain
criminal opportunities, but also form the conditions for suspecting and
exposing crime. Deviant, suspicious, not to mention forbidden, illegal or

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fraudulent behaviour, might develop into a kind of social taboo in situations


where the pressure towards social harmony is strong. Fraud, especially
managerial fraud, easily becomes unthinkable, literally speaking. The chances
are even larger if these culture-building projects, aiming at shared values and a
high-trust culture, are implemented forcefully from top management, without
proper space for internal discussions (Brytting and Trollestad, 2000). Indeed,
even so-called dialogues may create a negotiated, but still false trust.
In this way, fraud may parasitize on ideas about organizational harmony
and trust. Those who raise their suspicions will find it hard to be heard and
be taken seriously. Lack of trust is against the team player environment. The
formal control and surveillance systems that used to deal with these kinds of
suspicions of dysfunctional or suspect behaviour have probably been removed
during an empowerment project, or lost their internal status.
So far we have suggested that a general lack of trust in a country seems to
correspond to high levels of fraud and corruption. A rhetorical emphasis on
trust on the organizational level may also present a risk, if not for increased
fraud and corruption, at least of making it invisible. Avoiding both cynicism
and superficial harmony may put the organization in another trap; that of
blind trust.

Blind Trust
A sceptical or cynical attitude towards managers tends to increase with distance
and decrease with first-hand experiences. There are of course important
differences between different cultures, but far-off managers in other cultures are
normally believed to be less trustworthy than the ones close at hand. The latter
tend, to a higher degree, to be trustworthy in the eyes of their subordinates.
Why then is it so hard to suspect ones superior of being a fraudster? Why do
we trust some managers blindly?
It is in the nature of things that managers enjoy an extraordinarily high level
of trust. They have been given power and if top managers did not trust them
they would not be given power. Top-level managers, maybe even people at the
Board level, have probably been involved in the appointment of the manager
in question. They would not have recommended individuals they didnt trust.
This trust on the managerial level is almost there by definition, and is expressed
in the form of a loosely defined job description. This situation is inevitable

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93

since the manager of any business operation is responsible for dealing with
uncertainty, initiating renewal, implementing complex changes, taking care
of surprises, deviations from plans, and so on. Managerial work, particularly
at higher levels, cannot be specified in advance. It is therefore necessary that
manager not only have discretionary resources at their disposal, but also that
they have considerable freedom to act. You could say that every manager
has got a commission of trust. An immaculate manager is still to be found
but we cannot stand the thought that our own superior, or colleague in the
management team, is an impostor. They simply have to be of the reliable kind
because the alternative is too frightening. It follows from this that a manager
without trust is no longer a manager but a security risk.
Therefore, there is a quite understandable initial resistance to suspecting
managers of fraud. Everyone in the organization wants to trust managers fully
because too much is at stake when people in power are suspected of unacceptable
behaviour. If the trust is withdrawn, even on suspicion, the manager must be
quickly dismissed with considerable consequences for the organization.
This is one reason why trust in the organization, and especially in its
managers, runs the risk of becoming blind. These difficulties might also explain
why PricewaterhouseCoopers (2003) found that a third of the companies they
surveyed did not even investigate the extent of the fraud.
Even when confronted by the evidence, the top management somehow could
not accept that the manager they had appointed had betrayed them. They
recognized the risk of fraud and corruption in the former Soviet country, but
could not imagine that the main risk was the Western European manager!
One of them! And they found it equally hard to believe that Dmitri (the
whistleblower), a local employee, was the honest one.
In the end, the facts became impossible to ignore but top management still
refused to deal with the problem. They found it more expedient to close the
local company rather than admit to the Board how they had been deceived.
(Example from Case 1, Rose, p. 8).
The dangers associated with blind trust should be evident. And if trust is
both blind and dumb, remembering the moral muteness discussed in Chapter 5,
no critical reflection whatsoever will take place. Therefore, it comes as no
surprise that colleagues or subordinates near to the fraud often know or suspect
at least part of what is going on, but without drawing the right conclusion or

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blowing the whistle. And even if they do, more senior management is often
reluctant to deal with the problem.
In summary, if the organizational culture emphasizes decentralized decision
making, deregulation, flexibility and trust-based leadership, individuals with a
commission of trust who are bent towards fraud may see this as an opportunity.
High levels of trust, well founded or not, may paradoxically enough support
breaches of trust and may also at the same time obstruct exposure of the crime.
In the worst of cases, the combination of organizational harmony as a governing
ambition with a narcissistic manager might also in the end create feelings of
guilt and shame among those co-workers who witness the fraud unfold.

Cynicism
Instead of feeling guilt and shame one could develop a cynical view on
managerial fraud. This comes close to the Myth of Amoral Business we
mentioned before and is the opposite of blind trust.
The full-fledged cynic believes that managers are crooks all over. Every
new case of revealed fraud strengthens that conviction and no information
can prove otherwise. Honest managers are only seemingly honest. They just
havent been caught yet.
Cynicism can, psychologically speaking, be understood as a defence against
being deceived. The cynic expects to be deceived, and will not be caught by
surprise the day it happens.

Summary
Trust based on common values is an efficient way of coordinating and motivating
people in an organization. It is also pleasant to work in trustful relationships
with others. Therefore there is a tendency for both managers and employees to
build trust. But too much trust, blind trust, makes it impossible to spot fraud
and corruption. Cynicism, on the other hand, leads to a passive attitude towards
fraud and corruption. How do you reach a balanced or authentic trust?
Authentic trust is a form of trust that implies a risk. To have authentic trust
means to know that that those we trust may deceive us and take advantage of

Trust in Organizations

95

us, but we trust them anyway. Taking that risk is a conscious choice from our
side. Blind trust and cynicism are states of mind that we can fall into. Authentic
trust is a question of conscious risk taking which also means that we will keep
our eyes open and be prepared if red flags appear.

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The Closing of Mindsets

8

I will be brief. Your noble son is mad.


Hamlet, II, ii, 92

A common denominator between several of the enabling mechanisms behind


fraud and corruption described here could be called: The Closing of Mindsets.
Perpetrators, for their part, develop teleopathy and cannot be reached anymore
by anyone, especially not if they are of the narcissistic type. Bystanders, on
their part, stop thinking beyond the prevalent common sense, stop asking
questions or looking for new information or new opinions. Groups fall short
in noticing how they drift away, culturally, from the rest of the organization.
Whistleblowers keep silent. Suspicions are buried by top management. And,
since all of this is built on false representations of what is going on and on
carefully designed camouflage and manipulations, maintaining a decent facade
takes a lot of energy. The mind becomes gloomy and passive. Why even bother
to open the can of worms labelled Fraud and Corruption?
It is fraud and corruption, understood as illegal or illegitimate deception, or
the using of false representations to obtain an unjust advantage or to injure the
rights or interests of another, that has been locked out. The social construction
of daily life in the organization has failed to make fraud and corruption a social
fact. The solution then is to reopen the mindsets of the people involved and
start a social reconstruction of a reality in which fraud and corruption and the
moral condemnation of it exists; a return to sanity as it were.

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The Social Reconstruction of


Fraud and Corruption

9

It is a basic idea in this book to explain the dynamics of managerial fraud and
corruption as a failure by bystanders and/or fraudsters to reach a common
understanding of what is normal and what is abnormal. The fraudulent act
is somehow interpreted in a common sense way, something that may prohibit
critical reflection, new understanding and adequate action.
According to PricewaterhouseCoopers (2007), only a third of all fraud incidents
were detected by internal control and fraud protection systems, for example
through internal audit, fraud risk management and rotation of personnel. An
additional one-third was detected through what is somewhat vaguely formulated
as corporate culture, for example, internal (29 per cent) or external (14 per cent)
tip-offs. The report comments on this rather gloomy picture:
And the result is continuing evidence of the intractability of fraud
and its apparent immunity to managers attempt to control it: in 2007,
41 % of frauds were detected by chance, an increase of seven percentage
points in the past two years.
What then might support awareness and critical reflection? Part II of this
book will deal with that question in detail. Here, we will lay the theoretical
ground for that discussion by reformulating the question a bit: through what
social processes can the presence of fraud be turned into a social fact, or
something that is noticed by all, judged to be instances of deviant and immoral
behaviour and concretely dealt with? This is equivalent to asking: how can we
adequately reconstruct fraud and corruption in a company?
The usual recommendations urge top management not only to work
with internal control systems but also develop a corporate culture in which

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internal reporting of fraud suspicions is encouraged. Different ethical programmes


should be implemented, and law-abiding working methods should be seen as
matters of course. But if interpretations are in focus, we should also look for ways
in which common sense interpretations can be questioned, or ways to improve
the reliability of internal common sense itself. Achieving this improvement is
likely to require some significant effort, but this should be viewed together with
the potential rewards of success, that is to say a reduction of fraud.
We have already suggested that one idea could be to support internal
discussions about the feelings that working in the company create. For instance,
confusions, lack of energy, or fear, might be signs that should be taken seriously.
To guide our discussion, we may once again return to the model we
followed when we discussed the construction and deconstruction of fraud and
corruption, but now formulated as an appeal for reconstruction:

Figure 9.1

Appeals for the reconstruction of fraud and corruption

Establish Normality as the Norm!


We said earlier that one of the problems with rationalizations is that they are
not tested. People assume a lot of things about the content of the so-called
common sense, but they seldom confront these ideas with those of others or
with empirical facts. We have also proposed that some rationalizations are less
socially acceptable than others. To break these dysfunctional rationalizations
of fraud, it is necessary to install some form of statement of corporate values.
No one should doubt that top management does not approve fraudulent or
corrupt methods, and their willingness to follow up on it.

The Social Reconstruction of Fraud and Corruption

101

The Corporate Psychopath is a special case. They see themselves as outside


of, and above, normality. They are firmly convinced about their own superiority
and grandiosity. The crimes committed are experienced as rational given their
value system. Their omnipotent fantasies may even be combined with the
bystanders evaluation of themselves as normal, yet incompetent and deservedly
subordinated. The psychopath may be beyond help, but the bystanders need to
hear, and they deserve to hear, that they are reacting correctly when they feel
uncomfortable in the vicinity of fraud and corruption.

The Code of Conduct


Normally, the corporate code of conduct clarifies the kind of non-controversial
values from which fraudulent acts stand out as deviant. They may not always
be creative pieces of literature, or original in any sense of the word. We have
already seen that, for instance, respect for each individual and tolerance should
be seen as universal, not company specific, values. To follow the law, nondiscrimination, loyalty, customer service, quality, friendliness and so on are
additional examples of values that will surprise no one. But lack of originality
is not the point. The important thing is that they can potentially send a clear
message about the norms and values to which the company subscribes. They
convey authoritative conceptions of norms and values with which sub-cultures
can be challenged. But this desirable objective requires that the message is
taken to heart by its intended recipients. The authors experience is that many
companies have reasonable codes of conduct, but few codes have been absorbed
by employees with any degree of enthusiasm. This represents a significant area
of potential improvement.
A dialogue around the corporate code of conduct, either when it is being
developed or as part of its implementation, is one way of giving some power
to these common values. The power comes from the confrontation between
common values and individuals values. It could be an eye opener and it may
spur the development of the arguments one can use in a continuing reflection
around ones own and others behaviour in the organization. However, to
achieve this impact requires effective communication that bridges the gap
between the abstract or generic rules, and the common sense interpretations
that govern employees individual actions and decisions.
We will have much more to say about codes later in Part II under the
headings Understanding Integrity and Admitting that Fraud is Common.

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It goes without saying that fraud and corruption is not normal, meaning: it
is not the norm. Nevertheless, it seems to be common. Paradoxically enough,
realizing that fact and understanding the distinction between norm and
commonality might facilitate fraud prevention and detection. How?
If devious or cruel behaviour is being demonized and attributed to almost
non-human individuals or monsters the result may, paradoxically enough, be a
kind of acceptance and less than optimal reaction. The evil that one witnesses
is then seen as external and alien. What can one possibly do with an evil
monster other than try to eliminate it or hide from it? And since most of us
cannot eliminate our superior, we run for shelter. This is not a very constructive
response towards fraud and corruption.
Another attitude would imply admitting that fraud and corruption is
common, or even banal (Arendt, 1963), and that fraudulent behaviour is a part
of everyones potential behavioural repertoire. That would make it possible
to actively mobilize ones perception and reflection to a higher degree than
innocent naivet would allow. Fraud or fraudulent tendencies can then be
re-cognized, that is to say, known again. This also means realizing that we
already have many relevant experiences to draw on within ourselves. Those
experiences may be used to reveal and deal with fraud and corruption in much
more sophisticated ways than the simple fight or flight reaction.
It would also be less frightening for the bystanders to a fraud to realize
what is going on. It might help opening their eyes, thus supporting internal
reporting of the fraud through normal channels, or even whistleblowing. A lot
of our suggestions for raising fraud awareness work through this mechanism:
it makes fraud and corruption recognizable.
One of the strong drives of the Corporate Psychopath has been shown to
be fantasies of grandiosity. If knowledge about the normality of fraud and
corruption were more widespread, maybe the Corporate Psychopaths would
not have the same aura of infallibility and superiority, aboveness that they
might enjoy today in some cases.
Probably more important is the effect that an understanding of the
commonality of fraud has on bystanders. They can gather strength and pride
from the fact that they have not, like so many others, succumbed to the pitfalls
of fraud and corruption.

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Habits and Praxis


Aristotle (1999) used the word Praxis in order to designate virtuous actions
taken without any conscious purpose in mind, apart from performing the action
as perfectly as possible. Praxis has intrinsic value for us. Praxis is by definition
something good because it displays virtues in action and, at the same time, it
makes us feel good. It is what a good citizen is supposed to do, but because
praxis is non-instrumental, it has nothing to do with showing off or trying to
impress others. Praxis is good habits, the ability to use good judgement and
doing what is right, in the right moment and in the right place. Praxis simply
means excellence, revealing the characteristics of a good human being. Praxis is
virtues on public display. Fraud and corruption want to be hidden.
According to Aristotle, praxis in this sense cannot be captured or conveyed
in rules and regulations. It is more a question of developing wisdom and
experience. It is the norm in internalized, habitual, form. By imitating the
good acts that good people do, we might develop in ourselves a habit of doing
good.
A habit is a kind of reliable, but still, in the actual situation, not consciously
considered routine. In everyday language you could say that we are talking
about the tricks of the trade. These tricks are inherited from more experienced
colleagues.
Breaking up corruptive sub-cultures is therefore often a question of putting
less-experienced staff under the influence of good supervisors and role models.
They can show, through their own practice, how opportunities of fraud and
corruption should be handled in order to restore the normality.
If good role models those who perform praxis can be identified, they
can be used as mentors. If not, different kinds of rotation systems might create
the kind of distance and perspective in which local but corruptive common
sense behaviour can be revealed. Taking part in interactive workshops or using
interactive multimedia techniques dealing with fraud, can also be ways to
make dysfunctional habits visible. Properly designed, and we will show you
how that can be done in Part II, they might even provide an opportunity to
test and train new ways of dealing with warning signs, ways that with some
training might replace old habits.

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Investigate!
We have so far concentrated on how fraud is recognized or ignored, how
individuals resist or rationalize fraudulent acts, how fraudsters deceive their
victims and so forth. Our assumption has been that it is preferable if fraud
and corruption are recognized within the organization when they occur, and
preferable that employees are conscious of the norms and aware of the risks. But
what actually happens when fraud or corruptions do occur and are recognized?
If the organization has prepared contingency plans for this eventuality, and
its employees are aware of the risks and conscious of the norms, then managing
the occasional incidents that occur is routine. We will therefore first concern
ourselves with the organization that is unprepared, less aware of the risks.
When a serious incident imposes itself upon an unprepared management,
it is likely to be treated as a crisis requiring urgent resolution. Most incidents
are not that severe, unless they are mismanaged. But the general perception,
the common sense, is that fraud should never appear in a well-run company.
When it does appear, it is perceived as management failure. Management
has failed to maintain proper internal controls that should have prevented
the fraud. In truth, however, internal controls alone cannot stop fraud from
occurring; the determined fraudster will always find ways to circumvent the
system. There will always be some people who can find the rationalizations
they need to become fraudsters. Management negligence can be a factor, but it
is not a foregone conclusion.
However, because it is perceived as management failure, and because as
we pointed out earlier, managers are highly averse to being associated with
failure, an incident of fraud is highly disturbing. The management that finds a
fraud within its responsibility area seems to assume the shame and guilt that
the fraudster has rationalized away!
The desire to escape the stigma may lead to decisions which are not in the
best interests of the organization. We see in Rose (Chapter 2, Case 1), for example,
that management could not bear to face the Board with their problem, they
preferred to walk away from a substantial investment. In other cases, managers
have found it much easier and faster to come to an agreement with a fraudster,
and reward them with an early retirement package instead of pursuing them
in court. They have their own rationalizations for doing this, such as theres
no point shutting the stable door after the horse has bolted. Its too late.

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It will distract us from more important business. The investigation will cost
more than we can recover.
In fact the investigation probably will cost more than it recovers. If shortterm cost reduction is the only objective, managers might well be correct to cut
their losses and let the fraudsters keep their ill-gotten gains. However more
astute managers may see investigation and eventual prosecution as the best
remediation, both to recover lost assets and to create a deterrent effect for new
potential fraudsters. Unfortunately financial fraud investigations tend to be
long, complex and costly exercises which demand attention and overshadow
the more proactive, lower-profile actions that could keep fraud at bay in the
first place (Iyer and Morino, 2009). But are there other important reasons to
investigate? We would propose the following:

Determining what actually happened in order to learn from the


experience;
Are there flaws in internal control that should be fixed?
Is there a lack of awareness that should be addressed?
Are there other related incidents waiting to be discovered?

Establishing who was involved;


Who benefited from the incident?
Who allowed it to happen?
Is there an even more serious fraudster in the background?

Establishing who was not involved;


Has any innocent person fallen under the cloud of suspicion?

Demonstrating intolerance of norm violations;


Norm breakers should be seen to bear the consequences.
Norm breakers should not be seen to be rewarded!

There is still the obvious objective of recovering lost assets, but in most
cases the considerations noted above are far more important; they concern the
future welfare of the organization, that is to say the 99 horses which have not
yet bolted.
When the fraudster is a senior manager, someone with a high profile in
the organization, the decision to investigate is difficult, the temptation to settle
strong. An investigation will lead to unwanted publicity and costs. But taking

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the easy way out sends a dangerous message to the organization: misconduct
pays. Performing the difficult investigation might be just what is needed to
turn around an unhealthy company culture.
It was clear to all that the local CEO (with the support of the CFO) had been
abusing his position for years. The list of red flags was long: conflict of interest,
nepotism, collusion with suppliers, false reporting. As a result a culture had
developed where everything was allowed and this was spread all over the
company. At least half of the senior managers were running their own small
shows, including preferential treatment to favourite clients and suppliers,
kickbacks, secret deals and more. There was no doubt about the need of
further investigation. The question was how much and up to which level?
Would it have been worthwhile to investigate and prosecute every single
case? The pragmatic Head of Group Security decided that a long, drawn-out
investigation would be too painful and would probably not achieve the desired
result. Also he was not sure that he would have been able to prove fraud in
many instances that had been accepted for years. His simple and effective
solution was to gather enough evidence to dismiss the CEO and encourage
the CFO to an early retirement. Soon afterwards several other managers
decided to leave voluntarily and little by little the situation was locally solved
by the honest people remaining in the company. (Example from Case 6, Lapis
Lazuli, p. 19).
Lets return to an organization that is prepared for the necessity of
investigation. They know that incidents of fraud and corruption are inevitable,
and have therefore prepared themselves to deal with them. An incident is not
a crisis but a deviation that needs to be addressed, including identification of
the root causes of the deviation in order that actions may be taken to reduce the
likelihood of reoccurrence.
While this is not a book on investigation, we cannot resist adding a few
suggestions inspired by Nigel Iyer and Martin Samuciuk (2006) on how
managers should react to a fraud incident:

Avoid impulsive reactions when confronted with the signs of fraud.


Take a cup of coffee, sit down, and carefully consider all options.

Restrict knowledge of the suspicion to a very small group of


persons who will be involved in deciding on or implementing an

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investigation. The urge to confide unnecessarily is difficult to resist


and should not be underestimated.

Establish clear objectives for the investigation, both for addressing


the immediate suspicions and for identifying improvement
opportunities.

Act on the assumption that when the full extent of the fraud
is discovered, it will be more serious than the early suspicions
suggest.

Act on the assumption that it will eventually be necessary to present


evidence in a court of law. In other words, avoid any actions that
might impair the admissibility of evidence.

Ensure that competent resources are used in the investigation.

Obtain relevant legal advice.

When suspicions of fraud and corruption involving employees are verified,


disciplinary actions will normally be considered. There is a tendency to punish
small offenders from lower levels in the organization more severely than
serious offenders at high management levels. Perhaps it is because the lowerlevel employees are easy to discipline, whereas the larger offenders are more
likely to fight back and create a scandal. The authors believe that it would be
more productive and more just to apply the same disciplinary standard for all
offenders regardless of their level.

Mystification on Stage
Social processes can be analyzed using the theatre as a generative metaphor.
The American literary critic and philosopher Kenneth Burke developed the
drama metaphor in his book A Grammar of Motives (1945/1969). He argued that
what people do, and how events unfold, could be interpreted as something that
has a very specific structure. This structure puts together: What (was done) and
When? Where? By Whom? How? and Why?
In a vocabulary taken from the stage, these questions refer to: Act, Scene,
Agent, Agency and Purpose. When all the pieces fall into place, integrated
in a coherent picture, the interpretation/play works.

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Figure 9.2

The Anatomy of Fraud and Corruption

Dramaturgical elements that make a play work

The idea is that behind all actions lays an integrating structure of


rationalizations. In order to make sense of both our own behaviour and that
of others, we need to get satisfying answers to all open questions. If any part
is missing, suspicion and confusion arise. Remember, for instance, the detail
regarding consequential invoices in the case called Judgement Day, in
Chapter 2. This detail caught the attention of one subordinate who started to
think differently about what was going on. This state of mind has been called
Mystification and should, at least in this instance when we discuss fraud and
corruption, be treasured.
For example, if an accountant cannot combine an action (an invoice coming
from a supplier) with an actor (authorizer) and a purpose (received goods), or
if an actor (sales manager) suddenly appears in the wrong place/scene (expense
claims in a city outside the sales territory), any normal interpretation will not
work and the accountant will be mystified. Suspicion and curiosity will then,
hopefully, lead to further investigations in order to come up with new facts or
an interpretation and explanation that fit with the norm, or lead to the detection
of an attempted fraud.
We started this book by saying that fraud detection and prevention need
to start with a proper theory. Without a proper theory, it is impossible to make
sense of what is going on. The accountants situation will remain disturbing
until a new theory, about fraud and corruption this time, gains acceptance.
In some cases, however, individuals may fail to recognize obvious deviations
as the result of fear, wishful thinking or group pressure. But, as we have seen,
the play itself, the fabrication of negotiated realities and common sense, might

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develop a powerful dynamic of its own. The play itself, that is, a strong almost
mythical story, and not empirical facts, may supply the missing parts in the
scheme and satisfy the demands of mystification. Examples of missing parts
supplied by the play itself are what we now recognize as rationalizations:

they only do the same as all the others;

in comparison, what the others do is much worse;

this is how they always do it;

this is an exception;

they have to;

it is for a good cause;

they know what they are doing; and

this is not a crime.

The power of the myth can be so strong that the space for individual reflection
and action is radically reduced. Metaphorically speaking, the characters in the
play take hold of the actors who then abandon their own notions of norms
and values. The fraudulent actions continue and may never be understood and
exposed as such even though all the necessary facts are there.
Mystification can therefore be described as an effect of incomplete
rationalizations resulting in ambivalence. This makes the concept useful when
discussing preventive measures. Mystification if we take it seriously and do
not suppress it could trigger and inspire reflection. That would help us to
avoid blind trust and to question common sense. Maybe we should look for
ways to increase, not decrease, confusion in the company! We will return to this
subject in more detail in Part II.

Investigate Feelings
Let us go back to the remark made earlier about managerial fraudsters having
narcissistic tendencies, and that such personalities leave traces behind in the
organization. Feelings of guilt and energy drainage are two examples, caused

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by the narcissist projecting an aura of personal excellence and superiority which


others cannot hope to match. The people around the narcissist are convinced
that they fall short in most ways. They declare themselves incapacitated, and
accept the projected reality where the fraudster is guiltless and spotless. It
should be possible for someone coming from the outside to see these cultural
signs and let them be the starting point for a further examination of how the
organization struck by them is being managed. Perhaps this is no different than
the internal auditor who feels something is wrong, but has lacked the objective
arguments needed to justify further review.
But what about the mystification of the fraudsters experienced needs?
Isnt it rather unreasonable to be disturbed by the ambition of managers to earn
more money? Whats wrong with greed? As Nigel Iyer and Martin Samociuk
explained (2006):
Executives who meet their targets can expect higher base salaries, huge
cash bonuses and allocation of a large number of share options. There
is thus a very strong incentive to meet the targets, and some executives
have resorted to dubious or fraudulent practices in order to meet them.
It is a little nave for the people who decide on remuneration to assume
that some CEOs, who by their very nature are innovative problem
solvers, will not at least consider all possible ways of meeting their
targets, including creative accounting. It is also nave to assume that
massive remuneration is the key to developing honest, ethical business
practices and people.
It is also nave to think that power and wealth can be made to disappear as
drives on higher levels in the organizations. That may not even be desirable.
Managers, as well as most other people, will always experience a wish or
a need for more money. This seems to be a well-established common sense
opinion, judging from the design of managerial incentive systems. These are
almost exclusively based on financial rewards. Our needs, as a prerequisite
for fraud, seem to be inevitable. But the needs that lead up to fraud are special
in the sense that they are kept secret, or as we saw earlier, they are considered
non-sharable by the fraudster.
All fraudsters who refer to financial needs do not necessarily experience
these needs as a form of greed. The crime can even be made for the benefit of the
company they work for and not for direct benefit of the fraudsters themselves.
The fraudster, however, is likely to benefit at least indirectly, through the rewards

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that follow the companys success. The fraudsters, or at least some of them,
may not want to appear greedy but they find themselves in a situation that they
cannot discuss with others. In those instances, preventive measures could be
about efforts to simplify and encourage an open discussion about the situation:
is it really that bad? Maybe it is possible to solve the problem in a legal way?
Secrecy, not financial need as such, might be the real problem, and that
is a problem that can be solved. We will return to this issue below, under
Communicate!

Moralize!
The word moralize may carry some unpleasant associations. Bigoted and
narrow-minded individuals moralize over the behaviour of other people. To
moralize is to criticize, wanting other people to be ashamed and to feel guilt.
And behind the moralizing gossip, we recognize a sense of self-conceit and
malicious delight on the part of the moralizer. However this is not what we
intend when we use the term here.
Instead, we talk of moralizing as the verb form of morale. To moralize
would then mean to cultivate, to make or even to deliver morale. We want to
stress the necessity of developing what we earlier called judgemental ability,
or the ability to tell right from wrong, good from bad; and not allow that the
native hue of resolution is sicklied oer with the pale cast of thought (Hamlet,
III, i, 84) as Shakespeare put it.

Emotional Reconciliation
Most fraudster personalities seem to be at ease with their actions. For those
with a narcissistic personality, their own grandiosity and the environments
admiration and envy are real. Conscience and empathy do not pose any
problems. In fact, their absence is part of the fraudsters pathological pattern.
Dealing with or setting the narcissistic personality right has proved
to be extremely difficult. The literature on the subject stress that narcissism
is founded in experiences of fear, helplessness or panic in early childhood,
which have created a kind of inner chaos. One should therefore try to avoid
direct confrontation with these compensatory feelings of grandiosity. Instead,
it is better to try and draw clear and safe, non-confrontational, limits for

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the execution of leadership. But the odds seem to be against success. Often
dismissal becomes the only practical alternative.
For the less pathological fraudsters, different forms of rationalizations
justify the crime. They feel that the weight of the favourable definitions
exceeds the weight of the unfavourable definitions to use Sutherlands phrase
we quoted earlier.
However, for some of the bystanders the situation is different. Intuitions
about right and wrong, pride and shame, are constantly being provoked by
what they see happen. The situation doesnt make sense. Their emotional
reconciliation fails, which explains their bewilderment and passivity.
To be bewildered in that sense could be something positive if it is turned
into a starting point not only for a further investigation but also for development
of a fraud prevention programme aiming at strengthening and clarifying
the functions of conscience and empathy at work. Too often, conscientious
individuals believe they are all alone with their doubts, which they seldom
are (remember the discussion about moral muteness in Chapter 5). Realizing
that they are not alone will, in itself, help raise awareness of fraud in the
organization.
Without emotions there is no value. In that sense, one can say that emotions
are indispensable ingredients in any moralizing endeavour. If we take moralizing
seriously, we should continuously compare general principles and values,
found for instance in the code of conduct, with our emotional judgements and
with particular circumstances. We should look for rational arguments and facts
that may confirm or contradict our judgements. The search ought to go on until
we reach an integrated and stable conclusion, a reflective equilibrium which is
how the American philosopher John Rawls (1971) described this state of mind.
Then we know what to do. We regain our hue of resolution. If this search can
be turned into a collective effort, the organizational culture will be less lenient
towards fraudulent behaviour.

Better Envious than Blind


It is often better to call things by their real names rather than hiding behind
contrived ignorance.

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A classic definition of corruption is: The use of public office for private gains.
(Nowadays public office also refers to resources entrusted to employees in the
private sector.) The word: public in this expression should be understood as
the opposite of private as in our private lives. Every employee, and managers
especially, are supposed to be able to keep their public and private roles apart.
You are not supposed to use your office computer for private net surfing, use
the company car for weekend shopping tours, or use your own paid working
time for other purposes than your employers. Thus, corruption refers to a
confusion of the public with the private:
Corruption = Public Private
However, corruption is not only forbidden or inappropriate in a general
sense. It is immoral and unethical. It is condemned in the strongest words
and with considerable emotional back up. Is this formula really adequate in
order to explain societys moral condemnation of corruption and the neverending war on corruption? What, in more detail, is so threatening in mixing
our public and private lives? We need something more in order to understand
the roots of our own frustration.
It has been proposed by the Swedish philosopher and engineering scientist
Thomas Taro Lennerfors (2008) that the confusion of public and private is
provocative in two ways. First, because the confusion is asymmetrical in the sense
that it is an idea about the pure public sphere that is being contaminated with the
idea of a sloppy private sphere. It is not by chance that corruption is pictured in
metaphors like: bad apples, organizational rot and social cancer. Something
dirty is being mixed into that which we want to think of as clean, ordered
and under societal control, that is, the public sphere. Secondly, this confusion
or contamination is connected with a kind of uninhibited, undomesticated or
anarchic enjoyment that is forbidden in the civilized modern society.
The formula for corruption should therefore be completed with this
second contaminating element. Otherwise we cannot explain the strong moral
sentiments connected with corruption. Thus:
Corruption = Public Private + J
Where J would stand for jouissance, a French concept that stands for
stolen or denied enjoyment. Deep within, we long for the same enjoyment that
fraudsters may get from their fraud. We know that private use of public or

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entrusted resources is forbidden, and that is exactly why we are so frustrated


when we nevertheless see others indulge in it.
We are also frustrated when someone else seems to succeed in breaking the
social conventions that in a way are meant to chain us all. We would also like
to use public resources for private gains, but we refrain from doing it. This is a
kind of sacrifice on our behalf. Therefore we do not accept any one else getting
away with it.
To put it simply, we are envious. This is nothing we feel proud about so the
whole complex is normally repressed into our subconscious. But as therapists
can tell us, this doesnt mean that it is stripped of power. Compare sexual
drives that can cause dysfunctional behaviour if made unconscious. If openly
confronted, these feelings may be more fully understood and handled in a
constructive way. It would be better to admit these dark thoughts in us if it
could open our eyes.
Remember also that this envy of ours is exactly what the narcissistic
fraudster expects from us. It serves to confirm and feed their grandiosity and
it makes the rest of us feel a bit exposed and inferior. Denying the Corporate
Psychopath this energy is one way in which we might strip them of authority.
Interactive and experiential training techniques, if properly designed, are
ways in which these emotions can be raised to a conscious level and reflected
upon. More about this will follow in Part II.

Communicate!
One study by Frederick Bird and James Waters (1987) investigated what kind
of moral standards managers used when they judged activities with a moral
concern. They found that honesty in communication was the most frequently
used. Deceiving customers, colleagues or authorities, but also not living
according to ones words, was considered to contribute to poor planning, poor
utilization of resources and/or the loss of credibility. As they reported:
For honesty in communication called for managers to provide full,
candid accounts of all relevant information bearing upon the ongoing
decisions which other managers in the larger organization regularly
had to make.

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So, honest communication was wanted for rather pragmatic reasons:


because it simplified decision making. We have already mentioned several
additional reasons for maintaining an open communication, especially when it
comes to fraud and corruption.
In fact, you can say that all the different stages in the process of
reconstructing fraud and corruption, as shown in Figure 9.1, must be based on
communication.
In order to establish normality, practicing the norm is not enough. Violation
of the norm has to be called by its proper name. Getting to know the facts is not
possible without asking questions. Remember the quote: How can I know what
I think until I see what I say? We used it before to illustrate the link between
verbalization, communication, awareness and reflection. Here we can apply
it to moralizing. How may we judge the moral quality of an event without
communication? Finally, to mobilize, or move others from insights to concrete
efforts, is not possible without focused and concerted mutual planning.
In Scandinavia, the expression silent organizations is used to describe
places of work where people dont discuss work-related issues anymore for fear
of losing ones position or of being left over in the next round of promotions.
Whether or not management tolerates criticism or not is really not the issue.
Silence spreads if the opposite is perceived to weaken employment security
structures. Fear, well founded or not, makes communication much more
difficult.
One lesson to be learned here is that it must be safe to discuss fraud and
corruption. Managers have a special responsibility to create that security, to
build a climate of trust. But dont forget then the dangers connected with blind
trust discussed before!

Mobilize!
Let us return to the conclusions of Earl Rubington and Martin Weinberg (1968):
For deviance to become a social fact, someone must perceive an act,
situation or event as a departure from social norms, must categorize
that perception, must report that perception to others, must get them
to accept this definition of the situation, and must obtain a response

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that conforms to their definition. Unless all these requirements are met,
deviance as a social fact does not come into being.
If incidents of usage of public office for private gains have been identified
as incidents of fraud or corruption, meaning that they are seen as departures
from social norms in the organization and that they are condemned as forbidden
and/or unethical, and if that opinion has gained substantial social support in
the organization, fraud and corruption has still not been established as a social
fact. It remains an opinion, albeit shared, until something is done about it. If
it stays as an opinion only in the organization, it means that the fraudulent
and corrupt behaviour may continue. There has to be knowledge about how
to act and motivation to go with it which we discuss in Part II. But visible and
structural changes will also be needed.

Good Bureaucracy
We have seen that many contemporary trends in organizational design, such as
decentralization, deregulation, flexibility, trust-based leadership, values-based
management and so on may have adverse side effects when it comes to fraud
risk.
One could say that a common feature in many organizational development
projects today is to try and replace control mechanisms external to the
individual, for instance structured administrative routines or thorough
personal surveillance systems, with internal or values-based self-control. This
has shown to increase efficiency and motivation but may at the same time open
up possibilities for corrupt behaviour. If that is true, there might be a case for a
small step backwards, towards the reinstallation of a good bureaucracy.

Bureaucracy
Nowadays, the word bureaucracy is often associated with red tape, nonexistent service and inefficiency. However the German sociologist Max Weber
(Gerth and Mills, 1958), the originator of the theoretical concept, described
bureaucracy as a highly competitive organizational form. In fact it was so
efficient compared to the traditional forms prevalent in the nineteenth century
that it soon became standard. Its competitors were plagued by rigidity,
nepotism, fraud and corruption, and because of that also by inefficiency.
Bureaucracy became the winner and so it has remained even up to our own
days. We still very much live in the realm of bureaucracies.

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One of the characteristics with the bureaucratic form when it developed was
that it was purely rational. In other words, every action taken in a bureaucracy
is carefully calculated in order to reach established targets with a minimum of
resources spent. Up until the bureaucratic era, decisions were more strongly
influenced by old traditions, powerful and/or charismatic individuals, religious
or magical ideas, or from emotions, but not in a bureaucracy:
Bureaucracys specific nature develops the more perfectly the
more bureaucracy is dehumanized, the more completely it succeeds in
eliminating from official business love, hatred, and all purely personal,
irrational and emotional elements which escape calculation. This is the
specific nature of bureaucracy and it is appraised as its special virtue.
(Weber, 1978)
Rational calculations, precise documentation and fine-tuning of the
established operating procedures make the bureaucracy efficient.
A fully developed bureaucratic mechanism stands in the same
relationship to other forms as does the machine to the non-mechanical
production of goods. Precision, speed, clarity, documentary ability,
continuity, discretion, unity, rigid subordination, reduction of friction
and of material and personal expenses are unique to bureaucratic
organization. In the case of monocratic administration, these factors
are intensified to the optimum through schooled individual officials
in contrast to colleague-like older forms which are either honorary or
extra-official.
(Weber, 1978)
Speaking of a bureaucratic machine is therefore quite accurate. That
was precisely what its designers intended: a machine consisting of physical
equipment, a dehumanized labour force and formal rules. Not surprisingly,
this way of thinking also gave birth to the extremely tight surveillance systems
of the aptly named Scientific Management school in the beginning of the
twentieth century.
If the organization is a machine, controlled by cold scientists dressed in
business suits, no impostor or narcissist can find the cracks in the administrative
systems or in the minds of their colleagues, necessary in order to launch their
devious plans. No space for corruption here, unless deliberately done by order
of the machine!

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Therefore fraud prevention, if understood as risk management, is often


about installing bureaucracy; rules, controls and surveillance systems. But
problems arise when these structural solutions are installed in a business
culture that promotes aggressive risk taking, which it normally does. That may
result in a dissociated company. Therefore it seems logical also for this reason
to keep the internal control systems at arms length, with some distance from
the rest of the organization.

Paid to be Suspicious?
Installing special staff or departments with the purpose of keeping a keen eye on
internal rules and risks is one way of solving the problem with scattered or nonintegrated cultures. These people, for instance internal auditors and external
investigators making checkups, have the responsibility to be suspicious. It is
probably not possible to fully integrate them and their functions in the day-today activities of the firm. Indeed, it is necessary for them to be independent in
order to allow their objectivity. One argument is that they should be protected
from being drawn into the social deconstruction of fraud that might be going on.
Another is to let the positive effects of more clan-like organizational processes
develop undisturbed of the more machine-like surveillance systems.

Summary
This first part of the book began with a presentation of a frame of reference
that recognizes others influence on our knowledge of the world, and thereby
also on our behaviour. We called this social constructivism and have argued
that fraud and corruption occurs because of certain failures in this social
construction of the world. It sometimes makes us mute, blind and paralyzed
when it comes to fraud and corruption. Therefore, we ended this part of the
book by giving some suggestions of what it would take to reconstruct fraud
and corruption properly.
First, both the proper norm and violations of it have to be clarified. Second,
incidences of both fraud and corruption should be investigated, not only in order
to capture the offender but also to learn how to prevent recurrence. Especially
the investigation of feelings was brought forward since we may hunch fraud
and corruption before we know that it happens. Third, we suggested that the
concept: moralizing should be recycled, now depicting a kind of joint training
of our moral judgemental abilities, not shying away from our own envy towards

The Social Reconstruction of Fraud and Corruption

119

fraudsters. Fourth, communication about fraud and corruption was promoted.


Silent and frightened organizations can easily fall prey of deceptive fraudsters.
Fifth, and finally, we insisted on action. Both structural and cultural concrete
changes are needed to curb fraud and corruption.
The next part of the book, Exploring the Remedies, will discuss ways to
achieve all of this in practice.

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Part II

Exploring the Remedies

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Introduction to Part II
Exploring the Remedies

10

In Part I of this book, we explored the dynamics of management fraud and


the mindsets of fraudsters, bystanders and their supervisors. The committed
fraudster is beyond reach, bystanders fail to think or react and managers
are trusted blindly. Whistleblowers keep silent. Internal controls alone are
unlikely to stop fraud and corruption when the organization is complacent
and employees unaware of the risks. This does not mean that employees and
their managers are lazy or asleep on the job. More likely the opposite is true,
and employees are so fully occupied by their work that they have little time or
inclination to play devils advocate. Our native instincts that should help us to
recognize deception and expose fraud are deadened by the regularity of the
daily routine and standard processes.
If the objective is to reduce the likelihood of management fraud, and
reduce or prevent all kinds of fraud and corruption, then the strategy must
include both internal controls and risk awareness. Internal controls alone
will not prevent or detect fraud until it is too late. But when internal controls
are supported by risk-aware employees, the entire organization can become
fraud resistant. Incidents of fraud and corruption will be deterred, prevented
or at least detected and reported at an early stage before irreversible damage
is done. Fraudsters succeed when they can bypass the internal control system
without anybody noticing or reacting. When employees are alert and aware,
they will notice the red flags that are inevitably present when controls are
bypassed. Risk-aware employees will also know how to react to the red flags
they notice. They will know what to do, and equally important, what not to
do. As awareness will be the major topic in Part II, some initial definition of the
concept is necessary.

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The Anatomy of Fraud and Corruption

We have already defined fraud and corruption (IIA, 2010) as:


Any illegal acts characterized by deceit, concealment or violation of
trust Frauds are perpetrated by individuals and organizations to
obtain money, property, or services; to avoid payment or loss of services;
or to secure personal or business advantage.
By awareness of the risks of fraud and corruption, or fraud awareness for
short, we refer to the ability to perceive, to recognize, to notice, to feel, or to be
conscious of deception and of events and patterns that deviate from acceptable
conduct within an organization. The signs of deception and deviation are
symbolically called red flags, as red flags are often used as a warning, an
indication of danger, for example at a beach when swimming is dangerous.
Awareness requires therefore knowledge of what is acceptable, understanding
that deviations can and do occur, and alertness to the signs of deviation when
they appear.
However, surely, one might ask, this risk awareness and ability to identify
red flags is part of internal control? Yes it should be, if one talks about internal
control in the broadest sense. The IIA, or the Institute of Internal Auditors
(2009) define control as any action taken by management, the Board, and
other parties to manage risk and increase the likelihood that established
objectives and goals will be achieved. That is pretty broad; it would be hard to
find anything out of scope. It has long been recognized that internal control is
much more than a collection of internal controls (note the s) on the existence,
occurrence, completeness, valuation, presentation and reasonableness of
things. The IIA attaches great importance to what is known as the control
environment, which by their definition includes:

integrity and ethical values;

managements philosophy and operating style;

organizational structure;

assignment of authority and responsibility;

human resource policies and practices; and

competence of personnel.

Introduction to Part II Exploring the Remedies

125

Our focus in Part II will not be to challenge these definitions, but rather
to find new ways for organizations to improve their control environment and
internal control in the broadest sense, so that they might become more effective
in preventing and detecting fraud and corruption.
There are many kinds of unacceptable behaviour which are not strictly
speaking fraud or corruption; sexual harassment, polluting the environment,
exploiting child labour and racial discrimination just to name a few. Together
with fraud and corruption, these deviations from the norm fall into the
broader concept of organizational responsibility or integrity. While fraud and
corruption are main concerns in this book, we find that in awareness projects it
is sometimes difficult to separate them from the wider range of inappropriate
behaviour. Employees who are trained to be aware to the risks of fraud and
corruption will also be more aware of other integrity risks. This is just as well! It
is not uncommon to find fraud and corruption together with other wrongdoing.
The teleopathic fraudster can rationalize any action.
We suggest that fraud awareness is an ability that can be learned. By raising
the fraud awareness of employees, organizations can reduce the frequency and
severity of fraud and corruption incidents. We will, in the following chapters,
explore how this might be achieved.

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The Case for Experiential


Learning

11

Sblood, do you think I am easier to be played on than a pipe? Call me


what instrument you will, though you can fret me, yet you cannot play
upon me.
Hamlet, III, ii, 369

Teaching Awareness
Could we train employees to recognize deception in an organizational
context, to be alert to attempts to manipulate people or processes against the
organizations best interests and intentions? And if we could, would employees
be sufficiently interested and would they want to be trained?
Training is of course possible; the question is whether it is economically
and practically feasible. Few organizations would be able to afford the cost of
sending large numbers of employees on a college-level, comprehensive course
on fraud and corruption. Neither is it necessary for every employee to achieve
the same level of competence that a manager of corporate responsibility, human
resources, audit or security might need. Awareness does not require complete
understanding of the subject.
Acquiring the necessary knowledge and perception may not need a great deal
of time, but it does require that the student participate in the learning process.
We need to capture the interest of employees so that they will understand and
absorb the essence of fraud awareness. The challenge is therefore to overcome
employees initial indifference and inspire lasting fraud awareness, in a short
amount of time and at a reasonable cost. In other words, we need to bring the
subject to life.

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The Anatomy of Fraud and Corruption

Experiential Learning
Experiential learning is the process of making meaning from direct experience
(Itin, 1999) and focuses on the learning process for the individual. Instead
of hearing or reading about others experiences, one makes discoveries and
experiments with direct knowledge. An example of experiential learning is
diving underwater and learning through observation and interaction with the
water environment, as opposed to reading about animals and sea plants from
a book.
Experiential learning doesnt necessarily require a teacher and relates only to
the means of making process of the individuals direct experience. According to
David Kolb (1984), knowledge is continuously achieved through both personal
and environmental experiences. However, for a real learning experience to take
place, there are several prerequisites:

the individual must accept to be involved in the experience;

the individual must be capable of reflection on the experience;

the individual must possess and be able to apply analytical skills to


conceptualize the experience; and

the individual must be able to make conclusions, and must possess


problem-solving skills in order to use the new ideas gained from
the experience.

The value of experience as a tool in the creation of knowledge and the


development of human growth was seen as early as the fourth century B.C.
their using the language of knowledge is no proof that they possess it (Aristotle
according to Bynum et al. 2005). By this statement, Aristotle explains that theory
is not understood until a person is able to apply it. The notion of learning by
doing has a long history. A familiar caricature is the father throwing his son
in the pond, so that he might learn to swim. When it is a question of sink or
swim, some guidance and supervision can be indispensible. Early on, outdoor
instructors adopted experiential education as a way of learning in the open air.
In a similar way, adventure education programmes use real-world experiences
to reach their learning objectives. The value of deliberately using experience
as a means of formal learning in an educational setting was first recognized
by John Dewey, who challenged teachers in the early decades of the twentieth

The Case for Experiential Learning

129

century to develop learning programmes that would not be separated from reallife experience. However it was not until the 1970s that experiential learning
became a recognized field of education.

Experiential or Book Learning?


It would be hard to imaging learning to ride a bicycle by reading books in
the library. Riding a bicycle requires training reflexes that are controlled, at
least in part, by the subconscious. The typical first training session will be a bit
frightening, but fun, even exhilarating. The necessary expert, perhaps a loving
parent, knows how to get started and helps organize repetition until the riding
a bicycle is routine. The real enthusiasts might complete their knowledge with
a theoretical study of aerodynamics, gyroscopic effects or mechanics, racing
strategy and so on, but learning the basics absolutely requires experience; we
have to train our subconscious reflexes and instincts.
Learning about quantum physics is necessarily abstract; scientists may
organize and observe elaborate experiments and observe the results through
their instruments but the observations are indirect and the mathematics are
abstract and too complex for most of us to understand at all, let alone to
experience. Experiential training is not always a suitable substitute for other
methods of study.
That is not to say that an experiential approach can never be used to learn
abstract concepts. Dr Maria Montessori (1912) recognized that children learn by
doing, and created a learning environment with materials designed to allow the
child to experience directly mathematics, science, art, history, language and so
on. Perhaps especially for an abstract subject such as mathematics, experiential
learning can bring the concepts literally within our reach, and Montessoris
methods have helped countless children to truly understand, rather than
memorize. When learning requires training the subconscious, which controls
our reflexes and much more, the experiential approach is not only useful, but
indispensible.
Examples of the use of experiential learning today can be role playing
(designed to build specific functional skills), decision-making exercises
(including risk analysis, self-confidence, self-evaluation and perception), debate
exercises (aimed to help students to understand both sides of a controversial
issue), critique and evaluation exercises (where students are told about a
decision taken and are required to criticize the decision). Even if there are

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The Anatomy of Fraud and Corruption

several ways and different methods of working with experiential learning, the
common elements for a successful of experiential learning are:

Feeling; the learning has to involve emotions;

Happening; the learning includes an experience;

Awareness; the learning involves an expert who brings to knowledge


the rules and codes which will allow the student to succeed; and

Repetition; there is an element of reiteration of the experience to


transform awareness into learning. Enough repetition could further
transform this learning into a routine.

Riding a bicycle, playing the piano or solving complex mathematical


problems are activities that we can do alone. No social skills are necessary.
Playing monopoly, selling used cars and performing magic tricks on the other
hand requires that we interact with other human beings, make conclusions
about their state of mind and even influence or manipulate their behaviour.
Just as with autonomous activities, we can improve our manipulative abilities
through practice. We also learn through practice to resist being manipulated
ourselves. Magicians do not like to repeat the same trick too often, because
spectators will eventually catch on.
Organizations have an interest in teaching their employees to avoid being
manipulated or deceived by would-be fraudsters and con artists, and to
recognize signs of potential deception. These fraud awareness skills require
a practical understanding of processes and procedures, and alertness to spot
the subtle signs of deception. While our subconscious is adept at detecting
deception, in a non-threatening environment we tend to ignore the sixth sense
telling us something is wrong. Hamlet, in the citation at the beginning of this
chapter, is in a threatening environment with his senses on full alert. His father
has been murdered, and Hamlet correctly suspects his uncle and stepfather,
the new king, was responsible. Because Hamlet is alert to the possibility of foul
play, he easily sees through his friends attempt to manipulate him, and rebuffs
him. Can our employees, like Hamlet, become alert to attempted manipulation?
Can we use experiential training as a technique for becoming alert, and raising
fraud awareness?

The Case for Experiential Learning

131

The Art of Deception


As discussed in Part I, human beings are masters of deception. We are skilled
deceivers and also skilled at detecting deception when we follow our instincts.
The ability to commit fraudulent and corruptive acts is not only a part of
human nature, a part of our natural behaviour; it is also a part of our learned
behaviour, a cultural phenomenon.
Given our natural talent for deception, it is rather surprising that most
people are relatively nave when it comes to recognizing fraud and corruption.
Perhaps the explanation is that we dont consider the deception we do ourselves
as dishonest; it is performed within the bounds of what society allows, the
rules of war, or within the limits of our own conscience. We have rationalized it,
and our behaviour is not at variance with the norm as we have defined it. Fraud
perpetrated by someone else, we see as dishonest, culturally unacceptable, and
we dont expect it. This is a great advantage for the fraudster, who relies on the
gullibility and naivety of his victims, or its employees.

Targets, Victims and Bystanders


Fraud always involves deception. Generally speaking, the fraudster obtains an
unjust advantage through the erroneous actions (or failure to act) of the target,
a deceived person or organization. The target may also be the victim of fraud.
Or the victim might be an innocent third party that can be defrauded through
misuse of some privileged access held by the target. In a simple credit card
fraud, for example, the fraudster might use a stolen password to gain access
to a merchants computer system to obtain customer credit card details. The
fraudster has deceived the merchant (the target), posing as an authorized user
of the computer system. The merchant has privileged information about users
credit card numbers, which would not normally be divulged to an unauthorized
user. The fraudster gains an unjust advantage by using the stolen card data, or
selling it. The victims are the credit card holders, or their banks.
Or in another example, the target might be an employee in a large
organization, and the victim the organization itself. The employee target has
privileged access to the organizations systems, and can initiate or approve
transactions. The fraudster, who may or may not be an employee, deceives
the target to initiate or approve a transaction that is against the interest of the
organization and creates an advantage for themself.

132

Figure 11.1

The Anatomy of Fraud and Corruption

Relationships between the fraudster, the target and the victim

There may also be bystanders, that is to say persons who have no active role
in the fraud but knowingly or unknowingly witness all or part of the deception.
Like the target, the bystanders may be fooled by the deception. For the fraud
to succeed, bystanders must remain passive and not reveal the deception.
Preferably, in the fraudsters mind, the bystanders will not understand the true
situation. In a single fraud case, there might be one or more targets, victims,
bystanders and even fraudsters.

The Expected Learning Cycle (or Typology of Fraud from a


Pedagogical Perspective)
It is our premise that organizations can be made more resistant to incidents
of fraud and corruption, and sometimes avoid such incidents altogether, by
training their employees to be more aware of the risks, to recognize the signs of
deception and thereby stop the fraudsters attempt to defraud the victim. This
chapter will explore how the method of experiential learning can be applied as
a technique to both raise the awareness of fraud and corruption and as a means
to provide the trainees with useful tools for dealing with concrete situations
when they arise.

The Case for Experiential Learning

133

Writers in the field of experiential learning use the term with two different
meanings. On one hand the term is used to describe the learning that comes
through the possibility of applying knowledge, skills and feelings to a direct
specific setting. Experiential learning involves, according to Borzack (1981),
a direct encounter with the phenomena being studied rather than merely
thinking about the encounter, or only considering the possibility of doing
something about it. Individuals are encouraged to take responsibility for their
own learning and the emphasis is on the process of learning itself.
The second type of experiential learning is, education that occurs as a
direct participation in the events of life (Houle, 1980). In this case learning
is not supported by trainers but by people themselves. It is learning that is
attained through reflection upon everyday experience and is the way that most
of us do our learning.
In the real world, individual employees in a complex organization only see one
small part of what is happening and very rarely are given the chance to experience
a fraud event from the beginning to the end. The salesman sees one part, the
accounting clerk another part, the factory foreman, the procurement manager, the
controller and so on each see a small part of the fraud from a different, narrow
perspective. The fraudster does not need to deceive everyone at the same time,
but instead takes advantage of the complexity and disarray that are a natural part
of any large organization. And to the extent they are deceived, the targets and
bystanders do not realize at the time that they are witnessing a part of a fraud.
Thus the experiential value of actual fraud events is pretty limited.

Simulated Experiential Training


However, is it possible to experientially learn about how fraud and corruption
takes place without experiencing it directly? Is it possible to simulate deception
and fraud situations in such a way that individuals are given the opportunity to
develop their skills and be prepared to deal with a real situation in the future?
Much of the literature on experiential learning is actually about learning from
primary experience. However we believe the work of D. A. Kolb and his associate
R. Fry can also be applied to a simulated experience. Fraud is harmful and even
dangerous so we would not deliberately involve employees in real ongoing fraud
situations as a training device even if it were possible, but we can insert them into
simulated situations to help them learn about fraudulent and corruption schemes
and how the different actors might behave when deception takes place.

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The Anatomy of Fraud and Corruption

The Learning Circle


Kolbs interest lay in exploring the processes associated with making sense of
concrete experiences. Together with Fry (1975) he developed a model out of
four elements: concrete experience, observation and reflection, the formation
of abstract concepts and testing in new situations. He represents these in the
Experiential Learning Circle:

Figure 11.2 The Experiential Learning Circle as described by Kolb

Concrete experience is followed by observation and reflection on that


experience on a personal basis. Based on their observation and reflection,
individuals then try to make sense of their experience, to explain and understand
how it fits into the general scheme of things (forming abstract concepts). With
their new understanding, which might be more or less accurate or inaccurate,
individuals can devise ways of modifying the next event or experience (testing
in new situation). That would lead in turn to the next concrete experience and
the next cycle where individuals reflect on the outcome, refine their abstract
concepts and test new situations.
According to the nature of each individual and the particular situation, the
learning circle can begin at any one of the four points, and it should really be
seen as a continuous cycle. However, in practice, the learning process often
begins with a person performing a specific action and then seeing and feeling
the effects of their action in this situation. The second step is the person trying

The Case for Experiential Learning

135

to understand these effects in the particular example so that if the same action
was taken in the same situation it would be possible to predict what would
follow as a result. The third step would be to understand the general principles
and rules under which the particular case falls.
We usually think of learning as an individual capability; can an organization
that is a collection of individuals also be capable of learning? In many industries,
for example aeronautics or telecommunications, the final product is so complex
that no single individual fully understands it. Yet there is a common body of
knowledge in the organization that does; collectively the organization has
the knowledge to design, produce and maintain the complex product. Many
experts in different fields are competent for various components, others for
overall design, documentation, logistics, manufacturing and administration.
Most employees probably have a general understanding of the product, that is
to say what it is for and who are the customers. It follows that an organization
is capable of learning, able to change and improve, and therefore we can apply
the learning cycle as if to an individual.
Awareness of fraud and corruption can also be treated like other areas of
knowledge within the organization. A few experts with a deep knowledge
of the subject are needed. Communications and training expertise is needed
to disseminate knowledge throughout the organization. Managers require
special competence to advise employees and correctly respond to incidents.
All employees require general fraud awareness so that they are equipped to
handle dilemma situations within their particular spheres of responsibility and
so that they can recognize signs of improper activities and know how to bring
these signs to management attention.
While an actual incident of fraud or corruption is an undesirable event,
when it inevitably occurs organizations should not miss the opportunity to
learn from the experience, understanding what went wrong. Incidents might
also become the inspiration for case study simulations for training purposes,
with trainees either making decisions to address the simulated incident, or
observing the decisions being made by others. Using actual events, true stories,
for case studies also increases the credibility of the simulation for trainees. One
can say, this really happened.
Following the learning cycle described above it should be possible to use
actual or simulated incidents as a learning tool which should help the individual

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The Anatomy of Fraud and Corruption

and the organization develop the ability to see a connection between the actions
and effects over a range of situations.
Persons and organizations that have learned in this way may well develop
various rules and generalizations about what to do in different circumstances.
They will be able to say what action to take when, for example, a supplier is
deliberately inflating an invoice, or when they notice an unusual change in the
lifestyle in one of their colleagues. All this may happen in a flash, or over days,
weeks or months, depending on the topic, and there may be a circles within
circles process at the same time.
One could argue that there may be difficulties when trying to apply lessons
learned during one fraud incident or simulation to other settings and situations.
However it should be possible to define footprints and paths, the abstract
concepts, which can then be adapted and applied to the specific situation.
Many organizations however miss the learning opportunity.
When an organization experiences fraud, as a victim or target or both, it is
tempting to jump to the conclusion that management is to blame. An incident
of fraud seems to be evidence of management failure, on the premise that
competent management would have prevented the incident from occurring.
Because of this common misperception, managers therefore tend to treat
fraud incidents as embarrassing events that need to be quickly resolved and
buried with as little attention as possible from their superiors (or worse yet, the
media). This tendency is unfortunate, since organizations miss the opportunity
to analyze and use incidents as a learning experience for the organization and
for its employees. A healthier attitude would be that incidents of fraud are
inevitable in any large organization, but that the costs can be contained through
good management. When incidents are detected and competently addressed, it
is evidence of management strength, not weakness.
However, even if organizations would make full educational use of their
fraud experiences, they naturally would prefer to avoid them. Fraud incidents
create a learning opportunity but not a complete training solution. A more
economical and predictable form of training is needed. So how can we use
the power of experiential training without the inconvenience of actual fraud
incidents? One possible solution which we are exploring is use of the theatre
metaphor as an instrument of quasi-experiential training. One could also say
that this is a way of using generalized experience from many different instances
of fraud, making them transferable to others.

The Case for Experiential Learning

137

Role Play and Theatre


In a role play or theatre situation, the participants see the entire chain of events
as they are presented, rather than a small piece. Participants have no trouble
recognizing the deception and reflecting on their own reactions, as they are
now the scientific observers. The fraudsters actions now become as transparent
as those of the chimp stealing food as described in the opening chapters. The
participants also see how easily the various characters, who do not see the big
picture, are deceived, and are able to reflect on how they would react in the
same situation.
In the following chapters we will describe in more details some of the
methods and techniques that the authors have put into practice in their
awareness programmes to train employees at all levels in identifying and
recognizing the signs of deception and learn how to react to a fraud incident.

Summary
In this chapter we suggested that it is difficult to raise fraud awareness, or
to learn to ride a bicycle, without practical experience. We discussed how
the theory of experiential learning can be applied as a method to both raise
individual and organizational awareness of fraud and corruption and also
provide trainees with useful tools on how to deal with concrete situations in
the future. While real fraud incidents provide valuable lessons, they do not
fill the training need. In order to provide the required practical experience,
we need to use simulation. People without experience in fraud and corruption
situations may be nave concerning the risks. But most people are skilled in
the art of deception, having learned it at an early age in the normal course
of development. Our task is to take this understanding of deception and
demonstrate how it is applied in fraud and corruption situations.

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12

Using the Drama Metaphor as a


Training Tool
Ill have grounds more relative than this: the plays the thing. Wherein
Ill catch the conscience of the king.
Hamlet, II, ii, 605

Fraud and Acting


Fraud is always based on deception. The target acts, or fails to act, based on
an incomplete understanding of the situation. The victim of the fraud suffers a
disadvantage or loss as a result of the deception, and the fraudster benefits.
Corruption does not necessarily require deception, but its perpetrators
generally prefer to hide their corrupt behaviour behind a mask of legitimacy.
Bribes tend to be illegal or at least improper for both the proposer and the
acceptor, and exposure might jeopardize their purpose.
As we discussed in Part I, in The Social Reconstruction of Fraud and
Corruption, social interaction can be described as a drama metaphor, with
acts, characters and scenes. We are able to make sense of a situation when we
can satisfactorily identify the act, scene, agent, agency and purpose, or in other
words answer the questions what, where and when, by whom, how and why.
When something is missing or out of place, we are suspicious and confused, or
mystified.
We cannot remain in a mystified state, we have to either satisfy our
curiosity through further reflection and investigation, or else deliberately
accept an unsatisfactory answer and move on to the next situation, emulating
the ostrich and sticking our heads in the sand, as it were. In the case of

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The Anatomy of Fraud and Corruption

fraud, the fraudster of course does not want bystanders to investigate. In a


perfect fraud, there are satisfactory answers to every question; bystanders
are completely deceived and mystification does not occur. In most cases,
however, the fraudster cannot create a completely coherent and consistent
alternate reality. Deviations occur when the fraudster finds ways to bypass
internal controls. Some things will be out of place and some mystification will
occur. The fraudster relies on bystanders accepting answers that are not fully
satisfactory. Through fear, wishful thinking, group pressure, time pressure,
rationalizations or simple indifference, bystanders might be motivated to fill in
the gaps with imperfect answers, and move on. As a result the fraudulent and
corrupt behaviour continues and remains unnoticed in the organization. When,
however, employees are alert and fully aware of the risks, mystification is more
likely to lead to suspicion and investigation. Awareness may thus be one way
of preventing or detecting fraud and corruption. By raising their awareness,
we make it more difficult for bystanders in a fraud situation to resolve their
mystification with inaccurate explanations, and thus more likely that the fraud
will be reported and investigated. Shakespeare, as he often did, said it best:
All the worlds a stage, and all the men and women merely players;
they have their exits and their entrances; and one man in his time plays
many parts
As You Like It, II, 7, 139
So we are all actors to some extent. Fraudsters, in their active or passive
deception can certainly be compared to actors. Both the fraudster and the actor
are acting out a fiction as though it were true. Success or failure depends on the
believability of their performances.
It does not follow that acting is fraud. The actors audience is aware the
performance they watch is fiction. They are complicit to the fiction; they want to
be deceived because they find it entertaining. The actors audiences are bystanders
and cannot be considered victims, unless of course the actors fail to provide a
convincing and entertaining performance, as in Mark Twains (1885) story!
Well, that night we had OUR show; but there warnt only about twelve
people there just enough to pay expenses. And they laughed all the
time, and that made the duke mad; everybody left, anyway, before the
show was over, but one boy which was asleep. So the duke said these
Arkansaw lunkheads couldnt come up to Shakespeare; what they
wanted was low comedy

Using the Drama Metaphor as a Training Tool

141

The duke blamed his lack of success on the stupidity of the audience, rather
than his own lack of talent. But while he was a poor actor, he was successful as
a fraudster. Acting is apparently the more difficult profession.
While acting is not fraud, fraud often involves a kind of acting. The fraudster
creates the deception, or takes advantage of a deceiving situation. When the
fraudster is, for example, an employee deceiving their employer, they must play
a role that is consistent with the deception, and possibly keep up the faade for
years. Bystanders mystification must be avoided or satisfied. Fraudsters may
be extremely believable, so comfortable with the role that they can even fool
themselves and believe their own lies. At the same time fraudsters have an
advantage over their targets as compared to an actor, in that the fraudsters
targets do not expect to be deceived. If the target also personally knows the
fraudster, as a work colleague for example, then the fraudsters advantage is
even greater. The target trusts the fraudster.

The Fraud Play


Although improvisation is used to some extent in the world of theatre, actors
generally perform according to a predetermined script. They know in advance
what the other players are going to say and do. Part of their craft involves
acting surprised, happy, sad, angry and so on at the right moment, as though
spontaneous. In this and in following chapters, we have included by way of
example excerpts from a short play specifically intended for use in a fraud
awareness training context.

Sketch 12.1

The agents contract

Nick Elback, Regional Sales Manager, flashed a smile to his reflection in


the window as he enters. It was going to be a very good year!
Nick: Good morning Russ. Heres the file for the new market agent I

called about. Draft contract, due diligence report, company

registration its all here.
Russ: These are in Arabic!
Nick: What do you expect? Its an Arab country. Look, the contract is in
English.
Russ: (He looks at the contract) With a bank account in Switzerland?

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The Anatomy of Fraud and Corruption

Nick: So? Thats not illegal. Listen, this agent is a rich man. Very

well connected to the Royal Family. We are lucky to get access to

his services.
Russ: Well, I guess so. Its odd how many of our agents have bank

accounts in Switzerland, dont you think?
Nick: Not at all I keep several accounts there, dont you? Just kidding
Russ, just kidding!
Nick chuckles as he leaves the room, as Russ stares after him, not finding
it funny at all

The Fraudsters Act


Fraudsters follow a predetermined script of their own creation. They
dont know exactly what the other players will say or do, but they do have
expectations based on prior experience, on how people might react and how to
meet different reactions. A convincing fraudster is a master of improvisation.
If some part of the deception is discovered, the fraudster is prepared to act
surprised or to supply the proper emotion as though also deceived. In common
with some actors, fraudsters may become totally immersed in their roles, they
are permanently in character, living truthfully under imaginary circumstances
(Meisner and Longwell, 1987) even when they are offstage.
The success of actors and the authors who write their scripts is measured
in terms of entertainment and impact. Unrealistically high doses of emotion,
drama, humour and message are concentrated into a relatively short
performance. The audience is deliberately stimulated to laugh, cry, think and
understand the moral of the story.
It could be argued that fraudsters succeed by putting their audience to
sleep. They do not want to entertain or teach a lesson; they want to distract
the target and bystanders from the danger areas so that they dont notice the
red flags or become mystified. The last thing the fraudster wants is for the
audience, targets and bystanders, to become curious or suspicious and to begin
to investigate discrepancies. That is not to say the fraudster must be a boring
character. A fraudster might be the unfriendly loner, or excessively witty and
charismatic, even overpowering in the case of the narcissist. But their charisma
is used to divert the audience from the true story line, not to illustrate it.

Using the Drama Metaphor as a Training Tool

143

The fraudster helps bystanders resolve their mystification by getting them to


accept unsatisfactory explanations. They create illusions not for the audiences
best but for their own. This is why we call fraud immoral and acting amusing
or developing.

Table 12.1

Comparing the actor and the fraudster

Actor
Acting on an artificial stage
Acting a fiction
Entertaining story
Follows a script
Audience aware of fiction
Short performance
Audience watches
Actor is a third party
Other directed interest

Fraudster
Acting in a real-life setting
Living a lie
Distraction
Follows a plan, improvised script
Audience is truly deceived
Never ending story
Bystanders participate
One of us
Self-directed interest

Acting is not a form of fraud. But the fraudster is nonetheless performing,


to a certain extent, as an actor would. Is it possible to take advantage of this
similarity and design training tools that will raise employee awareness and
frustrate the real fraudsters? We think so. The resemblance between acting
and deception for the purpose of fraud creates an opportunity to use the
drama metaphor as quasi-experiential educational tool. It is not practicable
to arrange true experiential training for employees by involving them in real
fraud incidents. We can however simulate our own fraud drama, with real
actors and a realistic scenario. Perhaps the scenario is drawn from an actual
past incident. The audience, our trainees, will directly or, if necessary, with
some help, observe the behaviour, deceptions and circumstances and thereby
improve their own ability to recognize signs of deception when they occur in
real life, spot weakness that might tempt potential fraudsters, and even better
understand an action that could be taken to prevent fraud. And if an actual
or potential fraudster is present during the performance, going through the
drama may lead to some degree of second thoughts or even insights that might
deter fraudulent actions. Rationalizations become more difficult. The innocent
fraudster awakes. The committed fraudster suffers stress. In Hamlet, the king
was tricked into watching a play that mirrored his own crime. He become upset
and abruptly stood up, stopping the play and revealing his guilt.

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The Anatomy of Fraud and Corruption

Drama as a Training Tool


In a theatre setting, the audience will very quickly understand the plot,
complicated sub-plots, and the true nature of the characters being acted out.
They do not require detailed explanations; they see and feel the truth. They are
in other words aware. An aware and alert audience will notice small details
and easily understand their significance. When watching a talented magician,
the audience is looking for the subterfuge. They may not find it, but they know
its there. In a real fraud situation, on the other hand, the victims and subjects
can be deceived for years, and never suspect they are being fooled. They are
not alert, they are unaware. They may see the small details and anomalies, and
perhaps even think to themselves, Isnt that odd? But, as compared to theatre
audiences, they are not watchful to the possibility of deception and resolve
their mystification too easily or are not mystified at all.
If only we could train our employees to be as vigilant to trickery as the
theatre audience! Perhaps we can, by putting them in a theatre setting as the
audience, where they will automatically assume the high state of alertness
drama spectators possess. The theatrics included in awareness training can be
simple or complex, depending on the objectives. In one event, a fully scripted
mini-drama written by Nigel Iyer (2008) was produced, using both professional
and amateur actors in a dinner theatre setting. In this event, a company setting
was used, where the actors played key management employees in a fictive
company, and the audience was addressed as if they were also employees who
had been invited to a company event. Real-life managers also played roles in
the piece, side by side with the professionals and much to the amusement of
the audience. The results exceeded expectations. The participants were clearly
entertained, and the play made a lasting impact on many of them. A more
detailed description of the dinner theatre setting as tool to raise fraud and
corruption awareness will be described in a later chapter.
While dinner theatre might not fit every organizations training needs, there
are other ways to apply dramatic technique. A fraud drama might be recorded
as a video, for example, and used alone or in combination with other training
methods. Or in a classroom setting, simple role-playing scenarios can be used,
where the trainees themselves play some of the parts.
Some methods are less intrusive than others but they are all intended to
make the audience experience similar situations to the ones they would or
could face as bystanders, targets or victims of the fraud in real life so that when

Using the Drama Metaphor as a Training Tool

145

the time comes they will notice the signs and with a heightened awareness, be
mystified, and frustrate the deception when they search for answers.

Sketch 12.2

The whistleblower

Its getting late, and Dawn has just cleared and locked her desk, the end
of her daily routine. After six months at Deluxtronics Ltd they have finally
put her label outside the door Room C010816, Dawn Rade, Internal
Audit. She is surprised to have a visitor now, Leigh Wey from accounts.
Leigh: Am I disturbing?
Leigh is apparently nervous, even looks back over her shoulder to check
that nobody has seen her come in.
Dawn: No, please sit down Leigh.
Leigh: Thanks, but I just wanted to drop off something you might be

interested in.
Dawn: Well, all right, but what is it about?
Leigh: If you dont mind, I would rather you have a look first, then if you

like we can talk. I think you will find it interesting reading.
Short silence as Dawn takes the file and opens it
Dawn: What on earth is this? Where did you get it?
Leigh: Got to go
Dawn: Thanks a lot.
Leigh is already gone. Dawn unlocks her desk again and starts to read.
She is clearly intrigued by the papers, and leafs through them quickly,
looking for something.

We made the point in the first pages of this book that when fraud is detected,
it is usually by accident or as the result of a tip. The term whistleblower is
sometimes used for the person providing the tip, and in the short scene above,
Leigh is playing that role. Dawn, the internal auditor, is given a file which

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The Anatomy of Fraud and Corruption

contains something shocking; evidence that fraud is taking place. The actors
are setting the stage for the fraud drama.

Role Playing
As the Oxford English Dictionary states, role playing is the changing of ones
behaviour to fulfil a social role. The behavioural change can be unconscious
in the case of filling a social role, or conscious, when a person acts an adopted
role.
The term role playing was first used in the 1920s by Jacob L. Moreno, a
Viennese psychiatrist who concluded that patients achieved more from learning
about their problems by acting them out than by talking about them (1947).
In social science, role playing refers to psychodrama and sociodrama.
While psychodrama deals with the personal role, sociodrama deals with the
collective aspects of a role (Dayton, 2004). Role playing follows the lines of a
theatre performance and includes many actors. The participants are put into
hypothetical situations, usually playing as themselves rather than as another
pretended person. They are the main characters. Their lives or abilities and their
roles, are the ones that are observed and analyzed. The secondary characters
include anyone else who put the main characters within the situation. The
audience is any watcher who may provide feedback. The stage is where the
performance takes place, and the director is the expert who guides the exercise,
perhaps as the facilitator in a workshop.
Role playing can be used for teaching communication skills, interpersonal
skills, leadership training, organizational management, professional training
and even sports. It can also be an effective teaching technique for raising
employees awareness and vigilance for the risks of fraud and corruption.
One reason that role play is so effective is that it forces participants out
of their comfort zone and into a danger zone, into the spotlight of attention.
As with any dangerous situation, the adrenaline flows and the challenge
commands the full attention of the participant! But by avoiding the dangers
of the real-life situation, role playing allows participants to test a new action
repertoire without suffering from real panic.

Using the Drama Metaphor as a Training Tool

147

Through role play, trainees could learn not only about fraud and fraudsters
behaviour but also about how victims, informants, management and all the other
corporate players behave and react in suspicious or fraudulent situations.
Awareness to fraud and corruption and the ability to detect signs of
malicious deception is a valuable skill. Our subconscious is already equipped
with formidable tools for recognizing deception, but we need to train ourselves
to be alert for the signals so that we can take conscious defensive actions.
Training by the book is not enough; experiential training is called for. We cannot
build a training programme around real fraud incidents as they are happening,
but we can simulate the incidents using the tool of drama.

Summary
Children learn the reflexes of cycling under the watchful eyes of their parents,
with a couple of training wheels. Fighter pilots make extensive use of simulators
to learn how to handle difficult situations that would be too dangerous to
teach in the air. Pilot simulation training is necessary in order to provide the
hands on experience the pilot might suddenly need in the performance of his
normally routine duties. In the same way, we can use the drama metaphor as
a simulator, and use role playing to give people concrete experience on how
a typical fraud incident would or could take place in the real life. It allows
participants to acquire the hands-on experience they cannot obtain from other
kinds of training. With the learning acquired it becomes possible for trainees
to define for themselves general rules describing the experience. They can
then use these rules to recognize and proactively modify the next occurrence
of the experience, taking actions that will lead to discovery and frustration of
actual incidents. When fraud and corruption take place for real, the more alert
bystanders will be more likely to be curious and suspicious, less likely to accept
unsatisfactory explanations to the inconsistencies they notice. Experiential
training is also a convenient way to make awareness training entertaining in
order to attract employees attention and make an impact during a relatively
short training period.

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Establishing the Norm

13

This above all: to thine own self be true, and it must follow, as the night
the day,
Thou canst not then be false to any man
Hamlet, I, iii, 78

Code of Conduct
One of the principal responsibilities belonging to the highest level of authority
in any organization is to establish the ethical values that the organization
will follow. In a simple corporate structure with a Board of Directors, Chief
Executive Officer (CEO) and an executive management team, the Board has
the responsibility to approve and monitor the companys ethical values. They
appoint and direct the CEO and the executive team, who through their policies
and actions determine the shape of the organizations ethical behaviour on a
daily basis. The Board is also responsible for reviewing the performance of
the executive team, monitoring that they do what is necessary to ensure that
operations take place within the ethical framework the Board has defined
and approved. It is apparent that in an organization with many thousands
of employees, mechanisms are needed to ensure that each employee is acting
within the mandated ethical framework. The Board should therefore approve
a formal code of conduct for the organization, ensure that it is effectively
communicated throughout the organization, and ensure that compliance is
monitored. The code of conduct might have another name or consist of one or
more documents, web pages or brochures. Thus we see statements of ethics,
corporate values, responsibility and Corporate Governance.
No matter how well designed, a written code of conduct cannot be
sufficiently detailed to clearly establish the norm for employee behaviour in
every situation. It is simply not possible to foresee every specific ethical dilemma

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The Anatomy of Fraud and Corruption

that might occur and to define the appropriate response. Neither is it practical
to do so; if the document is too long, few will read or remember it. Because it
must be concise, the code of conduct can only provide general guidance. It is
up to each individual in the organization to interpret the general guidelines
and apply them to the specific situations they encounter. If the employees, and
their direct managers, have not received the necessary guidance and training
that would enable them to recognize ethical dilemmas and competently make
the right decisions, then they are less likely to recognize the situation or make
the right choice.

Moralize
In Part I we used the word moralize as the verb form of morale. Our goal is to
cultivate and deliver morale. We have seen that fraud and corruption succeed
in part because fraudsters rationalize their behaviour, while bystanders fail to
recognize or react to activities that are in variance with the norm. If the norms
themselves are not clearly defined or understood, it is of course more difficult
to recognize deviant activities. But, on the other hand, if the organization can
clearly define the norm and ensure employees understand and can apply
its principles to different situations, it becomes more difficult for fraudsters
to rationalize their actions and for bystanders to ignore the deviations they
observe.
Fraud awareness training is necessary for raising employee understanding
of the code of conduct and organizational values, but another awareness tool
is also important in this regard. Often called the tone at the top, the personal
example set by the leadership, members of the Board and top management is the
most important element in establishing the ethical direction of the organization.
If top managers by their own example demonstrate the code, and ensure that
lower levels of management understand and follow the same practice, then
employees will more easily understand and follow the rules themselves. If, on
the other hand, top managers imply by their words and actions that they are
above the code of conduct, not bound by it, then managers and other employees
at lower levels will tend to also ignore the rules, and to define in practice more
convenient norms to govern their own behaviour.

Establishing the Norm

Sketch 13.1

151

Starting to dig

Dawn Rade of Internal Audit drops by the office of the Marketing


Controller, Russ Tecarr. A huge safe takes up half the office, so there is
not much space left for visitors.
Dawn: Russ, I need to understand better how we deal with sales agents

and marketing consultants. Can you straighten me out?
Russ: Well, OK. I may not be the right person to ask, but go ahead.
Dawn: Can the payments to these consultants be large?
Russ: Huge. They can earn 2 or 3 per cent of project sales, sometimes

more. The payments can be millions of euros
Dawn: Must be a popular job! Who selects which consultants to use?
Russ: Normally the regional sales managers, or the head of sales.

They know their markets, and how they work.
Dawn: OK, but how do we know these consultants are not just

mailboxes with a bank account?
Russ: Between you and me, some of them are just mailboxes. See

this company in the Cayman Islands? Its used to pay bonuses

to senior management.
Dawn: Are you serious? Isnt that illegal? Like, tax evasion for

example?
Russ: Not necessarily. The payments go to a pension fund that the

bosses cant touch until they retire. We have a legal opinion on

file approving the whole setup. Its all kept very confidential of

course.
Dawn: Yes, of course!

The policies and values that top management themselves follow and apply
to their own behaviour determine what policies and values will be followed
in the organization, regardless of what is written in the code of conduct. In an
organization where the top managers pay themselves secret bonuses, abuse
expense privileges or otherwise misuse their power for personal benefit, other
employees are unlikely to pay much attention to an ethics statements or code
of conduct.

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The Anatomy of Fraud and Corruption

Risk Appetite
Another responsibility that rests with the Board or highest authority is to
consider and monitor the major risks and opportunities facing the company.
The Board decides what level of risk is acceptable for each risk area and
instructs the CEO and the executive team to manage the risks accordingly. For
certain financial risks, the Board might set specific quantitative limits, such as
setting a maximum amount of credit that may be granted to a single customer,
or establishing a formula for limiting the amount of foreign currency exposure.
The Board must also ensure that the CEO has adequate resources to implement
their risk decisions.
The risks of fraud and corruption are not easily definable or quantifiable,
but the Board must anyway consider these risks and instruct management on
how to manage them and what level of risks to accept. The Board must also
ensure that sufficient resources are dedicated to adequate internal control,
appropriate code of conduct and other polices, and communication of these
polices to all employees.
If we accept as realistic the surveys by PricewaterhouseCoopers (2007), and
by the Association of Certified Fraud Examiners (2008), which examine the
cost and frequency of fraud, then we have to conclude either that fraud costs
in the neighbourhood of 5 per cent of sales is reasonable, or that Boards and
managements have been largely unsuccessful in their fraud risk management
efforts. We believe the latter explanation; we are simply not good at managing
fraud risks. What is the reason for this failure?
Perhaps the explanation is that the Board and management have traditionally
relied on internal controls, in the belief that strong internal controls will prevent
fraud. At the same time, too little attention has been paid to raising employee
awareness. Lets recall for a moment our discussion of rationalizations from
Part I. Persons with type one rationalizations, who have detached themselves
from the norms, will find a way to create the opportunities they need. They will
defeat even the best internal controls. But if the employees who maintain the
controls are made aware of the risks, and easily suspicious, then the fraudsters
task becomes much more difficult and the possibility of detection much higher!
They will not be cured, but they will find things uncomfortable, and will
perhaps look for another, less vigilant organization to defraud.

Establishing the Norm

153

Then we have potential fraudsters with more benign rationalizations,


described as decadent, devoid and denial. These are the people we can cure!
Or rather, we can remove their rationalizations through awareness training.
An effective training will make it difficult to rationalize that the organization
is decadent, that everybody is doing it (unless the organization is in fact
decadent, in which case they are not likely to conduct training in the first place).
In the devoid category, lack of awareness is the whole problem, readily solved
through training. Finally we have category four, the denial rationalizations.
Persons in this group are able to commit fraud subconsciously, by lying to
themselves about their honourable intentions. Fraud awareness training for
them is likely to be stressful as they will be forced into a conscious recognition
of their actions. They will have to either end their fraud, or detach themselves
from the norm, joining category one.
Perhaps we should point out that the great majority of participants in
awareness training sessions are not likely to be burdened by serious offenses
on their conscience. By exposing potential rationalizations, they are more likely
to remain that way.
Fraud awareness training includes communicating the ethical values
approved by the Board and management throughout the organization, and
giving participants the tools they need to uphold these values. It does not
make sense to issue documents claiming high ethical values unless the Board
has earlier established and agreed the level of risk the company is willing to
accept when it comes to fraud and corruption. It would be appropriate for the
Board to consider fraud awareness training in this regard, as a means to reduce
risks to the accepted level. In practice, corporate functions such as Corporate
Responsibility, Legal, Human Resources, Internal Audit and others may play a
pivotal role in reminding the Board of their responsibility, proposing practical
solutions, and carrying them out with managements approval.

Understanding Integrity
Integrity is not an abstract quality. In an organizational context, integrity refers
to consistency between what is said and what is done, between policy and
practice. Unfortunately, one often sees empty rhetoric in the code of conduct
and other communications such as:

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The Anatomy of Fraud and Corruption

Figure 13.1 Exaggerated policy statement

Statements like these, especially when they come from organizations with
a mediocre or poor ethics track record, do more harm than good. Like the
narcissist Corporate Psychopath, the exaggerated claim demands admiration.
Employees do not believe the statement; they simply accept it as the official
version of the truth. The combination of historical flaws and statements like
these will be understood as: We have to write something here for show, because
we have to show something. But we dont really expect you to follow literally
what we state.
In the unlikely case that someone should examine the claim of highest
ethical standards seriously, they might reasonably wonder: What standards?
Where are they defined? Which moral authority says they are the highest?
Compared to whom?
Pirates famously had their own codes of conduct, such as this one described
by Johnson (1724) set by Captain John Phillips of the ship Revenge:

Establishing the Norm

I.

Every Man Shall obey civil Command; the Captain shall have one
full Share and a half of all Prizes; the Master, Carpenter, Boatswain
and Gunner shall have one Share and quarter.

II.

If any Man shall offer to run away, or keep any Secret from the
Company, he shall be marooned with one Bottle of Powder, one
Bottle of Water, one small Arm, and Shot.

III.

If any Man shall steal any Thing in the Company, or game, to the
Value of a Piece of Eight, he shall be marooned or shot.

IV.

If any time we shall meet another Marooner that Man shall sign
his Articles without the Consent of our Company, shall suffer such
Punishment as the Captain and Company shall think fit.

V.

That Man that shall strike another whilst these Articles are in
force, shall receive Mosess Law (that is, 40 Stripes lacking one)
on the bare Back.

VI.

That Man that shall snap his Arms, or smoke Tobacco in the Hold,
without a Cap to his Pipe, or carry a Candle lighted without a
Lanthorn, shall suffer the same Punishment as in the former
Article.

155

VII. That Man shall not keep his Arms clean, fit for an Engagement,
or neglect his Business, shall be cut off from his Share, and suffer
such other Punishment as the Captain and the Company shall
think fit.
VIII. If any Man shall lose a Joint in time of an Engagement, shall have
400 Pieces of Eight; if a Limb, 800.
IX.

If at any time you meet with a prudent Woman, that Man that
offers to meddle with her, without her Consent, shall suffer present
Death.

This code of conduct is clear and concise, and even specific to the potential
consequences of violations. It was probably well understood, with little
training required. Any experiential training was not simulated and the harsh
consequences of violations were undoubtedly useful in promoting awareness.

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The Anatomy of Fraud and Corruption

Of course the pirates business model was fairly simple, and they were not
concerned with such modern niceties as human rights, legal compliance or
environmental protection. It is unlikely that a modern enterprise could achieve
the same level of concise and elegant simplicity, or apply the same level of
disciplinary harshness. Even so, there undoubtedly arose situations where the
pirates needed to interpret the code. Under Article VII for example, when can
a Pirate be said to neglect his business? Each pirate would have needed to
use some common sense judgement to apply this requirement to a particular
situation. They must have had many interesting discussions on the subject.
Modern day business models are more complex and subject to more rules
than pirates needed to contend with. The modern code of conduct is likely to
be less specific than the pirate code, but it should not be deliberately vague.
Consider the following alternative anti-corruption rules:
We respect the integrity of public servants and of the decision makers
with whom we do business.
Or,
It is never acceptable to pay a bribe for the purpose of obtaining business.
We only reluctantly make facilitation payments, in the following
circumstances:
Or,
It is never acceptable to pay bribes or make facilitation payments.
The first statement is elegant, but it does not provide clear guidance. It could
be interpreted that bribes are acceptable, as long as the initiative comes from
the other party. The second set of statements is much more useful, and more
likely to be effective. The second statement also recognizes the inevitability of
facilitation payments. Perhaps they are. If, in a particular business, facilitation
payments are inevitable, then it is better to provide practical guidance in
the code of conduct than to like in the third statement pretend that such
payments can always be avoided, turning a blind eye to the actual cases. If
the code of conduct is not truthful about facilitation payments, perhaps other
sections will not be taken seriously.

Establishing the Norm

157

Communicating Integrity Policies and the Code of Conduct


The traditional and inadequate approach for communicating integrity policies
has been to write a finely worded document, distribute it and ask employees to
read it. Sometimes, employees are asked to sign a confirmation that they have
read the policies. While the confirmations may provide some legal basis for
firing employees who have performed misdeeds, it does very little to spread
the awareness or understanding that are needed to prevent the deeds in the
first place!
Through examples and training, employees can learn how to apply the
guidance to their day-to-day situations.
Raising awareness is more effectively accomplished by avoiding narcissist
self-praise and instead adopting a more modest and realistic approach. The
organization should:

ensure that its values, code of conduct and policies are meaningful
and appropriate;

ensure that policies are internally consistent;

understand where the ethical challenges are, target the code


especially on them, and decide how to handle them;

train employees how to apply these guiding principles;

listen to employees objections, comments, questions; and

measure compliance or non-compliance.

It is challenging enough for most organizations to fulfil the minimum legal


requirements, let alone the highest ethical standards (whatever they are!).
Consider the following dilemma situation:
Your company has a project in a country with a high level of corruption, as
measured by the leading perception survey. Bringing necessary project
materials through customs is slow and tedious, because local officials are
looking for facilitation payments and will not process the paper work without
them. Most companies get around the problem by hiring local customs

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The Anatomy of Fraud and Corruption

clearance agents to handle the formalities. They are expensive; it is obvious


that parts of their fees are used to make facilitation payments. But they get
the job done, and the cost is less than the cost of customs delays. How will
your company handle the problem?
Of course the Chairman of the Board does not have to decide what to do.
Local managers are expected to make these kinds of decisions, within the
framework of company policy. The purpose of a code of conduct is to provide
guidance for handling difficult situations. Statements like we are committed to
the highest ethical standards provide no practical guidance in the real world.
A technician was recently employed with a company that participated in large
building projects. An unofficial practice had been in place for years, whereby
extra building materials and large appliances such as refrigerators, kitchen
ovens and washing machines were ordered, charged to the project, but
delivered to selected employees as a bonus. A key manager decided who would
participate, but he had been generous and his employees were extremely
loyal to him. It was an open secret, but the new employee wondered: Is this
fraud? Perhaps I should report it to someone?
In this true example, the company had a code of conduct but:

it provided no specific guidance on what was acceptable


behaviour;

it did not provide guidance on how or where to report concerns;


and

the employee had never seen the code of conduct, it was not well
communicated.

Employees do face situations like these, and they need practical guidance.
Grandiose, empty statements do not satisfy their need. A humble, credible
approach is more useful.
In Part I of this book we examined narcissist Corporate Psychopaths who
believe they can do no wrong. Top managers unfortunately sometimes exhibit
the same characteristics. This is no accident; narcissists may exhibit many of
the same qualities that the Board wants its management to have: charisma, selfconfidence, intelligence, ambition and drive.

Establishing the Norm

159

Writing the Code of Conduct


When writing the code of conduct, management needs to demonstrate
additional qualities that the narcissist lacks: honesty and humbleness!

Figure 13.2 Honest policy statement

Well, perhaps that is a little bit too humble and honest. But if organizations
seriously want to improve their internal ethical culture, they need to get
employees attention and support. High ethical standards might be described
as a goal to be achieved, rather than an accomplished fact. Top managements
message should not be, Look at me, follow me, I am beautiful but rather Help
us! Lets do this together.
One of the best ways of showing that the top is humble and sincere when
they are talking ethics is to build up consensus around code of conduct
issues and invite employees to be part of the process. No matter how strong
top management may be, the detailed knowledge of the business, and its

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The Anatomy of Fraud and Corruption

integrity risks, lies with the rank and file. Engaging employees in the process
demonstrates respect for their detailed knowledge, and using their feedback
will likely lead to a more practical and useful policy.
Employees should also be assured that their honest efforts to live by the
code will receive full support from the highest managerial level.

Objectives and Benefits of Awareness Training


Whether they are called workshops, seminars, training sessions or something
else, the most effective way to communicate with employees on ethical issues
and fraud prevention is through active discussion in small groups, for example
in a classroom setting. The objectives of the sessions might include:

moralize; communicate ethical values through the organization;

demonstrate managements sincerity;

communicate the risk appetite of the organization;

convince participants of the importance of preventing fraud;

teach participants how to make the right choices in difficult ethical


situations;

teach participants how to recognize red flags, see through


deception;

motivate employees to find the risks, and act upon them;

motivate employees to speak up when they know something


harmful;

learn from employees, validate the code of conduct, discover


shortcomings; and

increase pride in the organization.

Establishing the Norm

161

If the overall objective of fraud awareness training is to reduce the cost of


fraud, how exactly can we make sure that happens? And how can we measure
success? After all, fraud is based on deception; if we do not experience fraud,
does that mean we have successfully avoided it, or that we have not detected
the frauds that are in fact occurring? And how do we know that the lack of
fraud is the result of awareness training? Or what if training and awareness
results in an increase in the number of frauds that are reported?
As organizations stop relying on general polices and work to establish
more effective integrity programmes, management is likely to be surprised
by the risks and problems that become apparent, and the variety of solutions
that employees devise. The devil is in the details! After years of taking the
helicopter view on ethical issues and fraud risks, its time to put some boots on
the ground.
As workshops are held and employees are given the opportunity to discuss,
debate and brainstorm the risks, everyone becomes more alert and sensitive to
the issues.
It makes good commercial sense to have vigilant and cooperative employees
who are willing to be part of the risk management strategy, who can identify
local issues and monitor local activities for signs of trouble.
Another potential benefit of an effective training and awareness programme,
which makes the employees feel they are part of the process, is that employees
(who normally are not as careful with the company assets as they are with their
own) will start looking at things in a different way and most likely increase the
feeling of risk ownership.

Summary
The Board and top management, through their policy decisions, communication
with employees and their personal example, set the ethical tone for the entire
organization. Establishing a sound and ethical culture, moralizing the
organization, requires continuous effort over a long time. It is not a short-term
project. Writing a strong and useful code of conduct is the first step, which
might be accomplished in a few months. Effectively communicating the letter
and the spirit of the code of conduct to employees is a much more difficult
task. Employees in different locations, cultures and functions will face an

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The Anatomy of Fraud and Corruption

endless variety of ethical dilemmas. Often these dilemmas will not be simple or
obvious. There will be powerful motivations for making the wrong decisions.
Giving employees knowledge and motivation to make the best decisions in the
spirit of the code of conduct requires real training. Such training also serves to
make participants less vulnerable to most rationalizations, and therefore less
likely to commit fraud. It might be said that most organizations have placed too
much reliance on making systems resistant to fraud, too little effort into making
organizations resistant to fraud. By providing resources and visibly supporting
awareness training, top management demonstrate their commitment to ethical
values and their understanding of the difficulties involved in applying the
values consistently throughout the organization.

Who Gets What Training?

14

More matter, with less art.


Hamlet, II, ii, 95

Communication is the Key


In order for Fraud Awareness Training to have a real impact and affect the
way employees perform their tasks and make decisions, it is important that
communication on code of conduct issues flows in both directions. If management
expects employees to help, they had better listen to what employees have to say!
While top managers may, generally, be better educated and better paid, employees
are in the front line and possess invaluable knowledge about the actual ethical
issues they face. The feedback obtained from code of conduct training sessions
can be valuable input for managing fraud and corruption risks.
In order to develop a fruitful communication at all levels it is helpful for
management to understand where potential communication gaps could be,
both in the text of the policies and in regards to the perceived risks of fraud and
corruption facing the organization.
In a series of risk awareness workshops, XYZ Ltd systematically gathered
participants opinions on which types of fraud and corruption incidents might
occur, where they might occur and the likelihood of occurrence. One workshop
was held for the management team, other workshops included a broad
spectrum of employees from all parts of the organization. Management was
surprised to learn that their employees perception of the likelihood of fraud
occurring was radically different than their own. Employees also described in
detail several high likelihood risks that management was not aware of at all.
At the same time, the main risks identified by management were not raised
by lower level employees at all.

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The Anatomy of Fraud and Corruption

Who is right? Who is best able to describe the risks that are present? It
is a matter of perspective, and both perspectives have their pros and cons.
Employees are better able to identify the risks in the operations and processes
that they work with on a daily basis. The problem with this perspective is that
it may miss out the bigger and long-term picture. We can call this the risk of
making so-called myopia errors. Managers have a helicopter perspective, and
can spot broader risks that may not be obvious at the detail level. Of course,
this also means that something may be lost. Managers run the risk of making
superficiality errors. Fraud awareness workshops are a powerful tool to
combine insight from different perspectives.
Management will in the end decide which fraud risks are relevant, how likely
they are and how to address them. But by including the employee perspective
and providing feedback to employees, management can better ensure that
important risk areas are identified, and that there is employee acceptance of
the risk mitigation measures that are finally decided. When considering fraud
awareness and risk identification workshops, one must ponder:

Should we apply the greatest common denominator and only train


on the things that apply to everyone with the risk of being too
generic? Or perhaps have a generic training for everyone and then
specific follow-ups?

Should we try to include as much as possible, and be as specific as


possible, with the risk of producing something that is not relevant
for everyone?

Should the training be in our official company language, or local


language?

Can we use a cascade approach; train key employees who will then
train other employees and so forth?

How many employees can we include in each session?

Different Groups, Different Needs


The previous chapter discussed the objectives of fraud and corruption training.
Naturally the overall objective is to prevent fraud and corruption, or at least

Who Gets What Training?

165

make the organization resistant to those risks, but who must be trained? All
employees? Key employees? Managers? Bookkeeping personnel? Training
costs money; where should the investment be?
Most organizations come to the conclusion that because fraud can occur
anywhere some level of awareness training is suitable for all employees and even
for non-employees such as sub-contractor employees. Any employee might find
themselves witness (or bystander) to fraud. The content and depth of training is
likely to vary for different groups. For some employees, in-depth training might
be needed, while for others a small amount of training might be enough.
It is a tempting thought to only train managers. Managers are responsible
for maintaining internal control and preventing fraud within their area of
responsibility, if they are fully aware of the risks, isnt that sufficient? Consider
the following question that arose in the course of an actual training session,
during a discussion of acceptable and unacceptable gifts:
Mike is an information system administrator. Gail is another participant in the
training session.
Mike: Lets say the company was looking for a computer application

to accomplish some task. I happened to know a small supplier, an

old school friend, who would be perfect for the job.
Trainer: So what would you do?
Mike: I make the contact, recommend my friend. I am not involved at all

after that, but my friend gets the contract, and he does a great job,

delivers just what the company needs and charges a fair price for his

work. Everyone is happy. Would it be wrong of me to accept 1,000

euros from my friend in thanks?
Gail: Of course it would be wrong! It could be a bribe.
Mike: But the work was all finished, I didnt ask for the money.
Gail:
It might anyway influence you the next time
Mike: OK, OK. Maybe 1,000 is too much. How about 100 euros? A bottle of

wine? Tickets to a football match? What is the limit?
For many people, common sense would say that a gift of 1,000 euros from
a supplier to an employee would be improper. Mike recognized that it was
questionable, but really did not know the answer to this dilemma. And his
next question, what limit is acceptable? is usually not an easy one to answer
for many organizations, particularly if the organization spans many different
cultures and includes many different categories of employees.

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The Anatomy of Fraud and Corruption

Awareness training encourages participants to think about and discuss


the issues that are relevant to them and thereby develop a common sense that
will allow them to deal properly with real ethical dilemmas when they occur.
Every employee, whether working in a factory assembly line or as manager of
a company, will face ethical or code of conduct dilemmas in the course of their
work. They all need awareness training in one form or another, to establish the
common norm. And equally important, any employee might be in a position
to witness fraud attempts. Employees who are trained to recognize and report
red flags are far more likely to do so than employees who have not received
training. Awareness training also provides management with an opportunity to
communicate their commitment to ethical practice and demonstrate a healthy
tone at the top.
Risk awareness training is worthwhile for every employee, but that does
not mean that the same training will be suitable for all employees. In order to
benefit, participants must see the training as relevant to their own situation.
Consider the following company:
XYZ company is in the process of designing a new code of conduct for the final
approval of the Board of Directors. The Board has also instructed management
to prepare an internal communication programme to familiarize employees
around the world with the new Code.
XYZ company has over 20,000 employees spread between 60 countries, using
27 major languages, involved in design, manufacture, sales and distribution of
company products. The Board has given management one year to finalize the
Code and complete the training. At least 90 per cent of employees must be
trained by the end of this period.
The company has been the victim of several unrelated fraud incidents in the
last year, and the Board and management agree that part of the focus of the
training project is to better understand the fraud risks, and raise employees
awareness to these risks. Human Resources provided the following breakdown
of employees and locations:

167

Who Gets What Training?

Table 14.1 Employee statistics for XYZ company


Employee
Statistics
Senior Mgmt
Development

12

Head
Office
6

190

Total

USA/
Canada
1

95

25

Europe

Production

14000

Purchasing

1389

612

Sales

2097

Service

1460

Finance

330
99

Staff functions
Administration
TOTAL

4100

South
America
2

Asia
Pacific
1

Mideast/
Africa

67
3500

6400

90

201

450

710

450

358

486

85

461

256

310

290

140

30

110

20

55

70

45

91

30

545

42

150

42

58

160

93

20122

189

6242

886

4486

7926

393

An organization might include thousands or hundreds of thousands of


individuals, with different levels of experience and knowledge, different job
responsibilities. Engineers, production workers, designers, accounting staff,
purchasing, marketing and sales, research scientists are just a few categories.
Many employees have no managerial responsibility; others are supervisors,
mid-level managers or top managers. There are untrained workers and
highly skilled specialists. Some will only be fluent in their own language.
There are employees, contractors and consultants. Some employees within
the organization have functional responsibility for control, for example
purchasing, logistics, internal control, controller functions and others. Some
employees may be responsible for reacting to incidents, for example internal
audit, security, legal, human resources and more. Consultants may be filling
key roles, assisting in complex tender processes or project management roles.
Usually, a common code of conduct is intended for employees across the
entire company, but different areas of emphasis and levels of understanding
are required by different categories of employee. The risks and issues that a
salesman in Brazil might face are much different than what a factory worker in
China is likely to experience. The situations faced by purchasing department
buyers are much different from those faced by after-sales service technicians.
The working environments in northern versus southern Europe are different,
and even greater differences are found when European work places are
compared to other parts of the world.

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The Anatomy of Fraud and Corruption

Different groups of personnel face different risks and issues, and require
training adapted to their situation. At the same time, the organization needs to
deliver a consistent message across the entire organization. These conflicting
constraints can be satisfied through a common training platform completed
with various modules designed for the different categories of participants. The
common message can then be delivered to each group using examples, dilemmas
and other teaching devices relevant to them, in a language they understand. Lets
go back to XYZ. For this company, training variations might be:

Table 14.2 Training variations plan


Plan

Focus

Regions

Language

1a

Development and purchasing Worldwide

English

1b

Factory

Europe

English

1c

Factory

Asia

Local translators

1d

Factory

South America

Spanish

Sales

Worldwide

English

3a

All other

Except Latin America

English

3b

All other

Latin America

Spanish

Whether training is delivered through workshops, or through multimedia


techniques deployed over the intranet, the variations can be built into the
training programme. The same general programme structure can be used for
all training, while allowing the content to vary in terms of area of emphasis,
examples, film clips, case studies or group work.
In the following paragraphs we will consider specific groups of employees
and their particular training needs. These groups are to be taken as examples
and not intended as covering the whole spectrum of functions and positions that
a company can have. Moreover, naturally, different organizations will include
different groups of employees depending on the nature of their business. A
logistics company, a bank, a charity, a manufacturing and sales company or a
hospital each have their own special concerns and categories of employees.

Back Office Personnel


In recent years there has been a trend towards centralizing and standardizing
back office functions such as bookkeeping, supplier payments and payroll

Who Gets What Training?

169

processing. In large groups, shared services functions have been created where
personnel in one central location are processing transactions from different
group companies that are geographically dispersed, even internationally
dispersed. Through standardization and centralization, costs can be lowered
and compliance with processes and accounting rules improved. Thus a
centralized back office can improve internal control. At the same time,
accounting personnel are farther away from the business and less likely to
understand the transactions they are processing. As transactions are mass
processed, employees are less likely to notice unusual transactions if they
fulfil process requirements. Therefore a centralized back office can also lead to
internal control weaknesses.
Training for back office personnel should focus on raising awareness of their
importance in the overall system of internal control. Personnel can be trained
to recognize and report red flags that signal possible questionable transactions,
even if all process requirements have been fulfilled. Back office employees
often underestimate their own importance compared to higher-paid employees
working in operative areas. They need to be empowered and motivated to take
the initiative. The back office has privileged access to transaction data and
can therefore perform proactive detective testing, as a back office initiative or
together with other functions such as internal audit or internal control. Such
tests are further discussed in the final chapter of this book.
If an empowered and fraud-aware back office develops a reputation for
recognizing and questioning dubious transactions, this will contribute to a
deterrent effect. When making their Fraud Triangle calculation, potential fraudsters
will perceive a smaller opportunity, they will fear that the back office will not be
deceived, and will find it more difficult to rationalize. NOT everyone is doing it.

Purchasing Function
In employee surveys, the purchasing or procurement function is often singled
out as the function most likely to be involved in fraudulent activity. Certainly
the power to select suppliers, agree prices and issue purchase orders creates
opportunities for potential fraudsters!
In our experience, fraud is more likely to be perpetuated by managers
who bypass the purchasing function than by purchase department employees
themselves. The purchasing function itself is an important control function,
and its employees are professionally trained to deal with suppliers.

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The Anatomy of Fraud and Corruption

Awareness training for purchase department employees must address


the risks of dealing with suppliers, but should also address the common
misperception of the corrupt purchaser. The focus of training should be on the
positive role purchasing professionals play when they use their knowledge to
support other less experienced parts of the organization that are exposed to the
risks of inappropriate supplier relationships. Similar to back office functions, the
purchasing department is in a position to recognize inappropriate transactions
and bring them managements attention.

Factory Employees
Factory employees are exposed to a wide range of potentially fraudulent
activity. Compared to employees who work mainly with documents, data
and relationships, factory workers deal physically with their products and are
likely to notice unusual behaviour that might not attract the attention of office
employees.
Depending on the nature of the business, factory workers might be
unskilled labourers or highly educated specialists, or anything in between. In
some countries and organizations, the relationship between factory labour and
management might be traditionally confrontational. These factors need to be
taken into account in any awareness training. In a confrontational environment,
factory workers are less likely to report suspicious behaviour.
It is especially important that awareness training for factory employees is
not seen as a threat but as an invitation. If the participants are convinced of the
sincerity of the training, and understand that its purpose is to enlist their help,
not to threaten them, then they will help in the fight against fraud.

Sales and Service


Probably more opportunities for fraud, and incentives for corruption, are to be
found in sales and service than in any other part of most organizations. Sales
fraud is often complex and difficult to detect or prove. Understanding sales
and service frauds often requires knowledge of the products, how they are
sold, pricing strategies, quality issues, service requirements and so on. Fraud
methods take advantage of the complexities. In fraud awareness training, it is
useful to design tricky sales side dilemmas and case studies that participants
will find challenging and interesting.

Who Gets What Training?

171

While purchasing side frauds often involve overpricing by suppliers, sales


side fraud involves under pricing to customers. Just a few methods of sales side
fraud and corruption that we have seen include:

allowing unearned discounts or rebates;

applying the wrong price list;

failing to invoice for a delivery;

failing to record a cash sale in the cash register;

deliveries invoiced from another (employee-owned) company;

preferential supply of products during a shortage;

fraudulently reclassifying prima product as low grade, low price;

claiming for fictive guarantee repairs;

use of special customer accounts for money laundering;

distribution channel stuffing; and

sales to shell companies that disappear without making payment.

Because sales frauds are so varied and are relatively difficult to detect,
gathering feedback on possible methods of fraud and corruption is particularly
valuable when dealing with sales and service personnel.

Special Training for Managers


Managers normally need a deeper level of training than non-managers. They
have to be able to provide appropriate guidance to the employees reporting
to them. Most code of conduct documents will include statements like the
following: If you are unsure about how to act in a particular situation, ask
your manager. Whether or not employees will follow that advice, it certainly
does imply that the managers should receive deeper training in order that
they provide consistent and appropriate guidance. Consider the following
example:

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The Anatomy of Fraud and Corruption

During a code of conduct and Fraud Awareness workshop, the subject of gifts
is discussed. The code reads: Employees should not accept expensive gifts
from suppliers or other third parties with whom they do business. If in doubt
whether or not a gift is appropriate and may be accepted, employees should
consult their direct manager. One of the workshop participants told that she
had consulted with her manager, and was not allowed to accept the gift (a
jogging suit). But one of her colleagues in another department was allowed to
accept the same gift, because her manager was more flexible. Is this fair?
Not every situation can be foreseen in a written code of conduct, and
most organizations allow for some flexibility. Employees are more likely to
respect the rules and follow them if they are seen to be fair. Managers at all
levels are expected to ensure that the rules are followed within their area of
responsibility.

Internal Audit, Internal Control and Security


Awareness training for audit and security personnel and internal control
specialists is a bit like preaching to the choir; they have already heard many of
the arguments and are ready to accept fraud and corruption as real risks. They
are paid to be suspicious. Training for these employees should go beyond basic
awareness, as they will be the organizations fraud and corruption risk experts.
Fraud and corruption risks are significantly different than most of the other
risks that audit, security and internal control experts deal with. For example,
consider the following risk areas:

risk of fire;

credit risk;

exchange rate risk;

information systems continuity;

supplier risks (shortages);

shortage of qualified staff; and

product quality risks.

Who Gets What Training?

173

For most of the risks we deal with, responsibility for managing the risk
can be assigned to specific persons in the organization. Treasury manages
exchange risks, purchasing manages supplier risks, human resources manages
employment risks and so on. Who manages the risk of fraud? Because fraud
can strike at any part of the business, it is difficult to assign responsibility for
managing the risk. While security or internal audit may have expertise and be
able to assist, they do not own the risks.
Another difference is that most risks are dependent on factors that can be
managed using appropriate control mechanisms. We have sprinkler systems
designed to stop fires, credit limits to avoid excessive credit losses, hedging
transactions to mitigate exchange rate risk and so forth. Internal controls are,
however, not very effective in preventing fraud. Fraud occurs because people
are able to deliberately bypass the control system. The sprinkler system might
stop accidental fires, but it would not effectively stop a deliberately set fire. The
culprit could easily disable the sprinkler system.
Awareness training for employees with expertise in risk management
should, therefore, focus on the unique and difficult nature of fraud and
corruption, and effective management techniques.
In most present-day companies, employees are empowered and authority
is widely delegated. Internal controls systems are designed to prevent or detect
errors, and employees and managers enjoy the trust of their employers. As
we have pointed out, this should not become blind trust, but an atmosphere
of mistrust and suspicion would be intolerable. A few employees, such as
security and internal audit, are expected to be suspicious, or more politely,
professionally sceptical. These suspicious functions allow other managers and
employees to more easily work in an atmosphere of trust, with suspicion largely
delegated. As professional sceptics, internal auditors might never be fully
integrated or accepted by the rest of the organization. They are even required
by their professional standards to maintain an objective attitude. Awareness
training for these employees can examine what it means when you are paid to
be suspicious.
Because audit, security and internal control employees are likely to be
involved in responding to suspected incidents of fraud or corruption, their
training might also include response planning and investigation management.

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The Anatomy of Fraud and Corruption

Getting Started
Ideally, we believe organizations benefit most from a comprehensive fraud
and awareness training programme for its employees, covering the whole
organization and taking into account differing requirements of each group of
employees. Unfortunately this is not always possible. Competing priorities and
budget limitations might force a more limited approach.
Even in a small project, however, it is worthwhile to plan for the long term.
It should be clear what sort of training is to be delivered and what objectives
and expectations associated with it. It is also important to be aware of what
other initiatives have been undertaken, both to take advantage of synergies and
avoid confusion.
If there are already trainings on topics that interact with each other then
this should be explained to the trainees.
A major international company developed a code of conduct training
sponsored by Corporate Responsibility, an anti-corruption training sponsored
by the Legal function and an anti-fraud training sponsored by Internal Audit.
When employees received, during the same year, invitations to each of these
trainings they thought they were all the same, those who had already attended
one of them didnt go to the others and in some (worse) cases people did not
attend to any of them because: I dont understand what is what and I dont
have time to waste.
Management has to be concerned about overloading employees with
too many messages. Top management is often supported by an assortment
of corporate staff functions, each with its own specific area of responsibility
and messages to disseminate. While each of the messages is worthwhile,
taken together the messages become overwhelming. Consider the following
guidelines that employees might be subject to:

information security;

non-discrimination in employment practices;

operational safety and health;

business ethics and anti-corruption;

Who Gets What Training?

general code of conduct;

risk management and insurance requirements;

environmental concerns;

speaking to members of the press;

export guidelines;

contingency planning; and

quality management.

175

And all of these in addition to the employees normal job responsibility!


With so many rules competing for employees attention, it may be difficult to
generate interest for an additional training in fraud awareness. The different
functions need to work together and coordinate their messages and trainings.

Sketch 14.1

The innocent fraudster

Paula has worked as Nick Elbacks assistant for nearly four years, her first
full-time job and she is good at it. Not much happens that she doesnt
know about! She is proud that her boss trusts her so completely. She is
sitting at her desk, Nick standing over her giving instructions.
Nick: I need you to compose another invoice for me, this time from the
Dubai company, Middle East Services Limited.
Paula: When do you need it?
Nick: Actually its pretty urgent, can you do it right away? You can use

todays date.
Paula: Of course Mr Elback. Just tell me the amount, and what text to

include.
Nick: 75,000 Swiss francs, and you can use the same text as last time.
Dont forget to put a new invoice number!
Paula: Here is the model; we wrote: Market development and liaison

activities in accordance with agreement.
Nick: Thats fine. 75,000, Yes thats it. Just print it out, two copies please.

176

The Anatomy of Fraud and Corruption

Paula:

Nick:
Paula:

(As the copies print) Will I need to book another airline


reservation?
(Not answering) Save that in the confidential folder.
Yes Mr Elback, I know.

Paula looks down, a bit hurt but used to it, while Nick leaves with the
copies. After Nick leaves, Paula continues with her typing

Paula is an example of the innocent fraudster described in Part I of this


book. She prepares, at the instruction of her manager, false invoices from an
offshore company. At some subconscious level, she knows its wrong but she
lacks the experience to realize she is being used in a fraud scheme. She has
rationalized it in the decadent way, thinking this is the way its done here.
Paula has not worked in any other company, and obviously she has never
completed fraud awareness training!
It is clearly a challenge to organize training that delivers the message and
is seen as relevant by a broad range of employees. Using theatre, role play and
other dramatic variations can contribute to the solution. Employees who may
be turned off by mandatory training are likely to react more favourably to a
form of entertainment. The use of educational entertainment or edutainment
designed to educate as well as to amuse, has been successfully used in the last
50 years. Edutainment typically aims at teaching its audience by implanting
key messages or lessons to learn in some familiar form of entertainment (like
television programmes, films, music, computer and video games, multimedia
software). Through play and practice individuals can increase their abilities and
improve knowledge retention. The learners are turned from passive to active
and that will make them feel engaged and motivated. They will be able to take
actions, immediately experience their consequences, and practice at their own
level and speed without holding back or tying up others.
Finding the right training formula that will successfully engage a wide
variety of employees and effectively raise the level of fraud and corruption
awareness is difficult. Management, or whoever is designing the training,
should be careful to avoid a patronizing or detached attitude. Employees
instinctively understand that fraud and corruption are more likely to occur at
higher rather than lower levels in the organization, and tend to be turned off by
management preaching on the subject. A humbler, workshop approach, where

Who Gets What Training?

177

employees are invited to participate in indentifying the issues is more likely to


achieve the desired results.

Summary
Organizations need to balance the need to deliver consistent training across
the organization with the need to reach different categories of employee with
content that is relevant to their particular situation. The requirements for
awareness training will be different depending on the nature of business and
its risks, the size of the organization and the geographical location. Even within
the same organization, the training needs to be adapted for different groups
and sometimes in different languages. Managers and others with a special
responsibility for maintaining internal control and managing risks will need a
deeper level of training than employees with other responsibilities. Employees
in the purchase department will best understand examples related to suppliers,
while sales and marketing staff are more comfortable with customer-related
scenarios. It is also important to take into account related initiatives, and avoid
overloading employees with conflicting or overlapping messages.

This page has been left blank intentionally

Cultural Factors in Training

15

I am but mad north-north-west: when the wind is southerly I know a


hawk from a handsaw.
Hamlet, II, ii, 378

National Culture
As a cost-savings measure to avoid printing its advertising posters in multiple
languages, a pharmaceutical company developed a language-neutral poster
designed to promote its particular brand of pain relievers. The posters were
printed, billboard space was obtained and the posters went up in cities around
the world.

Figure 15.1

Advertising blooper

Within hours of the posters going up in Cairo, Egypt, retailers all over the
city were calling to complain. It had never occurred to the campaign manager
that in North Africa, most people read from right to left!
While this story is probably a myth, it illustrates the importance of taking
local culture into account. People look, talk, think and behave differently in

180

The Anatomy of Fraud and Corruption

different parts of the world. When rolling out a training programme, local
culture needs to be considered both in terms of how the message is delivered,
and in the content of the message itself.

Local Environment
Every year, Transparency International issues its highly respected public sector
Corruption Perceptions Index (CPI) which ranks countries on a scale of 0 to
10 according the perceived level of public sector corruption. A higher score
indicates a lower level of perceived corruption. In 2009, out of a total of 180
countries, only five countries scored 9.0 or better, while 129 scored below 5.0.
The CPI is not a measure of the honesty of each countrys citizenry, but it does
say something about the local environment and risks.
One might be tempted to conclude that fraud and corruption awareness
training is likely to be difficult or even a waste of time in countries with an
apparently high level of corruption. Surprisingly however, in the experience of
the authors, awareness training for employees living in a corrupt environment
is often easier and more rewarding than in countries with a low perceived level
of corruption.
Local employees in a country with high levels of corruption are more likely
to be the victims of corruption than the beneficiaries. They are sensitive to the
problem, and are often more than willing to contribute to the fight against
corruption if they are convinced that management is serious, and not corrupt
themselves. Employees in countries with endemic corruption are, however,
often sceptical regarding managements motives. In their experience, authority
and corruption are often related, and awareness training needs to take this
inherent mistrust into account. In that respect, it can be beneficial to have
training sessions where both senior managers and other employees are present
to demonstrate that everyone is a trainee. On the other hand, the presence of
senior managers can intimidate other employees, who will be less free to say
what they think. We will discuss this situation later in this chapter.
In Part I, we stressed the importance of knowing about present norms and
values in order to be able to see fraud. In countries with a low perception of
corruption, participants are less likely to believe that management is corrupt.
In fact the problem can be to convince participants that there is any risk at all!

Cultural Factors in Training

181

Company Culture
One of the advantages of a strong internal company culture is that it helps
bridge the gap between the company and the various local cultures. Some
multinational companies intentionally use their national origin as part of
their external profile. When the Swedish IKEA first opened in the outskirts of
Paris, for example, they playfully installed Caution Moose crossing signs in
the parking lot, to the amusement of the French public. IKEA products have
Scandinavian names, and Swedish meatballs are served in the cafeteria.

Figure 15.2

Caution moose crossing

Other companies, such as the family-owned French company Pernod


Ricard markets its brands without reference to the nationality of the parent
company, preserving the original national identity of each brand it sells. One
does not think of Jameson Whisky, Beefeater Gin, or Absolut Vodka as coming
from a French company.
The constant drive towards greater productivity and efficiency leads
companies to standardize their products, systems and processes across the
organization. At the same time, companies must remain sensitive to the local
market. Companies that substantially tailor their products, image and sales
efforts for each market are said to be multi-domestic rather than multinational.
IKEA is an example of a multinational approach, Pernod Ricard a multi-domestic.

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Thus the multinational approach can also be said to be the more monocultural,
the multi-domestic approach more multicultural.
The monocultural company is more likely to have relatively more expatriate
employees in key management positions around the world. In order to develop
a consistent corporate culture in the territories they operate, experienced
employees from the parent company or established group companies are
assigned to key positions in other countries. The expatriates tend to be better
paid and better connected than their local colleagues, which if not managed
can lead to internal resentment and to the existence of two parallel company
cultures in a single location. As we discussed in Part I, inequality reduces the
general level of trust in a society, and the same can be said for an organization.
When an us versus them mentality develops, each group will adopt its own
ethical norms, based on in-group trust. The code of conduct delivered from the
foreign headquarters is unlikely to succeed in becoming the norm for the local
staff. Thus when attempting to spread awareness, one must take into account
and deal with the us versus them situation, if it is present.
In one case, a code of conduct training was carried out in a South East Asia
subsidiary to a European company. Three sessions were held, in order to ensure
that all employees could attend in fact attendance was mandatory for the 70
employees. The staff included 12 European expatriate employees, on long-term
assignment from the parent company. The attendance results were revealing.
All of the local employees attended, with the exception of one person who
was sick. But only five of the expatriates attended, the others making various
excuses of more pressing priorities.
Seven expatriate employees, the elite, were not interested in the training,
and even though it was supposed to be mandatory, they did not attend. By their
example, they sent the message that the training was not important, and that
they were not interested in the code of conduct.
Multicultural companies tend to have relatively fewer expatriate employees,
and thereby avoid the problems and resentment caused by an expatriate elite
class. They are more able to maintain a company culture in tune with the local
environment. At the same time, it is more difficult for multicultural companies
to maintain a consistent ethical culture across the organization.

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The Value of a Strong Internal Culture


A senior vice president of a major multinational organization was once asked
about the risks of fraud and corruption in their operation in a major Latin
American country. The premise of the question was that because the local
tradition included a high level of corruption, perhaps the organization could
relax their standards when doing business there.
His response was full of insight. The senior manager explained that part
of the motivation for a strong internal culture was so that the company would
be seen as one company with the same ethical standards, doing business in the
same way all around the world. The local employees in each country should
see the internal culture and policy as a support, helping them resist corruption
in the local environment.
Employee loyalty is the key. If employees are genuinely proud of their
multinational or multi-domestic employer and admire its ethical values, they
will be more likely to adhere to the internal culture and avoid fraud and
corruption with this internal support. If, on the other hand, employees do not
approve and respect their employer, they are less likely to be loyal and more
likely to follow locally accepted corrupt practices.
It would be unfair and incorrect to assume that local employees are more
likely to be dishonest because they live in a country with a high level of
perceived corruption. Properly motivated and trained, local employees, who
are more likely to suffer than profit from fraudulent and corrupted schemes,
can be a powerful defence against fraud and corruption. It is up to management
to set the appropriate tone at the top, to convince employees of the sincerity of
the organizations ethical values. If management is able to inspire the trust and
respect of its employees, they are likely to accept and support the organizations
value system.

The Local Company in an International Group


When training employees in the local company or affiliate of an international
organization, one needs to take into account the local environment, the
multicultural or monocultural tendency in the organization, the existence or
absence of elite groups, or parallel us versus them cultures, and the tone at
the top that has been set by local management. All of these cultural factors will

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affect employee interest and willingness to cooperate in addressing fraud and


corruption risks.
In countries or in local areas suffering from endemic corruption, powerful
people typically misuse their positions for personal benefit. People without
power have good reason to mistrust those who have it, and employees may
instinctively mistrust managers for this reason. They might also interpret
awareness training as a sign that management mistrusts them. To avoid this
misunderstanding, it is helpful to demonstrate that awareness training is for
all employees including local management. It might be unproductive to use
local managers as workshop leaders, or even to use headquarters personnel. A
workshop leader should be a non-threatening third party or group employee
not closely associated with the chain of command. In multimedia training, it
should be made convincingly clear that the results of any survey questions will
remain anonymous.
In local organizations where the expatriate elite is seen to be above the
rules and excessively privileged, it will be difficult to achieve desired results
through awareness training. It is probably preferable to begin correcting the
defective tone at the top before attempting a training project. The training
project, however, can be used as part of the corrective measures. After a change
in local management, awareness training can be useful to demonstrate new
managements ethical intentions.

The One Company Town


A challenging local culture can develop in so-called one company towns, that
is to say when a local population is totally dependent for jobs on one major
employer. This situation is sometimes seen in mining communities, where a
town has grown up around a single mining company. Even after other industries
have developed, the one company town mentality can continue.
You load sixteen tons, and what do you get?
Another day older and deeper in debt.
Saint Peter, dont you call me, cause I cant go;
I owe my soul to the company store
(Travis, 1946)

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185

In some cases the employer owned the houses where employees lived
and their rent was deducted from their salary. Food was purchased from the
only store in town, the company store. Locals did what they could to survive,
and developed a healthy mistrust of the company and of outsiders in general.
Fraud against the dominating company, if you could get away with it, was not
considered wrong.
While these abusive practices are no longer present in most parts of the
world, these communities can still be challenging. Fraud against the company
might be seen as acceptable, but cooperating with outsiders to investigate
fraud is not. Individuals know that if they break the unwritten code, they risk
being ostracized by the community. An imprudent cooperation by a father at
the office can lead to repercussions against his children in the school yard! One
way to deal with the situation can be to specially train one or more local people,
and let them help design and lead the training.

Ethically Challenged Industries


Within any country, the risks of fraud and corruption are likely to be much
different from one industry to another, and even between companies in the
same industry. This is partly due to inherent factors; a clothing retailer is more
likely to suffer from shoplifting than a retailer selling refrigerators. A company
with customers that pay in cash is exposed to cash embezzlement; a mail order
company is exposed to credit card fraud, and so on.
The construction industry in many countries is considered to have a
relatively high risk of fraud and corruption. Part of the problem is inherent;
competition is fierce, large amounts of money are involved, projects often
require authorizations from local and/or central governmental institutions, it
is difficult to accurately estimate costs and it is difficult to maintain control
over building materials at work sites. But the corrupt personal example of
top managers and of public officials has also contributed to the problem. For
instance in one country, which according to Transparency International enjoys
a low level of perceived corruption, it was standard practice for many years
to deliver 20 per cent more material than was needed to construction sites;
not only building materials but also major appliances, ventilation equipment
and so forth. Senior managers routinely made home improvements or built
themselves second houses using these leftover materials.

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Other employees, of course, followed the example of more senior staff, on a


lower scale. Using project tools and materials for personal use was acceptable,
not really considered to be wrong. Raising internal awareness in an organization
that has long tolerated corruption is challenging, to say the least. Even with
a change in top management, initiatives to improve the culture are likely to
be strongly resisted or ignored by second-level managers and throughout the
organization.

Acquired Companies
A special situation arises when one company acquires or merges with another.
The internal culture of the acquired company is often much different than that
of the company that purchased it. Employees, who may have been more or
less loyal to an old organization, are asked to transfer their loyalties to a new
group. Some employees may feel resentment over lost status or promotion
opportunities, or feel they have been betrayed by former owners.
Awareness training in a newly acquired company can be therapeutic.
One needs to be open to the possibility that some processes, internal controls,
ethical values and policies in the acquired company may have been superior
to those of the purchaser. By discussing these issues openly with employees,
and listening to their ideas, it is possible to both heal resentments and obtain
feedback that might be used to make improvements.

Organizational Levels
Employees at any level in the organization can be involved in fraud and
corruption. Frauds might also be perpetuated by suppliers, customers or total
outsiders. The most damaging incidents, however, are likely to be caused by
senior managers, as they have more power and possibilities to bypass controls
and deviate from normal processes.
We have suggested that awareness training should be presented as an
invitation to employees at all levels to assist in the battle against fraud and
corruption, and to avoid the appearance of management lecturing employees
on the subject. One method to demonstrate solidarity is to perform workshops
where employees from different organizational levels participate as equals.

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187

In some company cultures, however, it may be difficult to mix different


levels, either because nobody will contradict the more senior persons, or
because there is a lack of trust. Lower-level employees may not be willing
to open up and say what is really on their mind when senior managers are
present. Workshops with mixed organizational levels are further discussed in
a later chapter.

Communication Difficulties due to Cultural Differences


Communication gaps can seriously affect the understanding of awareness
training or code of conduct documents, and the way they will be applied. It
is preferable to perform training in the local language if employees are not
very comfortable with the organizations standard language, often English. If
employees are not competent in the standard language, workshops are likely
to be dominated by the best linguists and valuable input from other employees
may be lost. If there is no workshop leader fluent in the local language, the next
best alternative is to select a local employee who can act as translator, and with
the help of written materials in the local language ensure that all employees are
able to understand and participate. Overcoming the local language issue, and
studying the local culture and habits, might still not always be enough. The
trainer should be alert and recognize the signals of potential misunderstandings
due to cultural difference at an early stage.
In certain environments some of the risks might be so embedded in the
culture as not to be seen as risks at all.
During a code of conduct training workshop in India, representatives of the
Head Office, when trying to explain the meaning of conflict of interest, got the
following comment: I dont understand, there is no one I could trust more than
my wife or other family members, so if I use them as suppliers, consultants or subcontractors, I can be sure that they will provide the best services to the company.
The relationship between management and employees also varies. In some
countries/organizations people trust management blindly, in some other countries
it would depend on whether the management is setting a credible tone and in
some others they would just take for granted that every manager has a secret
agenda and own interests. That would of course affect reactions and behaviours
during the training sessions and, more importantly, in the way employees would
address fraud and corruption-related issues in their daily work.

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Language barriers do not always run alongside national borders. Many


professional groups develop their own professional lingo that sometimes
can have a strong distancing effect on others. The same may happen between
different employees from different hierarchical levels or between groups
of people with different social status. When planning the training sessions,
measures should be taken to break, or at least soften, these barriers. We will
return to this issue later.
When awareness training is in the form of classroom workshops, the
facilitator or leader can adapt the programme to the participants at hand. But
even in multimedia self-training solutions, designers need to take cultural
factors into account to avoid miscommunication. Using multiple language
options and creating variations of the training for different groups can help
mitigate the constraints of standard development. Dramatizations and film
clips can also be used as part of multimedia training as a way to transcend
cultural barriers. Multimedia will be discussed further in a later chapter.

Sketch 15.1

The out-of-office meeting

Dawn has managed to get a booth in the corner of the coffee shop,
giving some semblance of privacy. She watches the door, looks at her
watch, waiting. Finally Leigh Wey enters, sees Dawn and walks over to
join her.
Leigh: Sorry Im late.
Dawn: I appreciate you taking the time to meet me. Quite a bundle of

mysteries you left me with last week!
Leigh: Look, maybe I was out of line. Its probably nothing. Its the end

of the third quarter, and there is a lot of pressure on.
Dawn: Isnt that normal in accounting? Closing the books at month

end?
Leigh: The work is fine. But I dont like the way the CFO keeps

interfering. We cant close the books until he approves the

results, and its a lot of extra work when you start changing

things, reducing reserves and so on.
Dawn: Are you telling me he is cooking the books?

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189

Leigh: Well I dont know, I mean he is the CFO and I guess he knows

what the reserves should be. They are just estimates. But I got

frustrated, thats why I gave you the X-files.
Dawn: The X-files?
Leigh: Oh sorry. Thats just the nickname we gave them in

bookkeeping.

In this last scene, the whistleblower drops a hint that reporting manipulation
might be taking place. While many audiences would recognize the implications,
some would not. When using drama in training, one must make sure it is suited
to the participants it is intended for. For that reason, it might make sense to
arrange different versions of the same sketch for different audiences.
Achievement of training objectives requires working through the local
culture, rather than working to overcome it. When raising awareness to the
risks of fraud and corruption, the concepts are quickly understood by most
groups. Creating an environment where employees are willing and able to
communicate suspected incidents can be more difficult and requires not only
that employees feel a strong sense of loyalty to the organization and respect for
its leaders, but also that they trust that they will not suffer adverse consequences
by coming forward. A strong, ethical company culture, where managers adopt
a sincere and approachable style, will help employees develop the necessary
organizational loyalty.

Summary
While every society and culture condemns fraud, there are differences in
how fraud is perceived, what constitutes inappropriate behavior. In addition
to national, regional, and ethnic differences we have to take into account the
organizational status quo; how different groups or categories of employees get
along with and trust or mistrust each other. In an environment where employees
are divided into two classes, such as an elite expatriate class and a local nonelite class, mistrust between the groups can make fraud awareness training
difficult. In an organisation or industry that has a long tradition of accepting
certain types of fraud, there is likely to be strong resistance to change.

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The language barrier should also be considered. Effective fraud awareness


training involves more than a distribution of information. Employees are more
likely to understand, to relate to and to be convinced about the messages
conveyed if they can be reached in their own language and tradition.
An international organization can develop its own internal culture, existing
in parallel with local cultures. This organizational culture can be used to build
pride and loyalty and to overcome local corrupt tendencies. Employees are
encouraged to identify with the organizations culture, and find there the
support they need to resist local pressures.

The Design Process

16

Be not too tame neither, but let your own discretion be your tutor.
Hamlet, III, ii,16

Organization
Employees or members of any organization may not do as they please. They
are constrained by laws and other government regulations, collective labour
agreements, contractual agreements with business partners, financial covenants
with lending institutions and so on. The owners, Board of Directors or equivalent
set additional constraints by defining internal organization, appointing managers,
issuing policies and guidelines, including the code of conduct and so forth. Taken
together, all of these constraints create a framework for employee behaviour.
Employees are expected and required to perform their agreed tasks within this
complex framework, but they can only do so to the extent that they are aware of
the rules and regulations, understand how to apply them in their daily work, and
accept that following the rules is the right thing to do.
An awareness training programme helps employees to know, understand
and accept the rules. It motivates them to explain and promote compliance to
other employees around them, and to be aware of threats both internal and
external.
While some companies prefer a focused fraud awareness training, others
have opted for a broader training that includes fraud, corruption and other
types of malpractice or unethical behaviour. Either approach can work. The
code of conduct, internal ethical guidelines and policies are normally anchored
at the highest levels in the organization, and it is natural that a fraud awareness
training programme would be similarly handled. Deciding the scope of
awareness training is one of many issues to resolve during the design process.

192

Figure 16.1

The Anatomy of Fraud and Corruption

Broad or narrow training

However, while top management may be involved in directing code of conduct


and fraud awareness projects, they are unlikely to take on the detailed design work
themselves. A typical structure for an awareness project might be as follows:

Figure 16.2

A fraud response organization

The Design Process

193

Awareness training is relevant to many different responsibility areas within


an organization. Including a broad representation of different functional areas
in the project team helps ensure that the final product will not only meet
awareness training objectives, but will do so in a manner compatible with the
existing approaches and internal communications. In practice, the extent that
each function chooses to participate in the project will vary. In most cases, a
small group of several people will do most of the design work, while other
more passive team members will contribute smaller bits related to their own
area of responsibility. But the extensive representation will in any case help to
ensure wide support, or at least forestall destructive opposition.

Figure 16.3

Reaching consensus

We referred earlier to an example of a company which rolled out three


similar training programmes sponsored by three different corporate functions.
Although the topics were clearly related, each project used a completely
different approach, different language and even apparently different advice to
participants. Employees were understandably confused, and the impact of the
trainings was low. By working to achieve a broad consensus in the early stages
of a project, this mistake can be avoided.

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The Anatomy of Fraud and Corruption

In practice, Fraud and Corruption Awareness projects may start in very


different ways, with different ambitions and budgets. A small project initiated
by one department to train a specific group of employees would obviously not
justify the same resources that a group-wide multimedia training for 50,000
employees in 26 different countries requires. If the time is not right for a major
all-inclusive project, a more modest approach can be adopted.
In order to achieve the intended benefits, awareness training must reflect
the organizations specific processes, language and culture, and it must
capture the attention of its employees. As discussed in previous chapters, the
objectives must be defined, and decisions taken about which employees to
train and to what level. Cultural issues must be addressed. The messages and
delivery methods have to be prepared, as well as methods for accumulating
feedback and measuring the extent to which objectives are achieved. In other
words, a true design process is required. The potential benefits of a successful
awareness programme, in terms of avoiding fraud, are great. At the same time
the difficulties in creating an effective programme are also great. Language
barriers, prevailing norms and rationalizations, cultural differences, competition
with other trainings and organizational issues are all significant. Perhaps the
greatest risk is that participants simply dont take the message seriously. So
creating a programme that effectively accomplishes the objectives requires
some serious thought. We have adapted the following design steps, which are
similar to those professional designers might follow when developing any kind
of product.

Figure 16.4 The design process

At first glance, it might seem excessive to take such rigorous approach. How
hard can it be to put together fraud awareness training? In truth, it is not very
hard to gather relevant material and create a presentation. Creating training

The Design Process

195

that makes an impact, that changes how employees will act in challenging
situations and how they react when they notice the signs of improper behaviour
by others is much more difficult.
We chose to describe our design process in four phases, divided into ten
steps. The research phase involves figuring out what kind of product we need.
What are the overall objectives? What will grab the attention of end users? Who
are the end users and what will motivate them? What products may already
exist on the market? Have any related projects been done, or are any related
projects planned?
The design phase involves taking the results of the first phase analysis, and
turning it into a detailed blueprint for production. This is the creative phase,
and it works best when it makes use of the creative talents of a design team
with different backgrounds and perspectives, and with a solid understanding
of the organization itself.
The build phase involves the production of presentation materials, which
might include overhead slides, case studies, group work instructions, film
clips, role playing scenarios, brochures and other printed materials, games
as teaching devices, and more. This third phase is where most of the money
is typically spent. If the preceding design phase was well done, it will allow
an efficient production. If the design was not well thought through, or if the
project owners keep changing their minds during production, then money is
likely to be wasted on rework.
The deliver phase of the design process involves rolling out the training to
the target group and, at an appropriate time, evaluating the results. These four
phases will be further explored in this chapter.

Ten Steps for Designing a Successful Fraud Awareness Training


1. The Problem Definition Phase
Problem definition involves identifying all of the various constraints that the
product and project must satisfy. Consider the constraints involved in designing
a chair. For example, the design constraints might require the chair to:

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The Anatomy of Fraud and Corruption

be strong enough to bear 150 kilograms;

not weigh more than 10 kilograms;

suit ergonomic regulations;

cost no more than 20,000 euros to design; and

cost no more than 30 euros per chair to produce.

A successful design must satisfy all the constraints. You could make the
chair out of titanium, it would be strong and light, but it would cost too much.
You could make it out of iron, it would be strong and cheap, but it would be
too heavy.
It is, of course, possible to define a set of constraints that are so strict as to be
impossible to satisfy. In the problem definition phase, our job is to define reasonable
constraints that will lead to a product that meets the organizations need.
The design constraints for an awareness training project should include:

What per cent of employees shall complete the training within what
timeframe?

Scope of training, for example, both fraud awareness and code of


conduct.

What methods to include, for example, classroom training,


multimedia self-training, printed booklets, drama, film clips and/or
other methods?

Who must approve content, for example, Legal, Human Resources,


Communications, Corporate Responsibility, Top Management?

Cost constraints, for example, training cost shall not exceed 75


euros per employee.

What mechanism for collecting employee feedback shall be included?

How employee comprehension shall be tested or measured?

The Design Process

197

Depending on the nature of the organization, other design constraints


might be necessary. The design constraints must reflect the overall objectives of
the training, and must be reasonable. In this first step in the design process, we
need to translate general objectives into concrete constraints that the designers
can work with.

2. Analysis from End User Perspective


When designing the training, the team needs to put themselves in the shoes of
the future participants. Will they understand the message? Do they have time
for the training, or are they overloaded with other work? What terminology
should be used? What examples will be relevant? Which different groups of
users should be considered?
One organization found it impossible to design training examples that
would be sufficiently challenging, but still understandable to all employees.
They solved the problem by creating three different streams within the same
training; employees identified themselves as sales, production or administrative,
and were then directed to the stream that was most relevant to their situation.
Finding the right balance, not too difficult, not too easy, not too fast, not too slow,
interactive and engaging but not too complicated, requires that the designers
know their users. End user surveys or other interviews with real users can help
designers ensure their product is appropriate for the intended target group.
Language and cultural issues must be addressed. Users need to be able
to relate the training concepts to their daily reality. To achieve the intended
impact, employees need to feel they are on familiar territory. Each employee
should feel they are talking about me, it is my company.
In order to avoid the mistake of creating similar and overlapping trainings,
as discussed earlier, the design team needs to review what has already been
done within the organization during recent years. The design team might decide
to postpone a project, if the timing of the training would create confusion, or
perhaps to build on the same platform that was used in a previous project.
By including, or at least consulting, key responsibility areas in the company,
potential conflicts will be found earlier rather than later. Research also includes
looking at applications used by other companies. External benchmarking
is useful both as a source of ideas and as a way to identify whats available
on the market. While organizations are understandably reluctant to divulge

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The Anatomy of Fraud and Corruption

information about actual incidents of fraud, they are often happy to share
information about prevention and training.

3. Research
Now, with a good idea of what is required, the project team is able to research
what is available in order to deliver it. The team might look for existing products
that could be used or adapted, or for suppliers who have delivered similar
products. Cost is, of course, always a factor; the project team must find a way
forward that will meet all of the constraints that have been defined. Research
should also include an analysis of resources and capabilities needed in order
to understand whether and what needs to be outsourced and what is already
present in the company.

4. Design Specification
The challenge of the design phase is to balance creativity with practicality,
which is sort of like trying to fly while keeping your feet on the ground. The
solution, of course, is to have a team that together can combine the necessary
skills. To a certain extent, design specification and idea generation take place
simultaneously, but for the sake of efficiency the project team should set strict
limits for itself. As a rule of thumb, 80 per cent of the design should be decided
during the first 20 per cent of the budgeted development time. Agreeing the
basic structure of the training at an early stage will save time and money.
The design specification will require firm decisions on the form of the
training. Will it include workshops? Multimedia self-training? Drama and web
drama tools? What languages will be used? How will feedback be captured?
How will the project be supported with brochures, invitations, presentations,
articles in internal magazines or other methods?
The development team should also consider what options are likely to
be added in the future, and design with flexibility in mind. The first priority
in the first project must be to build a solid platform that can be updated and
improved in the future. It may be preferable to start with a modest platform
that can be adjusted and reused, rather than a complex system that might not
be sustainable.

The Design Process

Sketch 16.1

199

Counterattack

An irritated Dawn Rade is in her own office, sitting at her desk writing
when the telephone rings. It is a call from Nick Elback. Nick heard that
Dawn has been asking questions about special payments.
Nick: I was surprised to hear you are doing an audit of Russ Tecarrs

manual payments. Dont you know the external audit auditors

already did a full report at the end of last year?
Dawn: Im not doing an audit; I just asked him a few questions.
Nick: Sure, sure, OK. Have a look at the Blynde & Deff report, its all

there.
Dawn: Thanks for the advice, I will do that.
Nick: (Not wanting to hang up) Anything particular you are looking

for?
Dawn: I will certainly let you know if there is. But since you ask, why

do you order so many manual payments? Why not pay your

consultants through the normal accounts payable process?
Nick: Confidentiality. These consultants are important people with

important contacts. They help us get the big orders, but we

have to keep our relationship confidential. We cant have their

invoices where every clerk can see them.
Dawn: Confidential from the tax authorities you mean?
Nick: Take my advice, dont go there. Wasting your valuable time on

something that is already approved is not going to help your

career. Just read the report.
Dawn: Goodbye Nick.
Nick has already hung up. Dawn shrugs her shoulders and returns to
her writing.

It is obvious by now that Nick has been engaging in activities that do not
bear close scrutiny, possibly with the support of even more senior managers.
He sees the danger of internal audits meddling and gives us a glimpse of his
nasty side as he tries to scare Dawn off. Will she give in?

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5. Idea Generation
A time-tested method for generating ideas and encouraging broad participation
in the process is facilitated brainstorming. Assemble a group of people with
diverse talents creative, practical, knowledge of the organization, knowledge
and experience of the subject, training expertise and communications skills.
Put them together, show them the problem definition constraints and assign
them the task of devising a solution. The services of a professional facilitator
can help ensure the process is not dominated by the loudest voice.
Of course like most things, idea generation can be outsourced. Suppliers
with experience in awareness training can quickly come up with a menu of
ideas, drawn from their own experience and materials. When using external
suppliers, however, care should be taken to ensure the training does not use
unfamiliar examples or language. On the contrary, the training should use inhouse examples and terminology to maximize its relevance. It is also important
that the external suppliers possess the necessary experience in fraud awareness
training and on the subject of fraud and corruption in general.

6. Design Decisions
A design decision can be described as a compromise between the various
design constraints that were established during the first phase of the design
process. But taken as a whole, the design decisions are also a calculated gamble
on what will work to meet the overall project objectives. When designing a
chair, a project team can, with a high degree of certainty, know how much it
will cost to build, how much weight it will bear and what it will look like.
But will anyone buy it? That is less certain, and the same uncertainty faces the
awareness training design team.
Decisions also require a consensus among the team, who may have very
different opinions on what will work and what will not. If the project has started
with clear objectives, and has developed a clear, written problem definition
during the research phase, then decision making will be easier than in a project
with unclear objectives and an undefined problem to resolve.
It is not always easy to reach an agreement but it should not be put off. The
creative phase must come to a stop, and the compromises reached so that the
design can be frozen and the project moved forward to the production phase.

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7. Production
Project teams are sometimes tempted to rush into the development stage,
without a clear idea of what must be developed. This mistake is even more
likely if the project team has underestimated the difficulty of creating an
effective awareness programme. Beginning development without a design
is a waste of resources, as changing design decisions will require premature
development to be redone. More seriously, the developers may lose sight of the
overall objectives.
If, on the other hand, development only starts when a clear blueprint has
been agreed, developers can use their time to solve the technical issues they are
trained for.
Ideally a project manager (can be internal or external) should be appointed.
That person would be in charge of liaising with the developers as well as
keeping the management updated on the work in progress and taking care of
any adjustment/modification of the original specification.

8. Testing
The more complex the product, the more testing is required. The tests naturally
depend on the nature of the product. Any written product requires careful
proofreading; no matter how accurate the developers are, spelling errors have a
way of appearing in the final text. The problem increases if multiple languages
are involved.
Multimedia self-training packages require, in addition, testing of
functionality, speed, navigation tools and all of the many details that will
comprise the users experience.
In addition to the purely technical testing, some pilot tests can be used to try out
the new training tool on real users. Their valuable feedback regarding what works
and what doesnt can then be taken into account in the final release version.

9. Implementation and Roll Out


Rolling out the final training to the organization requires its own careful
planning and preparation that takes into account organizational culture and
sensitivities. While one organization might find it appropriate to make a training

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programme mandatory, another might prefer voluntary participation. In either


case, internal marketing is helpful in shaping a positive attitude. Support and
good example by top managers can be a factor.
Fraud and corruption is a sensitive subject, and awareness training requires
more attention in the implementation phase than a more neutral topic would.
It is important that end users perceive awareness training as positive. Potential
bad reactions might be: Are we getting this because they suspect that we are
doing something wrong? Do they really think that this is going to make any
difference? Dont they trust me?
The training must be introduced to employees in a manner that neutralizes
such negative reactions. Participants are invited because their help and
advice is needed to solve a common problem. The attitude expressed in any
invitation letter or training description should be humble, not aloof. Humour
is an excellent way to grab attention and put people at ease when beginning a
workshop or included in the style of a multimedia tool.

10. Evaluation
The project does not end with implementation. If the organization is serious
about the awareness objectives, then it should be prepared to measure the extent
to which they are being met. And if the objectives are not being fulfilled, that
must be reported to management so that they can take appropriate corrective
measures. Evaluation is also a way to repeat to the organization the original
message, a way to raise fraud awareness once again. It is also a way for the
project steering committee to learn more about any eventual resistance towards
the message, local or general.
Fraud and corruption training will likely become a regular in-house training
for employees and managers, and as such should be reviewed and updated on
a regular basis, to ensure that it remains relevant and compatible with policy,
guidelines and the organizations culture.

Summary
Organizations must understand that internal controls will not effectively
prevent or detect fraud and corruption until the majority of employees are
made aware of the risks and the rationalizations. While it is a simple task to

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send employees to training, it is difficult to create a training programme that


will make the required impact on employees and significantly change their
perceptions, and at a reasonable cost.
Management ought to recognize the difficulty of the task, and ensure that
the design of the training is adapted to the organizations needs and will be well
received by employees. The training must fit with the organizations culture and
it must capture the interest of trainees. The training should fit within the overall
framework of training and policy with which employees are bombarded. The
design is more likely to succeed if early input is provided by representatives
of all the stakeholders; control, legal, finance, audit, security, human resources,
communications and so on according to the structure of the organization.
Using rigorous product design methodology increases the chances
that an awareness programme does not miss its mark, and that it meets the
organizations objectives. Like internal control, awareness is not a onetime
exercise. In order that awareness is lasting and becomes part of the organizations
culture, awareness programmes and training need to be designed for long-term
capability.

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Workshop Techniques

17

To be honest, as this world goes, is to be one man picked out of ten


thousand.
Hamlet, II, ii, 178

The Business Case for Workshop Training


The traditional approach to training employees is to bring them in groups
into a classroom and assign a teacher who, hopefully, knows more about
the subject than they do. Classroom training has many advantages. First of
all, with a teacher-student scenario the students are physically present in a
supervised setting, with nothing else they are supposed to do. The teacher is
able to directly monitor whether or not the students are getting the message,
and can adjust teaching techniques as needed. The individual students are able
to ask questions and get an immediate answer. In a successful training, a group
dynamic develops where students get the benefit not only of the teachers
message, but of the contributions of fellow students. In fraud and corruption
awareness training, obtaining employee feedback is often one of the objectives,
and the classroom setting frequently generates rich and varied responses.
The disadvantages of classroom training are mostly related to the cost and
logistical difficulty of training a large number of employees in a limited amount
of time. The quality of the training is limited by the skill of the teacher. If more
than one teacher (or as we prefer, facilitator) is involved, the training might be
inconsistent from one session to the next. The facilitators and participants need
to be in the same place at the same time. Employees who are not present, due
to illness, vacation, business travel and so on might miss out altogether. And
when the facilitator leaves, the employees go back to their normal routines and
can quickly forget the messages they were intended to absorb.

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The challenge, therefore, is to create a training that is both flexible and


consistent, that can be rolled out to a wide organization, and which will be
so engaging and stimulating that it will actually change the way employees
monitor fraud risk and react to potential incidents.

Attitude
In many organizations, communications regarding ethics have the appearance
of self-praise for the organization and its leadership, preaching to the employees
and warning them of the dire consequences of misbehaviour. The code of
conduct might start with a letter from the president, where, under whose proud
picture, a fine speech describes in glowing terms the organizations ethical
standards. While the intentions are probably good, the employees who read
the rule book might feel themselves to be in the role of potential sinners against
the good and ethical organization. Employees may be asked to sign statements
that they have read and understood the policies, which often include vague
threats of disciplinary actions in case of disobedience.
Naturally, this type of communication is not very effective. Employees
are turned off by the seemingly proud and aloof attitude and dont usually
believe or care about the fine words. Employees too often have seen examples
of the opposite, whether it is accusations of bribery, discrimination, nepotism,
unjustified bonuses to top managers, managers abusing travel privileges and
so on.
In the workshop, the facilitator should avoid the role of preacher and adopt
a humble attitude. Before achieving an open and meaningful communication,
the facilitator needs to gain the trust of the participants and be accepted into the
group. A basic premise of fraud awareness is that most people are imperfect,
and can be tempted to break the rules from time to time.
One of the hypothetical questions we often ask in an awareness workshop
is, Who is most likely to commit fraud, a top manager, a middle manager, or a
rank and file employee? The reactions vary, but employees are often quick to
point out that senior managers have more opportunities to commit fraud than
lower-level employees, and management frauds tend to be costly. These are valid
points! At the same time, the question helps to make clear that the awareness
exercise is not an accusation or threat against lower-level employees.

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In Part I we discussed the risk that trust becomes blind trust. Employees
and particularly managers enjoy a high level of trust; the organization could
not function otherwise. Managers and employees are empowered to take
initiatives and make decisions, and are trusted to do so in the best interests of
the organization. But the power to decide creates opportunities for personal
gain, and since people are imperfect they will be tempted. Some internal
controls are required to reduce the opportunity, to reduce the temptation.
The facilitator needs to convince participants that awareness training and
internal controls do not signal a lack of trust, but recognition of the fact that
trust should not become blind trust.

See the Fraudster in your Heart


Another favorite workshop question is along the lines How would YOU defraud
your employer for at least 10,000 euros in the next year without getting caught?
Employees are challenged to think like a thief, that is put themselves into the
shoes of a fraudster and devise ways to evade internal controls, to beat the system.
This technique is widely used to identify control weaknesses. In the world of
information security, experts are sometimes engaged to perform penetration
testing, that is to say to try to hack their way into a system just to see if they can find
a method. If they succeed, the method they used is then identified as a weakness
and is corrected. The origin of the idea is far older. The English proverb Set a thief to
catch a thief dates from the seventeenth century (Knowles, 2001). The exercise can
be quite a lot of fun! Participants have the opportunity to pretend to be something
they hopefully are not (a fraudster) and compete with each other to find the most
ingenious methods. And because employees have expert and detailed knowledge
of their own processes, they have no trouble inventing methods that would actually
work in practice. In other words, they have no trouble discovering internal control
weaknesses. This feedback is valuable and can be used to improve the system.
And because employees give their full concentration to the simple exercise, it is an
effective technique for raising awareness.

Structuring the Workshop


The success of an awareness workshop depends on the active participation of
employees. The designers need to be concerned with commanding the attention of
participants, stimulating their interest and motivating them to speak their minds.

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The facilitator should be concerned about not only discussing inappropriate


behaviour by others, but also helping the participants identify situations in
which ethical dilemmas were dealt with in a way which makes them feel proud
in their work. These good examples are important points of reference which can
make it easier for them to spot signs of fraudulent acts committed by others.
The time where participants are passively listening to presentation should
be minimized, and interspersed with dialogue. Most of the workshop time
should be dedicated to activities which require active participation.

Figure 17.1 Recommended percentage of time for various workshop


activities

Techniques to ensure participation might be simple or elaborate, can include


detailed supporting materials, or consist of a simple word game. A useful
opener is to ask participants to each briefly introduce themselves, their role in
the organization and their seniority. The point is to make sure that each person
has the opportunity, right at the start, to say something. The savvy facilitator
will also note interesting details for later reference, such as who has been in
the organization the longest, who is the newest member, who understands
accounting, customer service, purchasing and so on. Once participants have
introduced themselves, broken the ice, they will be less hesitant to speak up
and raise questions and volunteer answers later on.
A certain amount of lecture-style presentation by the facilitator will
normally be worthwhile, but the majority of time should be allocated to

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more participative activities. The presentation itself needs to be entertaining,


informative and inclusive in the sense that participants feel they are part of it.

Presentation Tactics
Keeping in mind the overall objectives of awareness training as discussed
earlier, one can consider specific tactics for each part of the training methods
selected. Specific tactics for the facilitators presentation style and attitude need
to be adjusted to the audience, but in general:

make it entertaining, non-threatening;

introduce key messages and themes, then get a dialogue going;

have a very practical approach and bring real examples into the
discussion which are relevant to the participants (read the local
newspapers, pick local examples that fit the crowd to illustrate
points);

establish the facilitator as an equal, not a teacher or management


representative. Gain respect, but then get the participants to do
most of the talking; and

ask questions to show that the trainer values the participants


knowledge and expertise.

If workshops can be adapted to the background and working situation of


its participants, they will find themselves on familiar territory and will be more
willing and able to understand and discuss the key messages. This will also
help to make people understand that their views are important and that they
are part of the process.
On presentation materials, such as overhead slides, text should be limited
to a few key words complemented by pictures, figures or animation. The key
messages should be delivered by the speaker, not by the text on the slides!
Nothing is more boring than watching a speaker read verbatim a long piece of
text shown simultaneously on an overhead slide.

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A few well-timed pleasantries are absolutely necessary, to relax the


participants and capture curiosity. Most participants do not at first expect the
material to be interesting, and unless they are entertained, they will lose interest
and worry about all the e-mails accumulating in their mailboxes. If the group
has not laughed at least once during the first ten minutes, the presentation is
in trouble!
The speaker can also use the information obtained from the participant
introductions, by asking the right question to the right person. A bit of respect
shown to the right person helps the facilitator achieve group acceptance:
Thomas, you have been in this company longer than anyone else in the room.
What do you think about or, Linda, how do you handle this kind of invoice
in the accounts department? Specifically directed questions show respect for
the chosen individual, reduce monotony and continue to position the workshop
as a dialogue between equals, rather than a lecture. They can also give the
facilitator the opportunity to take a sip of water.

Brainstorming Techniques
The concept of brainstorming was promoted by Alex Faickney Osborn (1963) as
a method to generate creative ideas and solutions to problems. Many variations
of the brainstorming method exist, some more formalized than others. In some
variations, participants proceed through predefined stages from defining the
problem to agreeing the solution. Different supporting tools may be used,
everything from post-it stickers to computer network applications.
In a brainstorming session, each participant applies their own particular
expertise, experience and perspective to the task of generating ideas to solve
a common problem. Because there are as many different perspectives as there
are participants, a wide range of ideas will be generated, and ideas from one
participant may trigger new ideas from others.
Typically, in a brainstorming exercise, all participants are treated equally
regardless of position in the organizational hierarchy. No ideas or suggestions
by a participant should be rejected. Criticism of ideas is withheld, so that
participants are encouraged to make unusual and unconventional proposals,
the more the better. The exercise is normally led by a facilitator, who provides
a degree of direction and organization, and an occasional suggestion, allowing
the participants to indulge themselves in chaotic creativity.

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Brainstorming techniques fit very well into a fraud and corruption


awareness workshop. Participants are actively involved; indeed they are
driving the process while the facilitator is only directing the traffic. Rather than
passively receiving facts or ideas presented by a teacher, they are applying
their own creativity to a set of interesting tasks presented to them. This requires
the participants to reach an understanding of the concepts involved, and this
understanding will be further enhanced as ideas from other participants are
presented and discussed.
The subject of the brainstorming, or in other words the problem to be
solved, will naturally be related to the central theme of the awareness training.
A fraud case study, complete with story, characters, suspicious documents,
e-mail conversations and so on could be used as the subject of an exercise, where
participants brainstorm fraud theories, possible investigative techniques and
appropriate countermeasures. Better still, participants can be asked to identify
real risks of fraud and corruption in their own organization! When solving a
fictive case study, participants are increasing their own understanding of fraud
and corruption. But when participants apply themselves to identify real risks in
their own organization, they are both developing their own understanding and
providing valuable feedback that can be used to mitigate risks and improve
overall internal control. Think like a thief was discussed earlier and it is a kind
of simple brainstorming.
Managers tend to underestimate the wealth of knowledge that employees
possess regarding risks and internal control weakness, and instead refer
to expensive external consultants to identify areas for improvement. The
consultants, who are not familiar with the details of organizations processes,
then conduct a series of interviews with employees, who hopefully reveal
the control weaknesses which are later described in the consultants report. A
brainstorming exercise with employees is a more cost-effective way to gather
that information, a further argument for the fraud awareness business case.
Brainstorming also creates the opportunity for employees to raise wild and
crazy ideas that cannot be raised in other situations. We discussed in Part I the
risk that trust becomes blind; it is simply unthinkable that the managers you
trust would commit fraud. In a brainstorming workshop where participants
are encouraged to come up with hypothetical and unusual ideas, it becomes
possible to think the unthinkable, speak the unmentionable.

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Case Studies and Group Work


Most people prefer to talk than to listen passively. But in a workshop with 20
to 30 participants not everybody will have the same chance to talk. Depending
on the local culture, the discussion will be dominated by the loudest voice, the
most extrovert, the most senior employee, and so on. Some people, by choice
or by necessity, will remain quietly on the sidelines and not say what is on their
mind. But we want to include everybody, not only to raise their awareness but
also to hear their valuable ideas.
One way to ensure everybody participates actively is to organize group
work. By dividing the participants into groups of four or five persons, each
will be obliged to speak within their group. Ideally, the groups should be
predefined, to ensure that groups are balanced in terms of experience, seniority
and language skills. In order to encourage participation from persons who tend
to defer to more dominant colleagues, it may be preferable to break up clusters
of employees who normally work together, putting them in separate groups.
Another approach that can be used when several group work exercises are
planned is to arrange groups differently for each exercise.

Figure 17.2 Mixing the participants for group work

The first exercise groups people from different departments but with
similar seniority or management level; the second exercise groups a diagonal of

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213

employees from different levels and departments, and the final exercise groups
by department. Breaking established patterns of work experience and power
and forcing people to work in new combinations stimulates idea generation
and builds confidence.
Group work might consist of a scenario, or short story, where the groups
are asked to identify risks and suggest countermeasures.
The group work itself needs to be challenging, not too obvious, and tailored
to the participants capabilities. It does not work well to provide a marketing
scenario to a group of accounting personnel, or a production dilemma to a
group of salesmen!
In fraud and corruption cases, the distinction between fraud and not fraud,
what is fraud and what is corruption, between right and wrong, is rarely clear.
This ambiguity can be reflected in group work scenarios, so that a single correct
solution will not be expected. The objective of the workshop is not to teach
participants to solve fraud cases, but to get them to think about, and talk about,
and increase their own awareness and understanding of fraud and corruption
risks. If there is disagreement among the participants on which approach or
solution is preferable, so much the better! It could be the first step in order to
break up common sense misunderstandings.
Depending on the time available and number of participants, different
scenarios and tasks can be assigned to groups, so that each group has an equal
opportunity to present the results of their work.

Dramatic Techniques
The value of using of dramatic techniques as an experiential learning tool was
discussed earlier. In a programme where numerous workshops are held, in
multiple locations, it is probably not economically feasible to travel with a
troupe of actors. It is, on the other hand, perfectly feasible to produce short film
clips suitable for use in a workshop. The workshop organizers can integrate
these into their programme, coordinating the workshop discussion and filmed
episodes.
The facilitator dims the lights

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Sketch 17.1

The legal department

Chief Financial Officer (CFO) Allan Dente is expecting Dawn Rade, who
asked for an appointment. He waves her in through the open door, not
leaving his desk.
Allan: Good morning Dawn. So, whats the bad news?
Dawn: Bad news? Oh, I get it. Audit means bad news.
Allan: Am I wrong?
Dawn: Well I guess no. I mean, there might be logical explanations

to everything but we seem to have payments to bank accounts

in tax haven countries, a manager who secretly owns the office

building we are renting, then we have a consulting company in

the Cayman Islands with no employees, and a promise of more

to come. What do you think it is?
Allan: Wait, wait take a breath (looking amused but a bit worried

at the same time) Where is this information coming from? You

have proof for all this?
Dawn: Ok the payments are a fact, but Im not sure what is legitimate

and whats not. Im told the Cayman Islands company is just a

vehicle to pay secret management bonuses.
Allan: (Silent while this sinks in) Oh hm Who told you that?
Dawn: So its true!
Allan: Im pretty sure you must be referring to a perfectly legal

confidential pension programme for senior executives. Where

did you get the information?
Dawn: It is all here in this file and more is to come if we want to have

more
Allan: Listen, I think you we need to reflect on this and dont rush

things I have a meeting in 10 minutes, why dont you give

me the file, I look at it and then we go through things more

properly tomorrow?
Dawn and Allan stare at each other politely. Will she give up the file?
The film fades out.

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215

At the end of the film as the lights come up, the facilitator will have prepared
relevant questions for the participants to discuss: Did Dawn do the right thing
going to the CFO with her information? Allan wants to know how Dawn found
out about the Cayman Islands company. How should she answer? Assuming
it turns out to be legal, is there any reason for Dawn to be concerned about the
confidential bonus programme? Should Dawn give the file to the CFO?
The use of film clips increases the variety of the workshop and allows the
participants to directly observe and experience a realistic fraud or dilemma
situation.
As a substitute or a complement to film clips, the facilitator can invite
workshop participants to take the place of the actors to perform a fraud
scenario. The actors will not have time to memorize the scripts, but good
results can be obtained simply by reading scripts out loud, as if it were an
acting audition. The results will be less realistic and serious than the film clip,
but the participants will nevertheless experience the situation, think about it,
discuss it and hopefully have some fun.
Role playing is another variant, where the participants are given a role and
instructions, but not a script, and asked to act out a scenario using improvisation.
The results can be surprising, and again the workshop participants are
immersing themselves into the subject, not only intellectually but also in the
sense that they can feel the excitement, the fear and the temptations.
Storytelling can also be used as a dramatic technique, where the facilitator,
a special guest or a participant describes a fraud situation from their own
experience. By consciously using storytelling techniques, the facilitator avoids
a dry recounting of facts and pulls the participants into the story.
The different dramatic techniques can be used alone or in combination.
For example, after leading with a short story example, the facilitator can show
a film clip and afterwards invite volunteers to a role play, showing what they
would do in this situation!

Dealing with Workshop Saboteurs


In spite of the fact that the workshop organizers have only the best
intentions, and that they have developed a fascinating programme based on

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very relevant material, the workshop leader is likely to encounter disgruntled


participants who, for their own reasons, seem to want to sabotage the workshop.
The possible motivations of workshop saboteurs are many such as:

they have decided in advance that the training is a waste of time;

there is a personal vendetta going on;

the saboteur want to be in focus, get attention;

there is a stressful situation in the organization;

a tradition of opposition to anything proposed by outsiders or by


headquarters;

fear that something will be discovered; or

personal problems not necessarily related to the organization.

Opposition is more likely to come from middle and higher positions in the
company. Employees at lower levels are more likely to welcome any kind of
training as a break from the normal routine, and less likely to want to sabotage it.
The most common form of passive resistance is that expected participants
simply do not show up for the workshop. Proper planning and management
emphasis in advance of the workshop should prevent excessive skulking, but it
is difficult to prevent the more senior people from deciding at the last minute
that they have urgent business to attend to. The facilitator cannot cure this
management issue. The best defence is to run a great workshop, and also to
ensure a record of participants is kept so that management is informed.
Another form of passive resistance is the participant who shows up, but is
visibly uninvolved, sleeping, sending SMS messages or otherwise ignoring the
workshop. The facilitator might adopt a soft approach, such as simply asking the
offender during the workshop or during a break what the problem is. Another
approach is to try to get the offender involved and ask him questions like,
What would you have done in this particular situation? A harder approach,
eventually asking the offender to leave, may be an option in extreme situations.
Once again, the local culture must be taken into account.

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Another possible saboteur is the individual looking for a fight: quick to


interrupt, to dispute key points, to challenge the relevance of the material or the
competence of the facilitator. A skilled facilitator can meet the challenge; explain
the key points and their relevance. Letting the fighter have their say, and using
their feedback as part of the discussion, can turn the aggressive opponent into
an ally. Since time is limited, however, at some point it may be necessary to cut
the discussion off and move on.
Perhaps the most dangerous saboteur appears when the most senior
manager present is opposed in principle to the workshop, and makes sure
everyone knows it. Other employees will then be reluctant to participate in
a proactive way. The workshop leader can, however, be confident in the
knowledge that senior management has approved the workshop, and stand up
to the local bully. While other participants may remain silent at first, they will
certainly enjoy seeing the workshop leader stand up to the challenge.
In every case, to win the fights against sleepers, fighters and bullies, it is
necessary that the workshop leader come very well prepared and with the
skills necessary to meet the saboteurs challenges.

How Fraudsters React to Fraud Workshops


People tend to break rules and almost everyone has something to feel guilty
about. In setting the tone for a workshop, the facilitator will try to put participants
at ease. After all, the workshop is not intended to be threatening. Occasionally
however, a workshop will include the presence of a serious fraudster, and their
reactions might differ noticeably from other participants.
The Narcissist fraudster, described in Part I, Working with a Corporate
Psychopath, is unlikely to sit through an entire workshop, but will instead
remember urgent matters elsewhere that require attention. But secure in their
own invincibility, narcissists will not be visibly concerned about a workshop.
When the narcissist is present, they spread negative emotions in the room, so
that other participants will feel less creative and will demonstrate lower selfesteem.
A more average fraudster who is required to participate in a workshop is
cool, collected and perhaps somewhat aggressive. They will avoid making any
positive contribution to the workshop, when they speak at all it is likely to be a

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negative comment, such as: This is silly, I have worked here 20 years and there
is no problem with fraud.
It has also occurred that a workshop participant, when their rationalizations
collapse, suffer a guilty conscience and become physically distressed, with
headaches, perspiration or other symptoms normally associated with a person
confronted with evidence of their guilt. This is exceptional and unusual; the
main purpose of the fraud awareness workshop is not to expose fraudsters
among the participants, and normally none are exposed. The workshop leader
should, however, be aware of the possibility and be able to recognize the
symptoms when they occur.

Summary
Classroom training has some clear advantages over other alternative training
techniques. Trainees can participate more completely than in pure multimedia
training through dialogue with the moderator and with the other trainees.
Group work and case studies can be used to stimulate participation. Role play
is another tool that gets attention, and gives participants almost real first-hand
experience dealing with a fraud situation. Workshops for selected participants
can also be used to analyze real incidents which have occurred. There is
much to be learned from the real cases that have occurred, in terms of what
happened, how it was handled, whether it could have been detected earlier and
so on. Companies that sweep their incidents under the rug in order to avoid
embarrassment are wasting a valuable improvement opportunity!

Multimedia Interactive
Techniques

18

And that, I hope, will teach you to imagine.


Hamlet, IV, vii, 35

Multimedia (from Latin: multus, several, medius, media) is a term that is used to
describe a communication tool which uses a combination of different content
forms. The added word multi is used in contrast to the simple use of the word
media which is normally associated only with the use of traditional forms
of printed or hand-produced material. Examples of multimedia can include
content delivered through a combination of still images, animation, video, text,
audio and different forms of interaction.
Multimedia is usually accessed through computerized and electronic
devices, even though it can also be part of a live performance.
When deciding to use multimedia self-training delivered over the Internet,
one has to be aware that it cannot provide the same depth of discussion and
exchange of ideas as a classroom workshop. It does, however, have the advantage
of being able to reach any number of people in a fast and cost-effective manner.
Another advantage is that a multimedia training application will deliver a
consistent message across the organization. While it may not be feasible or
economically justified to organize onsite workshops for all employees in the
organization, all employees still need a basic understanding of the risks of fraud
and corruption, and a knowledge of how to report concerns. Multimedia selftraining can provide that, following the same general lines as the workshop.
The benefits of using a multimedia solution to deliver basic (or more
advanced) knowledge and training can be summarized as follows:

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It combines real-life images and film clips, clarifying drawings,


illustrative sound, commenting texts and so on, thus using the
strengths of many pedagogical tools plus their combined effect.

The learning process is self-paced and the students have the


possibility to speed up or slow down as they need.

In some cases the learning can be self-directed, and give students


the chance to choose content and tools depending on their interests,
needs and skill levels.

There are no time constraints: the training can be taken at any time
and that makes scheduling easy and allows a greater number of
students to attend.

The training does not require physical attendance so travel time


and associated costs are reduced or eliminated.

The costs for companies needing to train a large number of


employees, or employees in many different locations, are lower.

The training can encourage students interaction and cooperation.

What Fits Best?


The decision to use a multimedia solution as part of the fraud and corruption
training and awareness portfolio of a company should come as the result of a
careful consideration of what the employees need and what they will be able to
use effectively. The end user analysis will consider such factors as the nature of
the company, where employees are located, the range of employees education,
the type of access they can have to computers, the time at their disposal and
so on.
Employees in most organizations will include a variety of backgrounds,
capabilities and perspectives. Education, language, cultural background
and economic situations are different and will affect training requirements.
Employees positions in the organization are also many and various; a sales
engineer will have a different perspective than an accounting assistant, a
factory worker or a purchasing professional. Careful design and preparation is

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221

required to deliver a multimedia solution that will have the desired impact on
each person in the diverse group.
Different overall approaches can be taken to awareness training. One
approach is to get employees in front of a screen and let them go through
an interactive training with minimal external intervention. But when the
multimedia tool is intended as the complete training solution, a higher level
of sophistication and interactivity is probably in order. Another approach
is to use multimedia as an assessment tool and combine the fact of being in
front of a screen with the presence of a consultant or mentor acting as coach. A
third variation might be to use multimedia as a teaching forum where several
employees are sitting together in front of a wide screen with a consultant or
mentor leading the education process. For example, one company took groups
of factory workers in China through multimedia online training, with the PC
display on a big screen and a moderator to talk the participants through the
training.
The overall strategy taken to raise fraud awareness should be carefully
formed using a design process approach as described previously. Multimedia
is an attractive option for extending coverage throughout the organization,
and can be extremely effective when used as part of a consistent and cohesive
integrity programme.

From e-Learning to Multimedia


The evolution of multimedia training can be described in terms of first, second,
third and fourth generations. The first generation focused on standalone
solutions, text-based learning, one-way communication and e-information.
IT specialists implemented solutions based on the content provided by the
owner of the project.
With the second generation, the focus moved to hard skills, that is to say
specific, teachable abilities that might be required in a given context, such as
being able to read, typing, mathematical ability, proficiency with software
applications, operating machinery and speaking a foreign language. The
development was around technology and factual knowledge, concentrating on
the interaction between a machine and a human being. Streaming videos were
introduced and IT developers began working together with Human Resources
experts for the implementation of training solutions.

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The third generation moves from exclusively dealing with hard skills
and starts including the concept of soft skills. Soft skills, such as a physicians
bedside manner, are often intangible and therefore not easily taught. They
tend to be more of a behavioural nature and include personality characteristics
such as motivation, sociability and work ethic. Examples of soft skills include
leadership, creativity, ambition, interpersonal abilities and reliability. The heart
of the teaching packages is now on emotional intelligence, human interaction,
blended learning, customized programmes and standard programmes,
enhanced focus on content, strategic focus and Learning Management
Systems. With this third generation, management starts being involved in the
development together with Human Resources and IT developers.
The emerging fourth generation is moving in the direction of virtual
reality, virtual rooms, voice recognition, strategic change, creative learning and
perceptual experience. Management, Human Resources and IT developers will
need to work even more closely together and often bring in special expertises
according to the needs.

Multimedia Fraud Awareness Training


The ability to recognize inappropriate or fraudulent activities relates to human
behaviour and human ways of equating (or not equating) deception with risk
of fraud and corruption. It follows that awareness training should focus on
those behavioural aspects. While there will always be some technical aspects to
consider when fraud and corruption is perpetrated, such as how it was done,
these tend to be simple and easily understood by participants without any
special instruction. The more difficult concept for participants to grasp is why
fraud and corruption occur. When rules and controls are broken it is mainly
because there was a human mind that deliberately wanted to do so. The human
motivations and the social engineering techniques a fraudster might use to
deceive or coerce other persons into cooperation are not easily communicated as
a list of facts. For this reason multimedia training developed with an approach
based on the first and the second generation are not likely to achieve much as
a training method for fraud and corruption awareness. The third and fourth
generation instead opens a wide range of opportunities and options which are
likely to get the message across in an effective and lasting manner.

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223

The 73855 Rule


Studies by Albert Mehrabian (1972) concluded that during a normal conversation,
approximately 7 per cent of the emotion communicated is verbal (that is, the
content of the words), 38 per cent is vocal (including the tonality of the voice,
the inflection and other throaty sounds), and 55 per cent is related to the body
language. This discovery, denominated the 73855 Rule (often abbreviated as the
3 Vs for Verbal, Vocal and Visual) highlights that it becomes more likely that the
receiver will trust the predominant form of communication, which is non-verbal
(38 per cent + 55 per cent), rather than the literal meaning of the words (7 per cent).
This does not imply that the bulk of the message is communicated non-verbally,
but it does imply that the non-verbal factors play an important role in convincing,
or failing to convince listeners. Or in other words, if the speakers do not really
believe or understand the message they deliver, their body language and vocal
intonations will conflict with the message. Listeners will not be convinced.
If this is the case, any form of training should take the 3 Vs relationship into
account. It would be unwise, for example, to run workshop trainings using teachers
or facilitators who are not sufficiently knowledgeable or committed to the subject.
Even if they say all the right words, their non-verbal communication will expose
their lack of knowledge or commitment and the training will be ineffective. In the
case of a multimedia training where no facilitator is present, the challenge is to
mix text, visual/animation and interaction, creating a body language so that the
user will both feel engaged and motivated to go through the learning experience
and also retain the information received in the most valuable way.
Voice can be used as part of the multimedia experience, using professional
actors or internal celebrities from the ranks of management. The participant
then not only reads messages and studies figures, but also listens to a convincing
voice. Actors can be very effective in multimedia. With proper coaching, they
can provide the correct vocal nuances and their lack of full knowledge will not
be exposed as they are not required to answer spontaneous questions. The use
of film clips that include both voice and body language can also be an option.

Participants Involvement
Verbal, Vocal and Visual are the 3 channels that any individual uses during
their learning process. In addition to that one can gain knowledge by speaking
and/or doing.

224

Figure 18.1

The Anatomy of Fraud and Corruption

Passive and active learning

While reading, listening and seeing are relatively passive ways of learning,
speaking and doing kindle the interpretation and realization process in a more
active way. Normally people learn through a combination of all of these and the
overall awareness training approach can include them all.
For most people, active learning will stimulate the imagination, encourage
the analytical process and greatly increase memory retention. It is easier to
remember something you have said or done, as opposed to something you have
seen or heard. Of the passive techniques, listening and seeing have a greater
potential impact than reading, but only on the important condition that the
student is paying attention! Reading, where the brain analyzes abstract letters
on a printed page and processes them according to a set of rules to logically
produce meaning, is the least efficient of the learning methods. Granted, some
students prefer learning on their own from books than attending lectures,
particularly when learning an abstract subject such as mathematics. After
all, you are reading this! Many people also claim to prefer a book to a movie,
perhaps due to the relative qualities of each, or because they prefer to create
characters in their own imaginations rather than have them predefined on
a screen. But when the objective is to stimulate interest and create a lasting
impact on a large number of employees, to change the way they think about
fraud and corruption, reading material alone is not likely to be effective.
Multimedia training normally includes passive training like reading text,
listening to audio clips, watching video clips and seeing pictures and graphics.
Speaking can be simulated through the keyboard, answering questions posed
by the multimedia or completing tests. If the multimedia system is permanently
available, it might include e-mails and message boards where users can
exchange ideas about particular points. More interactivity can be achieved

Multimedia Interactive Techniques

225

through a combination of games, dilemmas to solve, techniques that require the


participants into difficult situations providing a decision and so on. The more
the doing is realistic, the more impact and memory retention will be effective.
Realistic videos combined with questions on what should happen next, web
drama and virtual reality, where the user is getting emotionally involved and
feels part of the story presented normally have more impact than animation
and still pictures alone.

Interaction, Customization and Branding


A picture is truly worth a thousand words when using multimedia as awareness
tool. Visual objects can be used as stills, animation or more advanced video
clips. Even though some still pictures and graphics can be very powerful, it is
likely that individuals will remember more easily visuals with a higher level of
emotional involvement. For example, an interactive animation where the users
are asked to complete a task or a video describing a real-life situation which
requires them to make a decision on what the outcome of the story will/should
be, will definitely have a bigger impact that a plain photo.

Sketch 18.1

Its none of my business

Dawn is back in the office of Russ Tecarr. The safe open, revealing that it is
full of files. One of the files has been removed and lies open on the desk.
Russ: Pension Builder Trust, Cayman Islands. Its all right here.
Establishment documents, bank opening documents, payment

records. You can look, but no copies please!
Dawn: Who owns Pension Builder Trust?
Russ: Nobody owns it, thats the beauty of a trust. There is a trustee

who manages the assets, here they are, Tried Trusts Limited,

British Virgin Islands.
Dawn: This is how we pay management pensions? To a Swiss bank

account owned by a Cayman Island Trust managed from the

Virgin Islands?
Russ: Thats just the legal setup, you know, for tax reasons. All the

administration is done by a law firm in London, here are their

invoices.

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The Anatomy of Fraud and Corruption

Russ takes another file from the safe, and gives it to Dawn who begins
leafing through it.
Dawn: Establishment, trustees, annual fee ... (turning pages) hey,

look here. This invoice refers to another company, Middle East

Advice Network Ltd. Who are they?
Russ: Thats one of Nick Elbacks. You have to ask him, I just set it up

and make the payments.
Dawn: You make payments but you dont know what they are for?
Russ: He gives me the approved invoices, and I pay them. I dont care

what they are for. Its none of my business. Ask Nick.
Dawn smiles the smile of a hunter who has found his prey, unable to
escape.

The other key thing to take into consideration is the level of customization of
a multimedia. While an off-the-shelf solution will simplify the design process,
employees will more easily identify with a multimedia training that has their
organizations look and feel, with organization-specific scenarios, visual effects
and examples. An employee working in retail sales might not easily identify
with a scenario set on an offshore oil platform. It would not seem relevant. It is
preferable to create a training which reflects their specific situations on a daily
work basis. Customization (which can go from simple branding to include
company policies and related documents to specific scenarios) will make the
training more credible and relevant for the users, that is, They are talking about
my company, me, my daily job, and the difficulties I face and giving me advice
on how to deal with them.

Learning Cycle Applied to Multimedia


So what are the elements that a multimedia learning in fraud and corruption
should have? Can we talk about MUST components or key ingredients? When
establishing the basic structure of a fraud and corruption awareness solution
it might be useful to refer to the Experiential Learning Circle which was
mentioned at the beginning of Part II.

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Multimedia Interactive Techniques

Figure 18.2

Skills and knowledge learnt applied to the Learning Cycle

If applied to a multimedia awareness solution, one could say that in order


to develop a successful training there should be a good balance between content
aimed at teaching and or improving skills and content focusing on delivering
specific knowledge. For example, the main components of training could be
developed along the following lines:

Table 18.1

Components of multimedia training

Concrete experience

Observation and
reflection
Lectures on specific
topics
Information on rules
and procedures

On-the-job learning
(everyday tasks)
Possibility to give
feedback
Sharing of ideas,
Tests, examination
feelings and thoughts

Testing in a new
Forming abstract
situation
concepts
Role play, virtual games,
Case studies
scenarios and dilemmas
Group work

Theory solving

Home work

Assessment and
evaluation

In other words, to be effective, multimedia training must catch peoples


attention, be concise, engaging, interesting and relevant. It has to allow the user
to learn by doing but also supply pertinent information, such as what fraud is
and why it takes place, what to do if it happens, where to report and how. The
trainee has to be given the opportunity to reflect upon the information received
and become skilled on how to apply this knowledge in daily life in the future.
Since group discussions are not practical, multimedia training can use real-life

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The Anatomy of Fraud and Corruption

scenarios or problems that the participant needs to solve. The scenarios can
be both integrated into the training and included at the end as test questions,
where the participants are asked to display their understanding of the issues.

Could this situation be an indicator of fraud?


You are following up a series of quality complaints involving one of your
companys suppliers, Global Device Ltd. You notice that in spite of the quality
issues, GDL always wins the most important assignments ahead of other
suppliers. The paperwork seems to be in order, until you notice that many
requisition orders are raised after the work has already been completed. And
why is it that Allan Smith, who approves the requisitions, regularly attends
weekend events with GDLs managing director yet never issues an expense
claim?
Figure 18.3

A dilemma game in multimedia training

Source: Septia 2009

The Value of Employees Feedback


Because employees are participating through their computer keyboards, it is
also convenient to end multimedia training not only by testing the knowledge
of the users but also with surveys or perception questions that can provide
valuable feedback to management about employees points of view on selected
subjects. The ability to efficiently gather anonymous feedback is one point
where multimedia training is superior to classroom training.

Multimedia Interactive Techniques

229

Questions such as What do YOU believe are the three most important
fraud risks in this organization? can give very interesting results when cross
sections of employees respond.

Figure 18.4

Responses to a perception question

Source: Septia 2009

To reduce the risk that respondents automatically provide the answers they
think the management wants to hear, answers to perception questions can be
accumulated in an anonymous manner, without the possibility of retrieving
specific answers by individuals. If employees are convinced the survey is
anonymous, they will feel more comfortable giving their true opinions. For
surveys conducted across an entire organization, it is useful to analyze results
by country, division, region, position or other similar criteria.
Multimedia training can also include, or act as a bridge to onymous and
anonymous channels of communication. Employees who wish to report an
incident or a suspicion might be more comfortable doing so through a training

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The Anatomy of Fraud and Corruption

programme, rather than over a grim looking link on the security departments
web site. In order to further lower the psychological barrier, the instructions
for the communication channel might ask employees to please report their
concerns about any possible weaknesses in the internal control system, or
suggested improvements to the system. An employee with information might
not be keen on pointing the finger at someone or report a fraud, but still be
willing to report a weakness: Im not saying that something is going on, but if
someone wanted to do this it would be possible to do it in this way.

Workshop and Self-training: an Integrated Approach


Maintaining organizational resistance to fraud and corruption requires
continuous efforts to optimize internal control, monitor business processes
and to ensure employees are aware of the risks of fraud and corruption.
Multimedia training can play a valuable role, but probably cannot by itself
adequately address the awareness training requirement. An organization that
is serious about training its employees in fraud and corruption risk awareness
and prevention is likely to use both workshop training and multimedia selftraining in a continuous awareness process. The two methods can be used
in a complementary fashion, where, for example, the statistical results from
multimedia perception questions are shown to workshop participants, as
a starting point for discussion, and good suggestions from workshops are
integrated into the self-training. Multimedia self-training, which is always
available, can be easily included in orientation training for new employees,
while classroom workshops can be held for selected employees periodically.

Summary
By creating multimedia training, designed for use over the Internet, it is possible
to reach every employee in a cost-effective manner. Even employees who are
not normally tied to a computer can take a break from their normal routine
and logon to the training from home or from a workstation at a training point.
Another advantage of online training is that it standardizes the training across
the organization. Standard does not mean rigid. Language versions can be built
in, and parts of the training might vary, using different scenarios and examples
depending on the country, position and function of the employee. Multimedia,
as the name suggests, can combine images, text, voice, animation and video
clips of live fraudsters (actors), all with the desired level of interactivity.

Multimedia Interactive Techniques

231

Feedback from trainees can be gathered by recording responses to various


examples, or to test questions.

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The Theatre Experience

19

Bid the players make haste.


Hamlet, III, ii, 44

Drama in Education and Theatre in Education


When individuals go to the theatre they seek emotional stimulus. They are
entertained during the performance itself and take home some impressions of
good or bad, the moral of the story or other messages. Because the performance
reaches the audience at an emotional level, and through drama and suspense
holds their undivided attention, the communication is very effective, given a
reasonable level of theatrical quality. Audience members have no trouble at all
understanding the themes, remembering key messages and even details of the
performance.
The power of the theatre can be employed as a training tool, a means of
raising awareness on fraud and corruption. In this case it would start with an
appropriate educational topic or debate and develop a show around it.
Using drama as educational tool has become a common and wellacknowledged teaching method in schools. When talking about drama and
pedagogy, it is useful to differentiate Drama in Education from Theatre in
Education, as described by Jackson (1993). While Drama in Education focuses
on classroom drama, role-play activities and practising skills, Theatre in
Education uses performances to larger audiences as a vehicle to convey key
messages. It is likely that with Drama in Education both the students and the
teacher can learn from the content they are creating. With Theatre in Education,
the actor-teachers dont leave things to chance but follow a strict script. Drama
in Education on the other hand can start with a simple initial situation that can
be used as a base on which to spontaneously create drama while not knowing

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The Anatomy of Fraud and Corruption

where it is heading. For various reasons, including organizational ones, Theatre


in Education teams work has to be planned in almost every aspect before the
programme is presented. We could try to use the same classification and say that
using drama as part of a workshop activity can be seen as Drama in Education,
while developing a theatre performance aimed at raising the awareness of
fraud and corruption would come under the Theatre in Education category.
Through the use of theatre, the fraud and corruption play educates audience
participants by increasing their understanding of how unethical business
behaviour, fraud and corruption might arise, in an entertaining manner. Using
dramatic techniques to hold the participants attention, the key messages are
communicated at both a cognitive and emotional level. The storyline might also
engage the participants by treating them as employees or customers of a fictive
company where the fraud and corruption are occurring. There is always some
level of interaction between theatre actors and their audiences, this interaction can
be deliberately increased and even influence the outcome of the performance.
Educational live theatre is a luxurious technique, and in a large organization
with thousands of employees spread over dozens of countries it might not be
the best method of mass distribution. It might be reserved for key groups of
employees, with the intention to get them thinking about fraud and corruption in
general and innovative training methods such as theatre or film in particular.
Simon Scales, Director of Global Investigations for TNT express described
it as follows (2009):
Drama as it has for thousands of years gets people thinking about
topics, inside their own heads and discussing among colleagues,
getting through to people in a way that a PowerPoint presentation or
photocopied handout never could.

Planning a Theatre Performance


Most organizations do not have the internal resources necessary to produce a
theatre event. Fortunately there is no shortage of professional writers, directors and
actors who can be hired at reasonable cost. The requirements of an internal theatre
event for employees are naturally much less than those of a fully professional
production. The total theatre time will be shorter, and the desired learning effects
can be achieved without famous actors, extensive costumes, scenery or stage crew.

The Theatre Experience

235

It is important to develop a strong script, which will capture audience


attention and deliver the key messages on the theme of fraud and corruption.
Professional actors are probably needed for the key roles, while amateur actors
drawn from the organizations own ranks might handle smaller roles, that is to
say roles without too many lines to remember. There are a growing number of
external consultants working with fraud awareness training, some of which are
capable of producing a complete show.
The organization producing theatre training for its employees should,
however, be fully involved in the preparation and planning, deciding the focus
and taking care of practical arrangements. For example consider the following.

Time, resources and logistics

How much time is available for the performance or drama


workshop?

What budget is approved?

How much space is available?

What physical props are needed to set the scenes?

Will it be possible to set up in the space beforehand?

Is the production a one off or a series of events?

When will the event take place? It could, for example, be during
working hours, in the evening, on a weekend or as a summer school
event.

Participants

How many people should attend?

What is their background? Financial people, Human Resources,


Corporate Social Responsibility and Communication, line managers,
sales people, accounting people, a mixture of people?

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The Anatomy of Fraud and Corruption

To what extent should the performance include audience


participation, or workshop activities?

How much experience of theatre or drama workshops do


participants have?

How much experience of the specific topic that will be presented do


participants have?

Content

What key areas is the performance or drama workshop aiming at


covering?

Is the intention to be specific about a particular angle the work


should take? For example, instead of fraud and corruption in
general, one could focus on conflict of interest and collusion with
suppliers.

Printed Materials
When you go to the theatre, you normally expect to receive a programme that
details the cast of characters, a schedule of acts and intermissions, and perhaps
other interesting material. When producing a corporate theatre experience, the
programme can help set the tone for a theatre experience, even if the theatre is
the company cafeteria. A program might look like the example in Figure 19.1.
Because our intention is to use theatre as an educational device, we need a
high level of interaction with the audience. One straightforward approach is to
ask the audience, after the performance, to give their observations and analysis,
through a question and answer session or through organized group work. In
the following example, we ask the audience to work in small groups during
the breaks between the acts and then to play the role of journalists at a press
conference, and ask questions of their own choosing!

The Theatre Experience

Figure 19.1

Lack of Evidence programme

237

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The Anatomy of Fraud and Corruption

Sketch 19.1

The truth comes out

Langco Engineering surprised the market with a big loss in the third
quarter. There are suspicions of accounting irregularities, and the Stock
Exchange has started an investigation. Langco CEO and CFO are holding
a press conference in an attempt to defuse the situation.
CFO:
so as a result of these unexpected supplier problems in the

Far East, our project will be delayed until the end of next year.
Unfortunately this will increase project costs. We estimate

that the final loss on the project will be no more than 75

million euros, which is the amount we have provided for in

the current quarter. We have reported this amount as an

exceptional loss; we have also prepared pro forma statements

which show a substantial profit before these extraordinary

items.
Journalist 1: Can you please explain the reasons that you are restating

earnings from the last two years?
CFO: Hmm, yes, well because we expected substantial profits

on the Far East projects, according to the percentage of

completion method of accounting we were required to

show part of those profits last year and the year before. But

since we now expect a loss on the projects, we must

restate earnings.
Journalist 2: Why did you fail to recognize the supplier problems? Surely

they must have been known to you before this week?
CFO: No, no. Well there has been a failure, yes, well, we are

very disappointed with our team in the Far East who did

not advise us of the true situation until now
CEO:
We have started an internal investigation.
Journalist 1: Last year, after reporting strong earnings, important

bonuses to top management were approved and paid, but

with these adjustments we see there have in fact been no

profits for two years. Will you be returning your bonus?
CEO: Hmm, well that is a question for the Board of Directors, we

have not considered the issue of senior management

compensation.
The floor is opened to all of the members of the audience, who are asked
to act as journalists, improvising questions.

The Theatre Experience

239

In Sketch 19.1, the audience have the opportunity to get into the act as
journalists. Because they have watched the whole play, they have plenty of ideas
about what is going on at Langco and will have no trouble finding embarrassing
questions for the hapless CEO and CFO. In their learning experience, they have
witnessed the fraud and corruption, detected the deceptions, analyzed and
formed theories about what is taking place.
A fraud and corruption awareness theatre production titled House of
Cards Ltd (Iyer, 2008) has been held as a theatre awareness event in a dinnertheatre setting, with mixed audiences of between 50 to 200 people seated around
tables. At the end of the production, the different tables become teams for group
work, and are asked to give their opinions on a number of issues. The fictional
play is based on a fraud and corruption scenario in a make-believe company,
Build-IT. As the production reaches its climax, with ever increasing audience
participation, the scandal breaks complete with newspaper stories as shown in
Figure 19.2. In one performance of House of Cards Ltd, the audience became
so involved in the situation that when it reached the end, they continued to
play their parts for an extra 45 minutes.
The results of raising the awareness of fraud and corruption with a theatre
event can be surprising. The spectators are drawn into the plot which unfolds
in short scenes. Even if the audience can consist of representatives from many
different companies, they can easily assume the roles of company employees at
a big event. They are the bystanders, watching step by step as the tale of fraud
and corruption unfolds. As in real life, the bystanders are only given a few
pieces of the puzzle, but by watching the fraudsters and their targets in action,
they can soon imagine the missing pieces and see the full picture. As the play
reaches its conclusion, the cast and audience are normally so comfortable in
their roles that they continue the play with several improvised scenes of their
own!
Participants are both entertained and educated by the dinner-theatre
event and what is most significant is that even several years afterwards they
remember not only the event, but also details of the theatre piece. While use of
theatre as a fraud awareness training method is still experimental, its capacity
to make a lasting impact on participants is proven.

240

Figure 19.2

The Anatomy of Fraud and Corruption

Newspaper distributed at the end of the performance

The Theatre Experience

241

Summary
A powerful technique for raising awareness is through the theatre experience,
where the audience is entertained by a short play with a plot based on fraud
and corruption. While the characters and situations might seem exaggerated at
times, on the whole it is designed to be realistic and believable. The audience
become increasingly involved in the play, for example as employees of the
organization where it all happens, or in the sketch above, as journalists. By
the end of the performance the audience and cast are usually having so much
fun with the concepts and characters that they sometimes even spontaneously
improvise additional scenes. The lines come naturally; everyone understands
the previously hidden motivations of the various players, and the kinds of
frauds that are taking place. The theatre experience can be a successful training
exercise for that reason; the key messages are effectively communicated and
the participants understand those messages logically and emotionally. Several
years after the first event, participants would have no trouble recalling the
experience.

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Organizational Resilience
to Fraud

20

I shall the effect of this good lesson keep, as watchman to my heart.


Hamlet, I, iii, 45

The Limits of Prevention


It would be nice to think that with a clear understanding of the nature of fraud
and corruption, strong internal controls and high level of awareness we could
stop fraud and corruption from happening at all. Unfortunately, even when
all these measures are in place, incidents will still occur. There will always
be opportunities for fraud and corruption and persons who succumb to the
temptation. A completely secure system of internal control, if it were possible
at all, would be too expensive, too bureaucratic and too slow.
The next best solution, if one cant always prevent incidents, is to detect
and address them at an early stage before they have done too much damage. If
employees are well trained and aware of the risks, and if reasonable detective
controls and monitoring systems are in place, the chances of discovering
incidents improve.
There is likely to be a cost advantage of proactively looking for and
detecting fraud at an early stage when it is small, as opposed to only finding
it when it becomes too big to ignore. It is also obvious that preventing fraud
from occurring at all is even better, if the cost of preventive measures can be
kept reasonably small. Controls and employee vigilance can and should be
complemented by proactive measures to detect signs of fraud at an early stage.
When the organization achieves a reputation for consistently detecting and
addressing attempts at fraud, corruption or other unacceptable behaviour,

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The Anatomy of Fraud and Corruption

prevention becomes easier. The risk of getting caught that the potential fraudster
perceives is, finally, the most effective deterrent. If the risk is too great, the
dedicated fraudster will leave, looking for easier targets. Other less sinister
employees will be less likely to fall to temptation, more likely to feel loyalty to
an organization they are proud of.

Figure 20.1 Maturity cost curve

Thus, paradoxically from a deterrent point of view, effective fraud detection


precedes fraud prevention. Or in other words, a good record of detecting fraud
when it occurs acts as a deterrent and reduces the likelihood of other frauds.

What is Organizational Resilience to Fraud?


Resilience, according to the Oxford English Dictionary, can refer to the ability
to withstand or recover quickly from difficult conditions. By organizational
resilience to fraud, we mean the ability of organizations to withstand or recover
from incidents of fraud or corruption. Reacting to and managing the response
to a serious fraud incident is likely to be outside of the normal management
process. If the incident is serious enough, it might be termed a crisis. If the
organization is generally unprepared, even a moderate fraud incident might
escalate into a crisis.
Dr Erica Seville described three key aspects of organizational resilience,
these being vulnerability, adaptive capacity and awareness (2006). These aspects

Organizational Resilience to Fraud

245

apply as well to organizational fraud resilience. We need to work to reduce


both the likelihood and the impact of potential fraud events, and prepare
ourselves to effectively manage fraud events when they occur. Awareness, as
we have seen, is one of the keys to reducing vulnerability. It is also an important
supporting factor for our adaptive capacity; when we are aware of the risks we
can better prepare ourselves for the events.
When organizations first begin looking at the risks of fraud and corruption in
a holistic manner, they need to focus on detection and on how to professionally
manage the incidents that are uncovered. And, since it is the perceived risk
of getting caught that deters potential wrongdoers, not only the actual risk,
internal communication is important. Without threats, the organization can let
employees know that detective and disciplinary measures are taken. A hidden
radar trap is an effective method of detecting speeding vehicles, but notices
posted along the road warning motorists that radar detection is in place is more
effective prevention. The sight of a police car stopping a violator reinforces the
message.

Reporting Incidents
Internal controls, management supervision and even internal audit too often fail
to detect fraud because the fraudster knows how to avoid them. Most frauds are
probably not detected at all, and those that come to light often do so by accident,
or because somebody who is not part of the normal control structure tips off
management that something is amiss. This person, who might sometimes be
called a whistleblower, is perhaps an employee or former employee, but might
also be a supplier or customer or someone else who just happens to have inside
knowledge about the inappropriate activity. There are cases where valuable
tips have come from the jealous former spouse of a fraudster, for example.
Because it is so difficult to prevent incidents, persons with knowledge or
strong suspicions provide a valuable service to the organization when they come
forward. If fraud is going on, it is clearly in the best interest of the organization
that the fraudulent behaviour is reported. Unfortunately, it is not always in the
best interest of the person reporting it! Historically, organizations have been
quicker to punish the whistleblower than the fraudster, especially when the
persons accused are more important and powerful than the person reporting
the fraud. As Sophocles and Shakespeare have pointed out, nobody welcomes
the bearer of bad news. Potential informants are often reluctant to report their

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The Anatomy of Fraud and Corruption

concerns, and only do so when some strong personal motivation allows them
to overcome the reluctance. Some try to avoid the risk of reprisal by reporting
anonymously, but the risk remains that the identity of the whistleblower will
be guessed.
Not everyone who reports a problem or suspicion can be labelled a
whistleblower. The very word raises images of someone making lots of noise,
going out of their way to force their unwelcome suspicions on everyone they
meet! Surely this is not the best way to inform management of a problem. The
fault lies not with the whistleblower but with the organization that failed to
provide accessible channels of communication, or failed to educate employees
about their existence and how to use them. Typically, whistleblowing is a last,
desperate attempt to get attention when other less noisy methods have failed to
produce a result. Being the very last resort is also the only excuse for blowing
the whistle, since it implies that the basic loyalty one ought to show towards
ones superior is broken; the companys brand image may be hurt, costs may
be incurred and innocent individuals may suffer during the following turmoil.
Still, the whistleblower may be morally excused if everything else has failed.
One could also add that a necessary prerequisite for defending external
whistleblowing is that the trouble one causes by whistleblowing should be
proportionate to that is, less than the problems, costs and destructive effects
(including the effects on society at large, the public interest) of the fraud/
immoral things that are going on in the company.
The whistleblowers motivation might be a sincere outrage and sense of
loyalty to the organization. Or, the motivation might come from jealousy or a
desire for revenge. An employee who is passed over for promotion, dismissed
or otherwise mistreated (in their own eyes) might feel they have nothing to
lose. There have been cases where one fraudster reports another because
they felt they did not receive their fair share of the loot! With these strong,
sometimes negative motivations, whistleblowers sometimes report selectively
or untruthfully. Persons responding to whistleblower reports must separate
fact from fiction and get the full story.
Organizations can and should take steps to lower the barriers, making it
easier for people to raise their concerns. A clear policy that explains that reports
are treated confidentially, the identity of the person reporting is protected and
that nobody will be punished for concerns raised in good faith is helpful in
increasing the trust and confidence of individuals who might want to come
forward. Establishing dedicated communication channels to handle such

Organizational Resilience to Fraud

247

reports so called internal whistleblowing can also build confidence that


sensitive information will be treated with discretion. Perhaps the most effective
measure to lower barriers is when employees participate in awareness training,
where they are encouraged to participate in actively protecting the organization
from fraud, and informed how and when to report concerns.
The internal culture of the organization, and the example or tone at the top
set by management will also affect how willing or unwilling employees will be
to come forward with information. When top management has a questionable
ethical profile, whether it is deserved or not, employees will be less likely to
risk their positions by raising the alarm.
Once employees are trained, reporting channels established and
managements support for ethical behaviour clearly communicated, the dramatic
whistleblower is no longer as important. Reporting a concern becomes a routine
process, rather than a histrionic detour around established processes.

Ready to Listen
If employees are encouraged to report their concerns, the organization had
better be prepared to handle their reports. Responsibilities need to be assigned,
legal requirements understood and a process for systematically reviewing and
addressing complaints defined.
The right touch is very important when dealing with persons who
courageously come forward with information. When meeting with someone
who has taken the initiative to report, one must understand and show sympathy
for their situation and put the person at ease so that they are willing to tell the
entire story. At the same time, one must be able to recognize the significance of the
problem, ask the right questions and avoid making commitments or revealing
confidential information to the informant. The qualifications and knowledge of
the key persons assigned to this role can be assured through training and role
playing. We will discuss the strange world of the whistleblower later in this
chapter.
Behind the well-trained appropriate person/s that will be dealing with
incoming complaints and the individuals related to them, there needs to be a
suitable structure and process in place.

248

Figure 20.2

The Anatomy of Fraud and Corruption

Process for handling incoming written complaints

Depending on the channels of communication that are established, reports


or complaints of wrongdoing might arrive by e-mail, by telephone, internal
company mail or even through interviews. The team responsible for receiving,
assessing and addressing the incoming complaints should themselves be trained
in order to ensure a professional and consistent handling. For each complaint
that arrives, the team will need to decide whether the complaint is relevant,
serious and/or plausible. Complaints unrelated to fraud and corruption need
to be redirected and feedback given to the submitter. Individuals may very well
have opinions about the quality of food in the cafeteria, for example, but these
will normally be treated elsewhere. Some reports may even be nothing but evilminded gossip, moves in internal power struggles and so on. The team needs
to be sensitive also to ways of misusing report channels.
Complaints that are related to possible fraud and corruption need to be
assessed, and sometimes a decision must be taken on whether investigation

Organizational Resilience to Fraud

249

work is required. The group must also take into account issues such as the
protection of a whistleblower against reprisal, the rights of persons accused to
be informed of the accusations against them, and the restrictions that privacy
laws may bring regarding personal information stored in computer systems. An
approach for dealing with anonymous whistleblowing should also be defined.

Recognizing the Symptoms


While it is true that most frauds are discovered by accident or by a whistleblower
that is not how it should be, or could be. If management is aware of the risks,
they can take a proactive approach to detecting fraud. The traditional approach
to internal control treats incidents of fraud and corruption as unusual, unlikely
exceptions to the normal routine. At the same time, great reliance is placed
on preventive controls, such as segregation of duties, password protection,
physical locks and so forth. Employees are trusted and expected to follow
processes and obey the rules.
The fraudster is, by definition, willing to break the rules. By falsely
approving an invoice, or forging a signature, stealing a password or simply
exploiting some loophole in the system, they are able to bypass the controls
without getting caught. The fraudulent transaction, once completed, looks
much like any other transaction and is not likely to be detected.
Organizations need to change their approach to detecting fraud. Rather
than relying on passive controls to detect exceptions, one can actively look
for telltale symptoms of fraud and corruption with an expectation that it is
there somewhere. It is easier to find something you are looking for and expect
than something you are not looking for and do not expect! The reality is that
fraud is a certainty in any large organization, it will happen sooner or later
and from time to time. The risk of fraud should be treated accordingly. Rather
than simply investigating the unexpected incidents when they are (accidently)
discovered, looking for signs of fraud and corruption should become part of
the normal routine.
The analogy Health Check was used by Iyer and Samociuk (2006) to
describe a proactive search for possible symptoms of fraud and corruption.
Prudent people will go to the doctor for a check-up from time to time, even
though they do not feel ill. Similarly, organizations should regularly check
themselves for symptoms of fraud even when no particular fraud is suspected.

250

The Anatomy of Fraud and Corruption

The Health Check can start with the questions: We know that some fraud or
corruption is likely, but what might it look like? What form will it take? By
imagining (for example in an awareness workshop brainstorming session) what
kinds of fraudulent transactions could occur, it becomes possible to search for
them efficiently and systematically. Another Health Check method involves
routinely screening managers and key employees for involvement in external
companies, travel habits and expense reporting and compliance with internal
rules and code of conduct. Such a review need not be secret, or perceived as
an expression of distrust. On the contrary, managers should be informed that
such reviews will take place, and that they are an opportunity for managers to
demonstrate the proper tone at the top.
If there is a management narcissist with fraudulent tendencies in the
organization, as described in Chapter 6, Working with a Corporate Psychopath,
it is likely that their habits will betray them during a Health Check exercise.
The Health Check is designed to single out suspicious activities or transactions,
and when these signs appear on the radar screen additional research will soon
determine whether or not misbehaviour is present.
The use of corporate Health Checks can detect fraud at an early stage, as
compared to accidental discovery or reports by whistleblowers which tend to
concern incidents that have continued for some time. Through a systematic
analysis of patterns and indicators of potential red flags it is sometimes even
possible to predict what sorts of fraud are likely to take place in the future.
By pre-empting what the problem could be it becomes easier to take the right
measures to prevent it happening. If potential frauds are detected at a very
early phase, issues can be addressed in a calm and routine manner. Disciplinary
actions, if any, will also be minor.

Dealing with Informants


When awareness training and early detection programmes are routine, and the
organization has demonstrated its resolve to detect and address inappropriate
behaviour, the company will reach a high level of fraud prevention maturity
and it will be less necessary and less likely that major incidents will be
discovered or reported. Organizations, which are just getting started with fraud
and corruption awareness and prevention, are more likely to be affected by
frauds. Indeed, an increase in discovered and reported fraud and corruption is

Organizational Resilience to Fraud

251

often noted when first starting a fraud awareness project, as previously hidden
situations are brought to light.
It is somewhat problematic to assign a label for those persons who, in spite
of personal risks, come forward with information about fraud and corruption.
Whistleblower, informant and complainant all have negative associations,
and other words to describe the act of providing information about another
persons suspected misbehaviour are even more insulting. Fink, rat, squealer
and tattletale come to mind. It is not surprising that fraudsters, when found
out, are negatively inclined towards the person who, in their mind, betrayed
them. As discussed in Chapter 6, Working with a Corporate Psychopath
we see that while the narcissists seemingly pleasant mask makes colleagues
uncomfortable, the mask removed reveals a scary monster. No wonder people
are afraid to report.
To make matters worse, the whistleblowers motives are not always
completely honourable, even if they accurately describe a fraudulent situation.
Strong motivation is required to overcome the natural reluctance to report
wrongdoings. The whistleblower also has incriminating information that is
not generally known. Where does that information come from? Most often
the person reporting is, or was, in close contact with the persons they accuse,
perhaps trusted or, in the case of the narcissist, dominated by them. In many
cases, the whistleblower has at some point gone along with and even benefited
from the fraud they are now reporting, but have suffered some grievance that
motivates them to report. The reports and evidence from the dishonourable
whistleblower are likely to be biased, minimizing their own involvement and
maximizing blame on the subject of their wrath.
Not all whistleblowers have dishonourable motives. Some have found
themselves in an unenviable position of having to choose between participation
in the fraud (and sharing in the blame when it is eventually discovered),
or refusing to participate and immediately compromising their situation.
Whistleblowers who take the high road at the risk of losing their livelihood are
certainly not acting dishonourably.
In either case, the true whistleblower is likely to be subject to strongly
conflicting emotions. With their future hanging in the balance, they tend to
consider the incriminating information they are reporting as overwhelmingly
important and deserving of immediate and strong actions. Even in less dramatic

252

The Anatomy of Fraud and Corruption

situations, the person coming forward with information may have conflicting
emotions and an exaggerated sense of self-importance.
The organization needs to be prepared to meet informants and to
professionally deal with their complaints and anxieties in a way that will protect
the organization and respect the rights of both the accuser and the accused.
The person meeting the informant often starts with only the vaguest idea of
what will be discussed, yet they have to in short order acquire the trust of the
informant, obtain information and evidence which might be critical or might
be without value, might be true or false, avoid revealing potentially harmful
information to the accuser while convincing them that the allegations will be
taken seriously. There are plenty of potential pitfalls in such meetings.
It is very helpful to establish a trusting relationship with the informant.
There is usually no possibility to get complete information during the first
meeting, as the most pertinent questions become apparent only after review
and analysis. It is more important to make sure that the person will agree to
continue to cooperate, and also will not take matters into their own hands by
spreading rumours or initiating confrontations.
Thus, the persons who interview informants need to possess a highly
developed awareness and understanding of the risks involved, as well as an
ability to communicate effectively and sympathetically.

Incident Management
Be prepared is the Scout motto, and it applies here. When an incident occurs,
it naturally tends to disrupt the normal order of things. Who can be trusted? Is
it critical to stop the fraud immediately? How can we secure evidence? How
can we ensure business continuity?
Every incident is different, but the practical details of starting an
investigation can be thought through in advance. We discussed the importance
of investigating earlier in Part I. Most organizations do not have their own,
dedicated investigation department sitting around waiting for cases. But it is
possible to decide in advance responsibility for quickly and efficiently putting
together an investigation team on a project basis. It is also possible to prepare
in advance guidelines, checklists, sources of advice and so forth rather than
making spontaneous decisions in the heat of battle.

Organizational Resilience to Fraud

253

Many organizations have prepared an internal and confidential fraud


response plan for dealing with the incidents that inevitably will occur. It can
be similar in many ways to a crisis management plan, and in fact a serious
incident of fraud or corruption might well qualify as a crisis.
The fraud response plan will normally establish roles and responsibilities,
communication channels, general organization, even budget guidelines.
Outside specialist resources may be necessary, and it is of course helpful
if contacts with potential suppliers of investigation services are already
established beforehand. No matter how well structured the planning is, when
an incident takes place there will always be a surprise factor. Like any other
process or system, the fraud response plan and preparation skills can benefit
from continuous improvements.
For example, training for the incident response team can also be arranged,
whereby a fraud incident is prepared as a case study for the team to work
through. Dilemma and scenario-based exercises, role-play techniques and even
a make-believe whistleblower might be arranged. As with more basic forms
of fraud awareness training which were described in the previous chapters,
learning by doing is most effective.

Communication of Results
When an incident of fraud or corruption happens, it is instinctively seen as
evidence of poor management. As a result, managers often opt to limit the
damage by dealing with incidents as quickly as possible. Many serious
fraudsters, when discovered, have therefore never been investigated but instead
been rewarded with early retirement or other lucrative compensation packages.
The decision to reward the fraudster is defended as pragmatic. Investigations
are expensive, we need to put this behind us and move on, the story goes. The
fraudster, with pockets full and curriculum vitae untarnished can calmly begin
looking for the next victim. No wonder they wind up as narcissists!
Organizations that take the easy way out fail to take into account the
damage that is done to the company culture. A company that rewards fraud
and incompetence, rather than hard and honest work, is unlikely to develop
a culture of loyal and content employees. They are likely to suffer repeatedly
from incidents of fraud and corruption, as potential wrongdoers see there is
little risk.

254

The Anatomy of Fraud and Corruption

As we pointed out in Chapter 11, it is incorrect to assume that every


incident of fraud and corruption is evidence of management failure. Fraud
and corruption occur all the time, everywhere. If the organization succeeds
in detecting a fraud incident, and addresses it in a responsible way, that is
evidence of strong and successful management. The frequency and severity
of fraud and corruption incidents CAN be significantly reduced through
employee awareness and early detection systems that is the whole point of
this book. But incidents will continue to occur, and should not automatically be
treated as management failure or a reason for shame.
By sweeping fraud and corruption incidents out of sight, management also
misses the opportunity to learn from real cases and take actions to prevent
the same things from happening again. Each serious case can and should be
documented, and the lessons learned applied both to improving internal controls
and to increasing awareness. In most cases, the organization may not want to
advertise the real names of persons and companies involved in suspected or
proven incidents, for legal reasons. But genuine incidents can be described
anonymously and used as case studies in awareness training. Showing true
cases, telling employees this really happened is a useful technique to convince
employees that fraud and corruption are authentic risks.
When communicating with those who have been directly affected by an
incident, a balance needs to be struck between openness with the employees and
the need to protect the rights of the accused and of witnesses. Final settlement
of cases that wind up as police complaints or civil lawsuits can take years, and
in the meanwhile operations must continue.
Management needs to take an open and humble approach, that is, it
happened and this is how we dealt with it, hopefully it will not happen again
but we need the help of everyone to make our company more resilient and
healthier. Employees can be informed about what measures have been taken
and how things will be handled in the future. It is important that employees
feel that the company is doing the right thing, not accepting or rewarding
misbehaviour. The simple message should be that good behaviour is rewarded;
bad behaviour is not rewarded but punished.

Organizational Resilience to Fraud

Sketch 20.1

Epilogue

The Board of Directors of Langco Engineering instructed Internal Auditor


Dawn Rade to perform an internal investigation into apparent internal
control failures and accounting irregularities. Langco stock prices fell by
42 per cent immediately after the press conference, and continued to
fall during the following weeks. CFO Allan Dente resigned for reasons
related to his family. The Stock Exchange launched its own investigation,
and it was soon revealed that CEO Woodrow Melchase had sold more
than half of his shares in Langco several months before the accounting
problems were discovered. Their investigation is continuing, and it is
widely expected that criminal charges will be filed. He however denies
any knowledge of the unfortunate accounting surprises and claims his
sale of stock was proper.
As part of her internal investigation, Dawn Rade performed a full
summary of payments to the secret pension trust in the Cayman
Islands, which she presented to the Stock Exchange investigators at
their request, and to the Board. Further investigation showed that
the pension scheme was never approved by the Board of Directors,
although the CEO continues to claim that the Board was fully informed
which the Board Chairman also denies. The Board removed Woodrow
Melchase as CEO while paying him a substantial settlement according to
the terms of his contract.
Dawn Rade also discovered millions of euros in payments to dozens
of offshore companies, supposedly commission payments for major
engineering contracts in the Middle East and Far East. She has so far
been unable to verify ultimate ownership of the offshore companies, or
the identities of some of the agents and consultants. Nick Elback, who
had the personal contact with these agents and consultants, resigned
from Langco and has reportedly started his own consulting company.
Dawn Rade has been unable to make contact with him since he left
the company. The Chairman of the Board thanked Dawn Rade for an
excellent internal audit report, and suggested that she close the case
and concentrate on more current issues.

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Index
73855 rule 223

Barings Bank 634


Berger, Peter 656
Abagnale, Frank 29
biological theories 259
acquired companies 186
Bird, Frederick 70, 114
acting, and fraud 13943
blame, absence of 5668
active learning 2245
blind trust 924, 109, 115, 173, 207
Acton, Lord 64
body language 223
adaptive capacity 2445
book learning 12930
American Psychiatric
Borzack, Lenore 133
Association 845
brainstorming 200, 21011
amoral business, myth of 6064, 70, 94 branding 226
Andersen, Hans Christian 77
bribery 4, 32, 389, 66, 156
anti-corruption programmes 39
budgets 15, 68
Aristotle 103, 128
Build-IT case 1011, 52, 71, 23940
s, Berit 75
bureaucracy 11618
Association of Certified Fraud
Burke, Kenneth 107
Examiners 152
bystanders 51, 61, 678, 717,
authentic trust 945
1012, 112, 1312
awareness training
impact upon 869, 10911, 251
and cultural differences 17990
design process 191203
career fraudsters 53
and experiential learning 12737
case studies 21213
fraudsters responses 153, 21718
centralization 1689
multimedia 184, 188, 201, 21931
chimpanzees 256
objectives and benefits 16061
Cialdini, Robert 556
tailoring for different groups 16377 clan organizations 91
use of drama 1447, 189,
Clarke, John 84
21315, 2334
classroom training 205
use of theatre 23341
closing of mindsets 97
workshops 1767, 184,
Coan, James 55
1867, 20518, 230
codes of conduct 69, 1012, 14950,
15360, 167, 1712, 206
Babylon case 1416, 63, 68
training on 1578, 163,
back office personnel 1689
166, 1745, 182

264

The Anatomy of Fraud and Corruption

common ignorance 54
common sense 658, 99100
common values 912
communication
barriers to 6973
channels for 43, 2468, 22930
and cultural differences 1879
effectiveness of 11415, 206
importance of 41, 11415
of incidents 2534
and training 1634, 223
types of 223; see also 73855 Rule
company culture 478, 6971,
915, 99100, 1817, 2534
conformity 74
construction industry 1856
control environment 1245; 
see also internal controls
cooperation 278
coordination of functions 1934
corporate culture, see
organizational culture
Corporate Psychopaths 846, 101,
102, 114, 158, 217, 250
impact upon others
869, 10911, 251
corporate values 100103
corruption
biological theories 259
definitions 45
and power 645
and public/private
spheres 11314
public sector 3840, 180
social constructions 3143
social deconstruction 4577
social reconstruction 99119
see also fraud
Corruption Perceptions Index 180
Cressey, Donald 48, 56

cultural differences 3840,


17990, 1879
cultural knowledge 4043, 468
customization 226
cynicism 94
Darley, John 54
Darwinism 269
De George, Richard 6061
decadence 58, 60, 153
deception 256, 131
deconstruction 456
democracy 3940
denial 59, 60, 153
design specifications, training 1989
detachment 58, 60, 83, 152
deterrent effect 105, 169, 244, 245
deviant behaviour, defining 4043
devoid 589, 60, 153
Dewey, John 1289
Differential Association 42, 469, 59
diffusion of responsibility 54
dinner theatre 144, 239;
see also theatre
disciplinary procedures 107
discrimination 69, 756
drama 1447, 189, 21315,
2334; see also theatre
drama metaphor 29, 1079,
1367, 13947
edutainment 176
embezzlement 4
emotional detachment, see
detachment
emotional reconciliation 11112
emotional responses 869, 10914
end user perspectives, training
design 1978
envy 11214

index

ethical policy 14962


ethically challenged industries 1856
evaluation, training programmes 202
excellence, and fraud 8084
expenses fraud 4950
experiential learning 12737
facilitation payments 156, 1578
facts, knowledge of 4041, 42, 536
false memories 545
fear 70, 745, 102, 115
feedback 22830
film clips 21415
fraud
and acting 13943
biological theories 259
definitions 46
and excellence 8084
and fear 75
impact upon bystanders
869, 10911, 251
social constructions 3143
social deconstruction 4577
social reconstruction 99119
and trust 915
see also corruption
fraud awareness 99100, 102, 1235,
140, 150, 1523, 2445; see
also awareness training
fraud detection 99100,
2435, 24950
fraud prevention 2434
fraud resilience 24355
fraud response plans 253
fraud risk 1523, 1634
fraud triangle 4853, 59
fraudsters
as actors 1423
characteristics of 816
impact on others 869, 10911, 251

innocent 5051, 1756


relation to targets and
victims 1312
response to fraud awareness
training 153, 21718
see also corporate psychopaths
Fry, Roger 1334
Fundamental Attribution Error 31
Gaita, Raimond 34
Galinsky, Adam 64
gifts 165, 172
Goodpaster, Kenneth 823
greed 50, 11011
group pressure 745
group workshop exercises 21213
habits 103
hard skills 221
harmony 912
Health Check 24950
Heider, Fritz 31
Hotchkiss, Sandy 88
implementation, training
programmes 2012
incentives 83, 110
incident management 2524
incident reporting, see
whistleblowing
inequality 389, 182
informants, see whistleblowing
innocent fraudsters 5051, 1756
insiders 345
Institute of International
Auditors (IIA) 5, 124
integrity 1538
interactive materials 225
internal audit function 1723
internal control function 1723

265

266

The Anatomy of Fraud and Corruption

internal controls 99100, 1045,


1235, 152, 173, 243, 249
weaknesses in 1045, 207, 230
internal culture, see company culture
international groups 1834
International Standards on Auditing 5
investigation 10411, 2523
Iyer, Nigel 71, 1067, 110,
144, 239, 24950
Jackall, Robert 612
Jackson, Tony 233
Johnson, Charles 1545
jouissance 11314
Judgement Day case 1213, 84, 108
judgemental ability 41, 423,
5668, 11114
Kahneman, Daniel 63
Kaplan, Abraham 3
Kolb, David A. 128, 1334
Korsell, Lars 79
KPMG 523, 812
language issues 1678, 1878,
190, 194, 198
Lapis Lazuli case 1923,
323, 76, 87, 106
Latan, Bibb 54
learning cycle 1327, 2268
Leeson, Nick 634
Lennerfors, Thomas Taro 113
Loftus, Elizabeth 55
losses, avoiding 624
Luckmann, Thomas 656
Mad Max case 1718, 28, 47, 5051, 80
Madoff, Bernie 29
managers
awareness training for 1712

screening of 250
trust in 924
manipulation 130
media reporting 61
Mehrabian, Albert 223
memories, reconstructed 545
Millon, Theodore 856
mindsets, closing of 97
mobilization 41, 43, 737, 11518
monocultural companies 182, 1834
Montessori, Maria 129
moral blame, absence of 5668
moral decay 478, 612, 7980
moral muteness 6971, 93
moral relativism 357
moralizing 11114, 15051
multicultural companies 182, 1834
multi-domestic approach 1812
multimedia training 184,
188, 201, 21931
multinational approach 1812
mystification 1089, 13940
myopia errors 164
Myth of Amoral Business 6064, 70, 94
navety 102, 110, 131
narcissism 58, 60, 846, 11112,
114, 158, 217, 250
impact upon others
869, 10911, 251
national culture 17980
need 4950, 513, 11011
Nevander Fristrm, Lena 89
non-verbal communication 223
norms 4043, 468, 5760,
100103, 14962
objectivity 335
one-company towns 1845
opportunity 50, 513, 169

index

organizational culture, see


company culture
organizational design 34,
69, 912, 116
organizational levels 1867
organizational resilience 24355
Osborn, Alex Faickney 210
outsiders 345
passive learning 2245
pirates 1546
pluralistic ignorance 54
poverty 389
power 645
praxis 103
presentation tactics 20910
PricewaterhouseCoopers
82, 93, 99, 152
Prisoners Dilemma 713
private life 11314
problem definition, training
design 1957
public life 11314
public sector corruption 3840, 180
purchasing function 16970
rationalizations
by bystanders 678, 1089
by fraudsters 37, 5053, 5660,
83, 100101, 112, 1523
Rawls, John 112
reality 335, 4043
reconstructed memories 545
red flags 53, 106, 1234, 24950
reflective equilibrium 112
respect 35, 37
risk awareness, see fraud awareness
risk identification 1634
risk management 1523, 1723
role models 103

267

role play 137, 1467, 215


Rose case 89, 80, 93, 104
Rubington, Earl 40, 11516
ruling techniques 757
sabotage, of workshops 21518
sales function 17071
Samociuk, Martin 71, 1067,
110, 24950
Scales, Simon 234
scandals 61
scientific management 117
scope of training 1912
security 1723
self-training 22231
service function 17071
Seville, Erica 244
silent organizations 115
simulated experiential training 133
Skinner, Ingrid 86
slippery slope 624
small talk 66
social constructivism 314
social deconstruction 456
social facts 323, 4043, 99, 11516
social norms, see norms
social reconstruction 99119
sociobiological theories 259
soft skills 222
Storch, Marcus 267
storytelling 215
sub-cultures 42, 478, 5051, 867, 103
superficiality errors 164
surveillance systems 11718
survival of the fittest 269
Sutherland, Edwin 46, 50, 112
targets (for employees) 83
targets (of fraud) 1312
teleopathy 824

268

The Anatomy of Fraud and Corruption

testing, training programmes 201


theatre 144, 23341; see also drama
theatre metaphor, see drama
metaphor
theatre programmes 2357
tone at the top 15051, 183, 250
training, see awareness training
Transparency International
38, 180, 185
trust 915, 173, 182, 207
Tunbra, Lars-Olof 86
Tversky, Amos 63
Twain, Mark 140
us versus them culture 39, 182, 183
Uslaner, Eric 39
verbal communication 223
victims 1312
visual communication 223
vocal communication 223
vulnerability 2445

Wsterfors, David 66
Waters, James 70, 114
wealth distribution 389
Weber, Max 11617
Weick, Karl 71
Weinberg, Martin 40, 11516
whistleblowing
barriers to 43, 88, 2457
communication channels
for 43, 2468
dealing with informants 43,
1889, 2479, 25052
importance to detection
77, 7980, 1456, 245
motivations for 2456, 251
wishful thinking 556
work-life balance 834
workshops 1767, 184,
1867, 20518, 230

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