Et tu, Brute? When Top Executives Go Bad

There’s nothing like the treachery that comes from a trusted confidant. Top executive and management fraud is the cut that goes the deepest in betrayal of trust, and the financial losses can be enormous. The estimated costs to society range from $200 to $600 billion annually (Zahra, Priem, & Rasheed, 2007). But what are the warning signs, and how do companies protect themselves?

Identifying the Culprits and Their Motivation

Accountancy firm KPMG’s Profiles of a Fraudster Survey 2007 examined 360 fraud cases and identified a typical fraudster as a trusted male executive at management or senior management level. This person tends to be 26 to 55 years old, has been with the company more than six years, works in the finance department and commits the fraud alone. He will typically commit up to 20 acts of serious fraud over a five-year period, most often through misappropriation of money. Alternately, he works in operations, in sales or as the CEO. Greed and opportunity are the prime motivators for 73% of fraud incidents. In 55% of the cases studied by KPMG, there was no prior suspicion.

“Over 60% of perpetrators are members of senior management, whose status in the company makes it easier for them to bypass internal controls and inflict greater damage on the company,” said Richard Powell, a partner at KPMG Forensic (Paton, 2007b). But why would those who have climbed to the apex of society risk their jobs, reputations, fortunes and freedom?

There are no easy answers. Professors Shaker A. Zahra, Richard L. Priem and Abdul A. Rasheed write that fraud committed by top executives and senior management challenges the social class/poverty theories of crime. After all, these fraudsters are members of the upper socioeconomic classes, which should be less prone to economic stress and therefore less likely to engage in “culturally deviant” behavior. But Zahra and his colleagues do identify several factors that make fraud more likely. One of these is the somewhat well-founded belief that punishment will be delayed or modest.

Enablers of Fraud

In fact, the KPMG survey shows that fraudsters rarely face criminal charges and that there was no recovery of assets in 50% of the fraud cases investigated. Companies followed up discovery of fraud with internal investigations (25%), disciplinary action (21%), police/law involvement (20%), civil recovery (12%) and voluntary resignation or retirement (11%). Only 2% of companies took no action. Weak internal controls were cited as the most common enablers of fraud, while access to internal controls, trust and opportunity were all seen as enabling factors.

Concern about losses to shareholders and the company’s reputation are reasons for choosing not to alert authorities and the media. These considerations motivate some to ignore or even help to conceal fraud. This could be the Catch-22 of fraud prevention.

Professors N. Craig Smith, Sally S. Simpson and Chun-Yao Huang say that executives are less likely to commit fraud if they know their actions will be made public and that they will suffer the consequences. They contend that public disclosure may do more than penalties to deter fraud, as the certainty of disclosure increases the social consequences of fraud, such as loss of reputation and community standing (Yu, 2007).

Fraud may also go unpunished due to difficulty investigating outside the country where a company is headquartered. Technology allows criminals to instantly transfer money and intellectual property across international borders, where problems associated with different languages, cultures and laws can make investigations more difficult (Paton, 2007a). But governments are beginning to intervene in this area. For example, an increase in monitoring and enforcement by the U.S. and China in 2007, primarily in bribery and payoff investigations, may require multinationals to revamp internal controls, investigative capabilities and ethics training in overseas operations (Chen, 2007; Kersnar, 2007).

The Importance of Good Housekeeping

People are less likely to make a mess in a clean house. A corporate culture that promotes ethical behavior at all levels is critical in preventing top executive and senior management fraud. Cutthroat environments in the industry or the organization promote unethical and illegal conduct by those who identify it as a cultural norm (Zahra, Priem, & Rasheed, 2007).

Two important means of encouraging ethical behavior and detecting fraud are an active board of directors and whistleblower hotlines. An anonymous tip by a whistleblower was the primary source of fraud detection in 25% of cases investigated by KPMG. Other sources of fraud detection were management reviews (21%), external controls (10%), internal controls (10%), suspicious superior (9%), complaints by customers (9%) and accidental discovery (8%).

Companies also show that fraud won’t be tolerated by clearly communicating business ethics and encouraging workers to question unethical or illegal orders (Yu, 2007). Other proactive strategies are the separation of senior management powers (e.g., board chairmanship and the CEO position) and the implementation of stricter internal controls over autonomous or far-flung departments (Zahra, Priem, & Rasheed, 2007).

For more information:

For much more on crime in the workplace, see the Crime and Violence Knowledge Center. For more about business ethics and corporate culture, see the Ethics in Business and Corporate Culture Knowledge Centers. For more on making the workplace more secure, see the Corporate Security Knowledge Center.

For more on the Profiles of a Fraudster Survey 2007 from KPMG Holdings, please click here for a PDF version of the report. For more on KPMG, click here.

Documents referenced in this TrendWatcher include the following:

Chen, Wu. “View from China: Shanghai Confidential.” CFO Magazine. April 1, 2007.

Kersnar, Janet. “View from Europe: Global Bribery.” CFO Magazine, June 1, 2007.

Paton, Nic. “Cross-Border Fraudsters Getting Away with It.” Management-Issues, May 24, 2007a.

Paton, Nic. “Male, High-Level, Trusted – and Stealing from You.” Management-Issues, April 17, 2007b.

Profiles of a Fraudster Survey 2007. KPMG Holdings, 2007.

Yu, Larry. “Do Stronger Laws Prevent Corporate Crime?” MIT Sloan Management Review, Spring 2007, pp. 6-7.

Zahra, Shaker, Richard Priem and Abdul Rasheed. “Understanding the Causes and Effects of Top Management Fraud.” Organizational Dynamics, Vol. 36, No. 2, 2007, pp. 122-139.