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The Daily

Study: Ego, Not Greed, Motivates Management Fraud

Chris Gaetano
Published Date:
Oct 20, 2015
devil-speechWhen someone embezzles thousands of dollars from the corporate accounts, you can be pretty sure that greed, or perhaps desperation, was the motivating factor. However, a recent study found that while misstating financial information can indeed lead to a nice chunk of cash for a company, it's got more to do with soothing the ego and avoiding embarrassment than wanting more money. Essentially, the paper argues, people who commit management fraud are motivated by fear of failure, and fear that people will see them as a failure. 

"Fear of failure can be a very real factor among executives who have reputations to
uphold. Executives and financial accounting professionals are invested in their reputations not just from the aspect of feeding their own ego but maintaining a myth that they are 'on the ball', 'understand” the market' and 'know how to “lead' others is required for them to be able to function in a leadership role. Should these individuals be seen as failures then they would lose the benefit of being seen as having that indescribable “je ne sais quoi” that would make others in the business world wish to work with them and for them. The company would lose status that could easily translate to financial loss."

To this end, the researchers came up with a management fraud model that incorporates the well-known fraud triangle: it starts with a poor call on risk, which then leads to fear of failure, which then leads to the traditional fraud triangle of ability, motivation, and rationalization, which finally leads to financial statement fraud. This is in contrast to the asset misappropriation fraud model, which begins with greed or need, then goes into the fraud triangle, then goes into the act of theft itself, which leads into fear of being caught, which leads to cover up and deception as the final outcome. 

To illustrate, the researchers used the example of the Phar-Mor fraud, which came to light in the 90s. The company had based its success on offering lower prices than the competition, sometimes as much as 25 to 40 percent lower than the market. However, the CFO began to notice that this practice had been eroding away profits for quite some time. When he brought this issue to Mickey Modus, the founder and chief operating officer, Modus "lined out the poor numbers on the financial statement and filled in his own. This eventually led to obfuscation of inventory balances to defraud the external auditors, Cooper and Lybrand, and the pressuring of suppliers for fees which were placed into accounts to shore up losses." 

The CFO, as well as other professionals who were eventually brought into the fraud, went along with the plan, as he believed that there was still time to turn things around and fix the problem. However, it eventually came to pass that maintaining the fraud itself became the main thing in the way of actually solving the issues that led to the fraud in the first place. Once this became apparent that the company could not be saved, the accountants to helped "gave up and all but confessed to the fraud." 

"While Monus may have been motivated by greed as well as fear it is clear that since the fraud required people who rationalized the fraud using the [belief that their efforts were to save the company and people's jobs] and the ego portion of the paradigm which spurred the 'fear of failure' and 'hope for success'... these factors appear to be the main motivations for the beginning of the fraud." 

The researchers did say that there can still be cases where management fraud is motivated by simple greed, such as in the case of a startup trying to puff up results to get capital they would not ordinarily receive, they still asserted that fear of failure remains a primary motivator in financial statement fraud.