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There Is No Financial Fraud Personality Type

Jeffrey Borenstein, MD, Psychiatrist, and Arthur J. Radin, CPA

Sridhar Ramamoorti and Barry J. Epstein have written two articles published in The CPA Journal (“Today's Fraud Risk Models Lack Personality,” March 2016, http://bit.ly/2m7UUoX; “When Reckless Entrepreneurs Become Dangerous Fraudsters,” November 2016, http://bit.ly/2m7SVkD) claiming that there is a “dark triad” of personality types who, as business executives, are more likely than others to commit financial statement fraud. The “dark triad” consists of individuals who are narcissistic, Mach iavellian, and psychopathic. Based on various other articles, these authors claim that “the overall incidence of these personalities is relatively small—2% or less in the general population—the incidence on Wall Street and in corporate America seems to be in the 10–20% range.” The authors suggest that corporations, “before anyone is promoted to senior executive positions [sic] there should be assurance that their personalities are not deviant” and that for outside auditors “senior management personality types should be first be assessed and used to impact … audit procedures.”

We strongly disagree with the authors, on many grounds. The personality types referred to have disparate traits, which do not necessarily lead to criminal behavior. While an individual with antisocial personality disorder will frequently have a failure to conform to social norms, not all people who engage in criminal activities have this diagnosis, and not all people with this diagnosis engage in criminal activities. People with narcissistic personality disorder may well have a pattern of grandiosity, need for admiration, and lack of empathy, but such a person is not considered by the psychiatric profession to have a higher risk of criminal behavior. Lastly, Machiavellian personality is not a disorder included in the Diagnostic and Statistical Manual of the American Psychiatric Association. We know of no reliable studies indicating that a confluence of these traits in one individual would materially increase the risk that such an individual is significantly more likely to perpetrate a financial fraud.

There is a long history of society trying to find ways to define criminals by their physical characteristics, which have proven to be utter failures. We believe that the search for dark triad individuals is equally doomed to failure. There is a great deal of neurological research taking place currently that may or may not tie personality characteristics to genetic makeup someday, but we are far away from that understanding. Until the brain is better understood, we believe that trying to define dark triad individuals is another step in the failed attempt to define criminals based on non-experiential information.

In addition to the above generalities, we have specific disagreements with the positions taken in these articles:

  • We do not have faith in the statistics the authors cited, referenced above, as to the proportion of persons in the general population and in executive positions having personality characteristics that would classify them as being part of the dark triad. While such personalities exist, this type of disparity in their incidence is questionable. The authors also refer to “the apparent prevalence of psychopaths in corporate management”; we have not seen such a prevalence.

  • Our business, political, military, and social leaders have many of these characteristics. While we do not know if our leaders and heroes have dark triad personalities, many of them clearly have some of the personality characteristics included in the dark triad.

  • Our most creative, interesting, and profitable clients are frequently those who are building business empires. Such individuals are not shy, retiring, or anxious to follow all social norms. Would the elimination of individuals who exhibit some of the dark triad characteristics from business eliminate the creators of Apple, Google, or Facebook? Enron was a very creative company and did many very creative things. We do not believe that, since they went astray, we should carefully try to eliminate such creative individuals from our clients.

  • There is no support we know of for the idea that personality issues are a significant cause of financial dishonesty. The author of a recent book on creators of financial frauds, Why They Do It: Inside the Mind of the White Collar Criminal (Eugene Soltes, Public Affairs, 2016) states his belief that many of the criminals that he interviewed were good people who made mistakes, either out of their inadvertence or finding themselves in a poor position from which they did not know how to recover. In general, they did not exhibit any of the three characteristics of the dark triad. Examining companies for dark triad personalities would not have discovered these individuals.

  • A professional psychiatrist's diagnostic conclusions about personality characteristics require input from a cooperative person; the types of behaviors and characteristics of the people described in the triad can easily be hidden during such an evaluation. In addition, the authors would require auditors and board directors to simplify what is a very complex and subjective matter.

  • An auditor trying to follow the authors' recommendation would be perplexed as to how to proceed. The authors suggest that “perhaps psychologists or psychiatrists should interview client management and make assessments” for new clients. We do not believe this type of procedure is reasonable, as the individual would most likely strongly object. Alternatively, the authors believe that an auditor should make his own determination as to whether a prospective client is a member of the dark triad. If a psychiatric professional cannot do that, one cannot expect an auditor to make such an evaluation.

  • The authors suggest that “accounting students … should strive to become educated about abnormal personalities and their potential impact on audit risk.” We do not believe that such educational emphasis would be productive.

  • It is possible that a trained psychiatric professional could make a reasoned judgement from peripheral information about the potential client or employee. We note, however, that the American Psychiatric Association specifically forbids members from making such evaluations of public figures, where much more information is available.

Until the brain is better understood, we believe that trying to define dark triad individuals is another step in the failed attempt to define criminals based on non-experiential information.

There are certainly serial predators that can endanger investors; auditors have been aware of this risk for many, many years. Firms have adopted requirements for searches for new clients not personally known to members of the firm. Internet-based search engines such as Google or Yahoo have made such searches inexpensive, and we absolutely believe they should be made whenever a firm gets a new client with personnel unknown to the firm.

As stated above, we believe that the percentage risks of either dealing with a person from the dark triad or the risk of such an individual committing a financial fraud are highly suspect. The risks involved are completely non-quantifiable, and therefore it is not possible to make any cost-benefit evaluation of following the authors' suggestions.

Jeffrey Borenstein, MD, Psychiatrist. President, Brain & Behavior Research Foundation, New York, N.Y.
Arthur J. Radin, CPA. Treasurer, Brain & Behavior Research Foundation, New York, N.Y.

 
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