The "Unified Perspective" Recipe for a Successful Compliance Program

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(No Transcript)
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Cooking Up ComplianceThe Fraud Triangle

• Dr. Tony Dimnik and Dr. Pamela Murphy
• Queens School of Business

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Agenda

• Pamela Murphy
• Introduction of fraud triangle
• Tony Dimnik
• Situational vs. dispositional focus on compliance
• Motivation
• Tone at the Top
• Folly of Rewarding A While Hoping for B
• Systems first
• Pamela Murphy
• Rationalization

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The Fraud Triangle
Opportunity
Motivation
Fraud
Attitude / Rationalization
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Elements of the Fraud Triangle

• Opportunity
• Situations or conditions that allow an individual
  to commit fraud
• Motivation
• Pressures, incentives, and other motivators to
  commit fraud
• A reason to commit fraud
• Attitude / Rationalization
• Attitude a predisposition to commit fraud
• Rationalization a justification for committing
  fraud

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Key Things to Think About

• Systems are necessary but not sufficient in
  promoting compliance
• The environment in which individuals work may be
  more important than the characteristics of
  individuals in understanding and promoting
  compliance
• Are situational factors motivating your
  employees to commit fraud?
• Are situational factors allowing employees to
  rationalize fraud?

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Botticellis Chart of Hell circa 1480 (also
painted Birth of Venus)
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Dantes Inferno circa 1310
Those who commit Violence
Those who commit Fraud
Traitors
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Circle 8 The FraudulentThose guilty of
deliberate, knowing evil

• Worse than murderers
• Slightly better than traitors if external
• No better than traitors if internal

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Gustave Doré 1867
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The Lucifer Effect by Philip Zimbardo

• Social situations often exert much greater power
  over human actions than has been generally
  acknowledged by most psychologists or recognized
  by the general public. This situational
  approach is a corrective or counterweight to the
  dominance of the traditional dispositional
  perspective that has been at the core of
  Anglo-American psychology. The primary focus
  on personality and inner determinants of behavior
  is fueled by the reliance on an individualist
  orientation, in contrast to a collectivist
  evaluation that places greater emphasis on the
  community as the basic unit rather than the
  person. The Individual is the coin of the
  operating realm in virtually all of the major
  Western institutions of medicine, education, law,
  religion, and psychiatry.

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The Lucifer Effect continued

• These institutions collectively help create the
  myth that individuals are always in control of
  their behavior, act from free will, and are thus
  personally responsible for any and all of their
  actionsSituational factors are assumed to be
  little more than a set of minimally relevant
  extrinsic circumstancesThat view seemingly
  honors the dignity of individuals who should have
  the inner strength and will power to resist all
  temptations and situational inducementsWe
  should be aware that a range of apparently simple
  situational factors could impact our behavior
  more compellingly than seems possible.

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Motivation Situational Factors

• Tone at the Top
• Rewards
• Systems

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Tone at the Top Matters

• The Chicago Sun-Times Story

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Assessing Tone at the Top1992 COSO Control
Environment checklist

• Existence and implementation of a comprehensive
  code of conduct and other policies
• Codes are periodically acknowledged by all
  employees
• Employees understand what behavior is acceptable
  or unacceptable and know what to do if they
  encounter improper behavior
• Commitment to integrity and ethics is
  communicated effectively both in words and deeds
• Employees feel pressure to do the right thing
• Everyday dealings with customers, suppliers and
  employees are based on honesty and fairness
• Management responds to violations of behavioral
  standards
• The board and audit committee evaluate the
  effectiveness of tone at the top

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Folly of Rewarding A While Hoping for B

• Manchester bus service
• Moscow opera house
• German airline

Check the reward system before you blame the
individual.
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Systems

• Allow managers to monitor the organization
• Release management time and attention for
  situational initiatives
• How much time do you spend on people?
• How much time do you spend on the future?
• How much time do you spend on strategy (external
  issues and organizational design)?

Do you have the time to look at the faces of the
people who workin your organization?
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The Fraud Triangle
Opportunity
Motivation
Fraud
Attitude / Rationalization
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How Much is Attitude vs. Rationalization?

• If opportunity is present, and
• If motivation is present,
• How much of fraud is due to attitude vs.
  rationalization?

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Are all these people bad apples?
WorldCom
Enron
Jeff Skilling
Bernie Ebbers
Ken Lay
Scott Sullivan
Adelphia
Health South
Andy Fastow
Tyco
Dennis Kozlowski
Richard Scrushy
John Regis
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Were they all predisposed to commit fraud? Or
Were they able to rationalize it?
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My Premise

• Most people are not predisposed to commit fraud
• Most people have ethical values

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My Premise

• Most people are not predisposed to commit fraud
• Most people have ethical values
• If they commit fraud, they will feel guilty
• They will use psychological methods of reducing
  that guilt so they can sleep at night

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The Fraud Triangle
Opportunity
Motivation
Fraud
Rationalization
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What is Rationalization?

• A way of justifying or explaining ones behavior
  in a particular situation, while still
  maintaining ones beliefs
• I believe that committing fraud is wrong, but I
  did it in this particular situation because
• This justification may not be said aloud, but is
  certainly said to oneself
• Eight categories of rationalization

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Rationalization Category 1

• Ignore or misconstrue consequences
• Minimize, ignore, or misconstrue the consequences
  of the act

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Rationalization Category 1

• Ignore or misconstrue consequences
• Minimize, ignore, or misconstrue the consequences
  of the act

Im not hurting anyone
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Rationalization Category 2

• Diffusion of responsibility
• Obscuring personal agency by diffusing
  responsibility

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Rationalization Category 2

• Diffusion of responsibility
• Obscuring personal agency by diffusing
  responsibility

• Everybody does it

Richard Scrushy, Health South
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Rationalization Category 3

• Displacing responsibility
• Obscuring personal agency by displacing
  responsibility

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Rationalization Category 3

• Displacing responsibility
• Obscuring personal agency by displacing
  responsibility

We have to hit the numbers
Bernie Ebbers, CEO WorldCom
Scott Sullivan, CFO WorldCom
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Rationalization Category 4

• Advantageous comparison
• By comparing the wrongful act against a much more
  flagrant act, the original act looks better

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Rationalization Category 4

• Advantageous comparison
• By comparing the wrongful act against a much more
  flagrant act, the original act looks better

This is nothing compared to
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Rationalization Category 5

• Moral justification
• Reprehensible acts are reconstrued as socially
  worthy or having a moral purpose

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Rationalization Category 5

• Moral justification
• Reprehensible acts are reconstrued as socially
  worthy or having a moral purpose

I was a hero
Andy Fastow Enron
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Rationalization Category 5

• Moral justification
• Reprehensible acts are reconstrued as socially
  worthy or having a moral purpose

I was a hero
Andy Fastow Enron
Im helping my family
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Rationalization Category 6

• Euphemistic labeling
• Using convoluted verbiage to make a wrongful act
  sound better

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Rationalization Category 6

• Euphemistic labeling
• Using convoluted verbiage to make a wrongful act
  sound better

Im trying to level the playing field
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Rationalization Categories 7 and 8

• Dehumanize the victim
• Attribute blame to the victim

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Rationalization Categories 7 and 8

• Dehumanize the victim
• Attribute blame to the victim

• The company had it coming
• The company treated me unfairly,
• they deserve it
• Company executives get all the perks

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Category 9?

• Postponement
• Try not to think about it
• Does this work?

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Category 9?

• Postponement
• Try not to think about italong with
• Self affirmation
• Do or say something that makes one feel better
  about oneself

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Category 9?

• Postponement
• Try not to think about italong with
• Self affirmation
• Do or say something that makes one feel better
  about oneself

Bernie Ebbers WorldCom
John Rigas Adelphia
Dennis Kozlowski Tyco
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So What?

• Have you heard any of these rationalizations
  within your organization?
• Do you believe individuals are capable of both
• altruistic behavior
• fraudulent behavior?

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So What??

• Ethical decision making is often based in emotion
• Most people are not predisposed to commit fraud,
  but virtually everyone can rationalize
• By knowing typical rationalizations
• Make employees aware of the flaws of typical
  rationalizations
• In my experiments, misreporting rates dropped by
  more than 20 when participants were reminded of
  flaws in rationalizations
• Be aware of and probe for rationalizations from
  employees

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So What??

• Understanding institutional and
  environmental situations are essential
  to reduce the motivation to
  commit fraud

Motivation
Opportunity
Fraud
Attitude / Rationalization
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So What??

• Understanding rationalization helps
  detect fraud more quickly and may
  prevent fraud

Motivation
Opportunity
Fraud
Attitude / Rationalization
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So What??

• Systems are essential to reduce the opportunity
  to commit fraud
• Microsoft compliance solutions can help you
  reduce this opportunity

Motivation
Opportunity
Fraud
Attitude / Rationalization
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Moving Forward

• Begin thinking about how to action some of the
  ideas shared today by engaging in a complimentary
  half-day workshop with a corporate governance,
  risk and compliance consultancy technology
  partner.
• To arrange your workshop, please contact your
  sales rep or Sujan Menezes
• Industry Manager - Financial Services
  sujanm_at_microsoft.com
• Todays presentation will be made available at
  www.microsoft.ca/improvecompliance

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Thank you for your time and attention!