Financial Fraud Prevention and Detection: Governance and Effective Practices

CHAPTER ONE

The Origin of Financial Fraud

WHY DO BUSINESS EXECUTIVES COMMIT financial fraud? Viewed from almost any perspective, it simply makes no sense. Once engaged in a fraud, an executive's otherwise fulfilling career can be transformed into stress-filled days and sleepless nights. Every new day can present the risk of exposure by whistleblowers, the SEC, the internal auditors, the outside accounting firm, or innumerable others. The downsides of exposure can include ruined reputations and public condemnation. The downsides can also include decades in prison.

Why do executives do it? To get rich quick? Because they view themselves as above the law? Because they are dishonest and utterly lacking a moral compass?

Those are all logical explanations. But the underlying reason has little to do with any of them. The fact is that business executives often commit financial fraud without really thinking about it. Rarely do they plan for it to happen. And it's not that the guilty executives are necessarily corrupt or dishonest. For that matter, the level of individual honesty typically has little to do with it.

And that is one of the great tragedies. The perpetrators of financial fraud are often decent and honest individuals who have lived decent and honest lives. They have done well in school and earned college and graduate degrees. They have worked hard to achieve success and respect within their companies and communities. They are admired by almost all who know, or know of, them. ...