The Fraud Examiner

Is Your Blindness Motivated or Indirect? How Corporate Executives and Small Business Owners Commit Financial Statement Fraud

Bret Hood, CFE
Director, 21st Century Learning & Consulting

Has there been a time in your life when you were conflicted between two choices? While there are certainly times when you can’t go wrong with either choice, there are definitely instances when what you should do and what you want to do fail to align. What choice do you make in those situations? Do you follow your ethical and moral code, or do you cave in to your desires? Just like a number of corporate executives and small business owners, the decision you think you will make may not match the decision you actually make.

Research has shown that your brain struggles with internal conflicts of interest. When your brain desires one thing, but your conscience objects, dissonance is created. “Our desires influence the way we interpret information, even when we are trying to be objective and impartial,” writes Max Bazerman in “The Power of Noticing.”  Because of this, your brain skews certain facts and events to fit preconceived notions without you being aware. This is especially prevalent with executives and small business owners who commit financial statement fraud.

In the ACFE’s most recent Report to the Nations , the highest median loss suffered by reporting organizations involved financial statement fraud — with the average incident costing $800,000. While a portion of the loss amount can be attributed to the fact that executives and small business owners have financial control over organizations, do you wonder how these executives and small business owners are able to rationalize their misrepresentations, especially given the high salaries that some of them earn?  Surprisingly, it is not as hard as you would think.

Motivated blindness has been described as your brain’s ability to conveniently overlook or work around a set of facts that contradicts your self-interests. For example, let’s look at David Mobley, a hedge fund manager who falsified years of accounting records and was able to rationalize his behavior through motivated blindness. Since Mobley wanted to maintain his extravagant lifestyle and revel in his reputation as one of the premier stock traders in the world, his brain quickly set aside the investment losses by rationalizing the bad trades as mistakes that would not be repeated in subsequent months. This allowed him to effectively ignore the massive trading losses while continuing to recruit new investors touting his stellar investment returns. “We discount facts that contradict the conclusions we want to reach, and we uncritically accept evidence that supports our positions,” Bazerman said. “Unaware of our skewed information processing, we erroneously conclude that our judgments are free of bias.”