Shadow of the American dream

Fraud examiners should consider an enhanced set of Fraud Triangle factors for executives: greed, pride and entitlement. But the question remains, why do these behaviors manifest in executives who might be associated with fraud?

In her April 2015 Online Exclusive Fraud Magazine article, "The Executive Fraud Triangle: The great ‘I’", Laura Wagoner Downing, CFE, revisited Donald Cressey’s original Fraud Triangle and proposed an enhanced set of factors to consider in executive fraud: greed, pride and entitlement. Downing observed that executives who commit fraud often have a “me first” mindset, which she referred to as the “great I.”

In this column, I’d like to go a bit further and discuss why these behaviors manifest in executives who might be associated with fraud. As all anti-fraud professionals know, unraveling individual motivations can be critical to mitigating fraud. We might be able to explain the “great why” for the great I, in part by the early life experiences of many executives who’ve committed fraud.

Common experiences

If we closely analyze public sources of biographical data and public media accounts of those executives who’ve committed fraud, it becomes clear they often share common experiences: They come from modest or low socioeconomic status; their families, especially parents, have limited formal education; and they usually have worked menial jobs. We can clearly distinguish these experiences, in many cases, from “ordinary” executives who haven’t been associated with fraud.

An important caveat is that, like most qualitative analysis, this theory doesn’t lend itself well to statistical projection, and certainly we can’t generalize it to the current population of corporate executives with scientific certainty. However, it might represent a non-traditional, situational tool for investors and investigators to consider when they evaluate the possibility that a public executive could be at risk for committing fraud.

Let’s examine the common experiences of executives who’ve committed fraud and contrast those with ordinary executives who don’t commit fraud:

Socioeconomic status

More than a few public executives who’ve committed fraud have come from modest, if not poor, socioeconomic conditions. They often, at first, embodied the American dream before they descended into a much darker shadow of it. Consider former Enron founder, CEO and chairman, Ken Lay, who dreamed of escaping a life of poverty on the farm where he grew up, or ZZZZ Best’s Barry Minkow, who was embarrassed when the telephone service was cut off at his childhood home because his parents hadn’t paid the bills. (See Barry Minkow — His Dream Born in a Garage Turns Sour, by Alan C. Miller, Los Angeles Times, Jan. 19, 1988.)

High-profile frauds are, of course, small in number, so any biographical and behavioral analysis of those involved will naturally be theoretical and circumstantial. However, taken along with other risk factors, the early backgrounds of executives who’ve associated themselves with fraud begin to contrast with other executives.

I’ve observed that most ordinary executives, those who haven’t committed fraud and probably won’t, are from families of moderate to high socioeconomic status — the ratio of which has, naturally, increased over time. Their parents and family members are often professionals, or in some cases, “gray collar” workers who are successful and stable in their chosen occupation.

Gray-collar workers are employed in jobs that have some elements of blue- and white-collar work, such as police officers, child caregivers or salespeople. Most executives from moderate or high socioeconomic status seem to emerge, rather than burst, onto the scene.

Family education and support

Family education appears to be a significant factor in future executives’ potential for fraudulent activity. Executives who’ve associated with fraud are more likely to be the first in their families to attend college and often come from backgrounds where they had little intellectual support.

Often, they become entrepreneurs out of their own circumstances. Bernie Madoff saved money from his work as a lifeguard to begin his own investment firm, with limited support from his father, who was a plumber turned stockbroker. (See Bernard ‘Bernie’ Madoff: From Queens lifeguard to soaking fraud, by Larry McShane, Daily News, Dec. 13, 2008.)

Minkow is said to have begun working as a telemarketer because his mother couldn’t afford a babysitter. He became an independent entrepreneur borne of necessity and limited support.

In contrast, I’ve observed that the vast population of ordinary executives have come, historically, from families organized around businesses or semi-professional jobs and/or whose parents have college degrees. While these executives certainly are highly motivated and have a drive to succeed and possess an entrepreneurial spirit, these attributes saturate the worlds of those executives who’ve committed fraud. They are hard-chargers, free spirits and creative risk-takers who can make something out of nothing, and in many well-known cases, do so quite literally.

Menial jobs

Many members of this group had early life experiences with a wide range of what could be considered menial jobs. A clear example of this is HealthSouth’s Richard Scrushy who pumped gas as a teenager. These executives often began working these jobs, out of necessity, and at young ages. Former co-founder and CEO of WorldCom, Bernie Ebbers, was the product of a working-class family. He was a milkman and a bouncer. (See Scrushy’s site, richardscrushy.com/entrepreneur)

While experiences with menial jobs might simply be proxies for low socioeconomic status, they seem to have a more important effect. These menial jobs seem to inculcate in executives a desire to escape, and to construct new, more polished lives for themselves.

How greed, pride and entitlement might relate to the ‘great why’

A key observation emerging from this analysis is that executives who have committed fraud often achieve their positions by pushing through difficult life circumstances — mostly on their own. They construct strong personas and build façades of accomplishment behind which they seem untouchable. Ironically, they are untouchable because if they allow others to peer behind their curtains the mystiques are removed and the façades are destroyed. Instinctively, these executives go to great lengths to preserve the illusions.

Perhaps known fraud risk factors, such as a wheeler-dealer attitude, financial pressure stemming from limited individual wealth, an intense competitive desire and the need to exert great control over individual affairs are requisite to making any long, hard climb to the top. Therefore, anyone who makes it to an executive position from lower status might be inherently at greater risk for perpetrating fraud.

It’s also conceivable that the issue of menial work is merely a proxy for poorly educated families and low socioeconomic statuses. Children of poor families would be unlikely to land prized internships or work as apprentices at successful family businesses. Therefore, they might have to spend more time in menial jobs. Alternatively, perhaps the experience of working at low-wage, physically demanding jobs is a factor that motivated these executives to seek greater financial rewards. They make their way as instrumentalists in that they pursue their goals specifically and practically — not idealistically. Their goals are primary objects, and the methods for obtaining them are secondary. Accordingly, they come to appreciate toughness and ingenuity, and develop a displeasure for social order, rules and norms.

The great "why" of public executives and fraud

However, perhaps the Executive Fraud Triangle and the great I are still at work here: Fraudulent executives, who faced personal, educational and financial disadvantages must preserve hard-won success at all costs. The figure above suggests how greed, pride and entitlement — the tenets of the great I — might relate to the great why.

Effectively, executives who commit fraud might construct professional façades or non-shareable “spaces” for themselves at the top of their organizations as ways to reward themselves, protect their legacies and dispel those who might pose threats to their careers. The three tenets of the great I might, in fact, stem from a combination of life circumstances and individual characteristics.

Downing wrote in her article that in her evolved Fraud Triangle, the potentially fraudulent executive stands alone at the center of the great I and is surrounded by three points: greed, pride, and entitlement. She wrote:

• Greed: Executives want money, position, title, authority, perks, services, etc.
• Pride: Executives think they’re better, smarter, more skilled or superior.
• Entitled: Executives feel as though they deserve money, position, title, authority, perks, services, etc.

Based on her contentions, here are my proposed potential whys:

• Greed: Executives want money, position, title, authority, perks, services, etc. because they come from low to moderate socioeconomic backgrounds, have overcome them and don’t want to return to them.
• Pride: Executives think they’ve continually proven that they’re better, smarter, more skilled or superior in overcoming great odds to achieve great things.
• Entitled: Executives feel as though they deserve money, position, title, authority, perks, services, etc. because they did it on their own, and the rewards should be theirs.

Is socioeconomic hardship sufficient pressure?

One way to concretely think about this theory of the great why is to liken it as the dark shadow of the American dream. All the good things Americans purport to treasure — such as social mobility, equal opportunity and democracy in professional advancement — might, in fact, conceal a potentially evil twin.

It’s easy to see how the characteristics that allow executives to succeed against the odds could also forge in them an indomitable will and drive that’s not easily controlled within organizational bounds. Perhaps they’re natural rule breakers in that they’d already, early in life, shattered societal norms and expectations to achieve their success. We can conceive of how they might learn to view nuanced accounting rules and legal matters as window dressing — mere scenery to observe while they continue to do things their way. While this theory certainly doesn’t apply to all executives who become involved in fraud, and also might not be relevant to the population of executives as a whole, it might begin to help explain why we should be particularly concerned about romanticizing rags-to-riches stories in leaders and executives.

As a first-generation college student from lower middle-class America, it’s not easy for me to consider the possibility that certain positive traits — such as desiring the opportunities and benefits of top leadership and rationalizing individual rewards for individual efforts — might become liabilities under the right circumstances.

Many certainly believe that the pursuit of leadership is a noble endeavor, and that individual work and ingenuity deserves to be rewarded. This “bootstrap” mentality is often celebrated, but it overlooks the possibility that without highly visible guideposts, some might become lost in their pursuit of these goals.

At some point, the goal itself, whether it be Minkow’s pursuit of fame, or Enron’s pursuit of stock price, becomes the primary focus. This can turn a once-admirable pursuit into a descent into chaos. Ironically, the quest is still fueled by the same ingenuity, drive and entrepreneurial spirit — cast this time as its darker half.

Would Cressey agree that socioeconomic hardship and small beginnings — or the risk of returning to them — be sufficient pressure to engage a fraudster’s mindset? Even if it’s legal to profile executives’ socioeconomic backgrounds, is it ethical? Whether or not we can or should try to answer these questions, it might be worth considering the concepts of pressure and opportunity not just situationally, but as long-term socioeconomic variables that can shape behavior later in life.

Ryan Johnson, Ph.D., CFE, CPA, is an associate professor of accounting at Wofford College. Contact him at johnsonra1@wofford.edu.