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American Fraud Part III

April 6, 2012 in Accounting research, Fraud Research, Research by Toby Groves

Why Nothing Will Change Until We Think Differently


Is the way Americans think about ethics—and even ethics codes themselves—the real problem? 

Personal and professional experiences have allowed me to explore that question in detail. I’ve met and spoken to people associated with shocking financial scandals. Doing so has given me a perspective that I never would have imagined. It has made me think that everything we’re doing to protect ourselves from these scandals may actually be making us less safe than ever.

Cultural Implications

During the 1970s, social psychologist Lee Ross coined the term “fundamental attribution error” to explain the self-serving bias that causes us to see what we do as a reaction to our environment but what someone else does as a reflection of their character. Americans have a particularly damaging strain of this bias. Ross’s experiments proved that we focus so much on personality characteristics and individual responsibility that we dismiss the critical importance of context and situations when determining causes of behavior. The study of corporate crime is an excellent example of this concept, with almost all discussions centering on the criminal, and not the situation and events preceding the crime.

In a classic psychology study on cheating, researchers at Columbia University examined the behavior of 11,000 schoolchildren between the ages of eight and sixteen over a five-year period. The children would cheat for different reasons at different times, with no reliable way to tell when cheating would occur. The researchers concluded that “even slight changes in the situation affect individual behavior in unpredictable ways.” The study found what many other studies in social psychology and criminology have found—the correlation between what anyone will do under two different situations is “lower than would be required for an accurate prediction of individual behavior.” Still, Americans think they can predict who will commit crimes based on dispositional aspects or generalized situations.

Americans are terrible at recognizing context. This brings us back to my one exception in my research of 40 white collar criminals—the Asian-American I spoke to who understood the broader context of his actions. What surfaced in my research is supported in brain imaging studies involving Asian and American participants presented with pictures including different backgrounds. In the study, Asians saw the contextual differences while Americans seemed oblivious to them. When scenes changed and incongruent images were shown, Americans worked even harder to focus on the subject of the scene and ignore the background. Could this be the clue as to why my sole Asian-American subject could see the context of the moral aspects of his crime without reference to the law? Was his Asian identity enough to explain why his brain processed his crime differently from all the others?

Brain imaging technology also shows that when Americans think about whether they are honest, their brain activity is different than when they think about whether someone else is honest. This is not the case for a Chinese person. When a Chinese person thinks about whether they are honest, the brain activity is nearly the same as when they think about whether someone else is honest. Chinese people find it natural to focus on context and situations, not disposition. They do not experience the same fundamental attribution error. Genetic studies have noted genetic mutations that are believed to be co-evolving respective to American and Eastern Asian cultures that are related to these national belief structures.

In Part IV, we delve into how seemingly harmless small crimes escalate into something much larger and more damaging.

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American Fraud Part II

March 30, 2012 in Fraud Research by Toby Groves

Why Nothing Will Change Until We Think Differently

Enron Chief Executive, Jeffrey Skilling

Is the way Americans think about ethics—and even ethics codes themselves—the real problem? 

Personal and professional experiences have allowed me to explore that question in detail. I’ve met and spoken to people associated with shocking financial scandals. Doing so has given me a perspective that I never would have imagined. It has made me think that everything we’re doing to protect ourselves from these scandals may actually be making us less safe than ever.

Genetics? Psychology? Culture? Are Certain People Disposed to Commit Fraud?

As I discussed in Part I, I was convicted of the same crimes as my brother had been 20 years earlier. The coincidences of his situation and mine led me to wonder if genetics played a role. In reviewing numerous studies about crime and genetics, including the famous 1970s twins studies, there was no clear link. More recent studies attempted to isolate a “criminal” gene, but failed to find a reliable predictor of criminality.

In prison, I conducted research as scientifically as I could under the circumstances. After my release, I continued my research. I spoke to hundreds of auditors, fraud examiners, federal agents, and probation officers. I interviewed forty white collar criminals. I spoke with them about their criminal history, family background, and other topics. I found that 95% were in prison on their first offense. Most had never run afoul of the law. These individuals averaged sixteen years in their respective lines of business, were management level or above, and had an average age of 46.

If genetics and family history weren’t part of the answer, what about psychology? When it came to personality disorders, only one of the forty had what appeared to be clinically diagnosable narcissistic personality disorder, characterized by the arrogance, callousness, and self-centeredness the public often associates with these crimes. My anecdotal evidence was similar to that of federal probation officers who work with criminals after release. This contradicts the belief of more than half of the fraud examiners and auditors I spoke to who, when asked, agreed with the statement “Most white-collar criminals are psychopaths.” Experienced probation officers told me that the public and even many experts grossly overestimate these dispositional traits that apply to less than 5% of white-collar criminals.

The Seeds of Scandal

Many scandals start in small, sometimes imperceptible steps. More than 90% of those I interviewed reported that their crimes happened in such small steps that they were fully involved in the crime before becoming conscious of it.

Of the criminals in my study, 85% agreed with the statement “I did not consciously weigh the risk of prison when committing my crimes.” (another ten percent said they were unsure.) Ninety percent reported that they believed themselves to be basically ethical people. When I interviewed these individuals, it became clear that they could not discuss their crime in the context of “right and wrong” outside of a legal framework.

While discussing their acts, the criminals focused on the situation that caused their actions and what the law said about their behavior. They found it difficult to see the broader context of how their action affected others or alternative options they could have chosen. The only exception was one middle aged Asian-American man, a seemingly inconsequential fact that would later have greater implications.

In Part III, I discuss the cultural implications of national heritage on fraud.

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American Fraud

March 28, 2012 in Fraud Research, Research by Toby Groves

Why Nothing Will Change Until We Think Differently


Is the way Americans think about ethics—and even ethics codes themselves—the real problem?  

Personal and professional experiences have allowed me to explore that question in detail. I’ve met and spoken to people associated with shocking financial scandals. Doing so has given me a perspective that I never would have imagined. It has made me think that everything we’re doing to protect ourselves from these scandals may actually be making us less safe than ever.

A Tale of Two Dinners

On June 29, 2009, a close friend of mine was dining at a trendy New York restaurant with an auditing and corporate fraud expert. The two had just left an accounting conference not far from the courthouse where earlier that day Bernard Madoff had been sentenced to 150 years in prison for running the biggest Ponzi scheme in history.

The men discussed legislation and sophisticated technology that had emerged in recent years to battle corporate malfeasance. The wave of corruption earlier in the decade—Enron, WorldCom, Adelphia—had spurred the U.S. Sarbanes-Oxley Act of 2002. With a harsh spotlight on ethics, companies essentially were being required to institute formal ethics codes and install ethics officers. My friend and his dinner partner concluded that much effort was being exerted, but that tangible progress and real answers were still far out of reach.

Six hundred miles away, I was having a similar discussion and getting my first true insight into why ethics codes were not working. My dinner was with Dick Scruggs, a billionaire and America’s most powerful trial lawyer in another life. This was a man that I considered a hero for standing up to the powerful tobacco lobby in the 1990s (as portrayed in the 1999 film, The Insider). Our conversation drifted toward what role, if any, standards and codes played in shaping professional judgment and making the law more effective in stopping corporate wrongdoing.

Our dinner, however, was not as trendy as my friend’s; what makes this conversation most interesting is where it took place — a federal prison. We were both inmates. I had been convicted of fraud, and Dick had pleaded guilty to bribery charges. After our conversation, I became obsessed with the idea of how these frauds happen. Why do intelligent, successful people commit crimes, and why do otherwise well-meaning people follow almost blindly along? Ascribing the trait of greed to these individuals seemed the easy answer, but was it really that easy?

My motivation to research this topic was extremely personal. As a teenager during the 1980s, my family was shaken to its core after my oldest brother committed financial crimes. I was determined to take an opposite path. I became a CPA and fraud fighter. I built a successful national company and reputation as an ethical businessman. Twenty years and nearly two billion dollars of business later, years of training and my principled upbringing failed me. I was confronted with a situation not covered by the code.  On one hand I could try to protect my reputation, or I could do what was truly right.  I made the wrong decision.  That choice would eventually send me to prison. What started rather innocuously evolved into a multimillion-dollar fraud that enveloped multiple companies and affected hundreds of people. Twenty years after my brother’s acts rocked our family, I was convicted of the same crime at the same age and even in the same courthouse.

Disturbed by these coincidences, I wondered what led me, my brother, and others to this point?

In Part 2, I describe what my research and conversations with 40 other white-collar criminals uncovered.

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Event follow-up: Central Michigan University

February 28, 2012 in Events by Toby Groves

Sincere thanks to all who attended the events at Central Michigan University on February 23 and for the incredibly warm response; CMU was the inaugural event for previewing “Viral Ethics” documentary footage, and associated research.  Your input and questions will be valuable additions to the ongoing process.

Further clarification was requested regarding research findings as associated with Rational Choice Theory and Fundamental Attribution Error.  The  research, conducted with forty white collar criminals while still in prison for their crimes, indicated  that Rational Choice Theory (which suggests that criminals go through a cost-benefit analysis of the crime before committing it) needs further clarification in regards to white collar crime.   Only two of the forty criminals I interviewed indicated that they weighed the risks and benefits prior to committing their crime.  The other 38 (95%) claimed that they entered into the crime in small steps and did not consider legal risks until they believed they were inescapably involved in the criminal process.   While most (70%) say they should have recognized the early events as potentially criminal, all that claimed they were oblivious to the risks said they were focused on the situation as it existed and did not recognize early actions as a choice between legal sanctions and criminal gain.  For additional reading see Bouffard (2007).

Research that involved comparing feedback from both criminals and auditors (some of whom were involved in the same cases) focused on the role of Fundamental Attribution Error.  In simple terms, fundamental attribution error is a term in psychology that refers to how we automatically view our own behaviors as a reaction to the situation we are in, but we view the behavior of others as a reflection of their character.  This concept was found to have great influence on both sides of the cases I examined, with criminals being over-focused on their situation, and auditors being over-focused on the characteristics of the criminal.  Simply put, this caused short sightedness and poor decision processes for both parties.  For additional reading see Sabini and Silver (1983).


Bouffard, J.  (2007).  Predicting differences in the perceived relevance of crime’s costs and benefits in a test of rational choice theory.  International Journal of Offender Therapy and Comparative Criminology.  51(4). 461-485.

Sabini, J. and Silver, M. (1983), Dispositional vs. Situational Interpretations of Milgram’s Obedience Experiments: “The Fundamental Attributional Error”.  Journal for the Theory of Social Behaviour, 13: 147–154. doi: 10.1111/j.1468-5914.1983.tb00468.x

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Surly auditors more effective than happy ones?

January 9, 2012 in Accounting research by Toby Groves

Research shows logic of auditing practices may be influenced by auditor’s mood.

          The growing body of research examining the topic of auditor judgment is challenging the assumption that auditing decisions are purely logical.  If your auditor has a fleeting irritation you may be ok, but expect your financial statement to suffer if they are in a bad mood.

A study accepted by the American Accounting Association found that auditors’ mood state has an effect on inventory valuation decisions.[i].  The authors found that different mood states can lead to dissimilar judgments about ambiguous tasks, which is unsettling if you subscribe to the belief that people can control their logical thought processes..  This is significant because the audit work environment is complex, pressured, and likely to induce a variety of moods. The results show how sub-conscious emotional processes can alter professional judgment.

Specifically, the study measured “mood state”, as opposed to temporary emotions, and found that negative-mood-state participants were more conservative in their valuations than positive-mood state participants.  Negative-mood-state participants were only willing to sign off on inventory valuations 9.5 percent less than the clients’ valuation, while positive-mood state participants allowed valuations just 5.3 percent less than the clients’ valuation.  Also, 71.4 percent of positive mood-state participants recommended no material adjustments while in a near reversal, almost 70% percent of neutral-mood participants did recommend these adjustments.

Most interesting are the mechanisms and thinking paths followed in these decision processes.  Positive-mood, which spurs greater creativity and the ability to see interconnectedness may be helpful in many contexts but could be damaging to judgment in the audit context.  Positive-mood is also associated with positive memory retrieval and positive evaluations, flexibility, and motivation to maintain the positive mood[ii].  In the audit context this can mean avoiding unpleasant confrontations with clients or managers.   Positive mood may also be related to less concern with consensus, which is considered a signal of decision quality.  Negative-mood, in contrast, is associated with willingness to confront others with negative information, which may be more conducive to an accurate assessment.

So will your financial statements benefit from a well placed compliment to the auditor?  Probably not…but if they fought with their spouse this morning you may want to have them come back another day.

[i] Chung, J., Cohen, J., & Monroe, G. (2008).  The effect of moods on auditors’ inventory valuation decisions.  Auditing: A Journal of Practice and Theory.  27(2) 137-159

[ii] Wegener, D., & Petty, R. (1996).  Effects of mood on persuasion processes: Enhancing, reducing, and biasing scrutiny of attitude-relevant information.  In Striving and Feeling: Interactions Between Goals and Affect, edited by L.L. Martin, and A. Teser, 329-362.  Mahwah, NJ: Lawrence Erlbaum.

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Is Ethics Education Degrading America’s Moral Reasoning?

January 5, 2012 in Education and training by Toby Groves

 The trouble with a “No child left behind” approach to ethics education.

           As part of an ongoing research project that allows me to speak with certified fraud examiners, auditors and accounting educators around the country, I take an informal survey about progress in areas of education and professional judgment.    Respondents have indicated an increase in fraud examinations recently[i], along with general disappointment in both college and continuing professional education programs for their ability to address practical business issues.  Additionally, despite the efforts and focus on ethics education, a consensus of accounting professors indicates concern about the ethical judgment abilities of accounting students set to enter the workforce this fall.

          The continuing problem with scandals in business have led researchers to question whether the ethics education that our business and accounting students receive is effective, or perhaps even contributes to the problem.  Intuitively, increased education would lead to better moral reasoning, but evidence does not seem to support this, even indicating a negative association between business education and moral reasoning[ii].  Some researchers argue that this could be because business education in the U.S. focuses almost solely on shareholder value and not the ways that accounting decisions affect various stakeholders[iii].

Ethics education, now a core requirement in nearly all accounting curricula, is structured through regulatory agencies and influenced by codified standards. The National Association of State Boards of accountancy (NASBA) provides guidance to state boards of accountancy about the proper education requirements for CPA candidates and the American Institute of Certified Public Accountants (AICPA) plays a major part as well, due to their role in determining the content of the Uniform CPA Examination.   There is a growing condemnation of ethics education for being couched in philosophy rather than considered at the practical business level[iv], and criticized because it takes a “one size fits all” approach by being based upon the codified structure of the AICPA Code of Professional Conduct (see endnote iii).

A study published in Issues in Accounting Education[v] found that  the context in which an ethical dilemma is considered is paramount, and that accounting students are not able to flexibly transfer their ethics knowledge into different contexts.  The study suggests that when the students learn about ethical dilemmas in the context of codification, they then view all problems through the lens of codified ethical principles.  These findings are consistent with the suggestion from other research that the “one size fits all” approach to ethics education may not provide the decision-making skills required for the real world[vi].  Another study examined the effectiveness of a capstone course on professional responsibility required for seniors in accounting[vii].  This study showed that fewer students found a dubious accounting adjustment to be unethical than before they took the course.  The authors suggested that perhaps this was because the students were exposed to so many scandals they perceived it to be common.  This same study indicated that the use of case analyses did not develop a “sense of moral obligation” or “abilities needed to deal with ethical conflicts or dilemmas”; supporting the notion that context is critical to judgment processes.

Parallel criticisms have surfaced between ethics education and the No Child Left Behind Act.  This research suggests more emphasis may need to be placed on exploring a topic from multiple perspectives and that a codified structure can act as a distraction to ethical thought processes.

[i] This coincides with larger, formal surveys like the recent report from PricewaterhouseCoopers showing fraud on the rise in the U.S. as well as recent  surveys indicating that accountants and auditors believe that the threat of fraud is increasing.  See

[ii] Thorne, L. (2001).  Refocusing ethics education in accounting: An examination of accounting students’ tendency to use their cognitive moral capability.  Journal of Accounting Education 19(2) 103-117

[iii] Jennings, M. (2004).  Incorporating ethics and professionalism into accounting education and research: A discussion of the voids and advocacy for training in seminal works in business ethics.  Issues in Accounting Education 19(2) 7-26

[iv] Langdenderfer, H. & Rockness, J. (1989)  Integrating ethics into the accounting curriculum: Issues, problems, and solutions.  Issues in Accounting Education vol4 58-69

[v] Fleming, D., Romanus, R., & Lightner, S. (2009).  The effect of professional context on accounting students’ moral reasoning.  Issues in accounting education 24(1) 13-30.

[vi] Hurt, R. (2006).  We don’t have ethics here…or do we?  Strategic Finance 87(9) 16-17.

[vii] Shawver, T. (2006).  An exploratory study assessing the effectiveness of a professional responsibility course.  Global Perspectives on Accounting Education Vol. 3 49-66.

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