Data analytics now offers powerful tools and techniques to help deter or more quickly detect potential wrongdoing, reaching into huge populations of data and identifying anomalies that merit further investigation. Behavioral forensics has similar potential to help businesspeople identify anomalous behaviors that may indicate a heightened risk of fraud or other wrongdoing. In terms of widespread practical implementation, behavioral forensics may be some years behind data analytics, but its potential is just as exciting.
More than a century ago, Sigmund Freud brought our attention to the fact that the conscious part of ourselves is like the tip of an iceberg.1 The unconscious part is what lies underneath. Although unconscious motivation was first introduced by Freud as part of his psychoanalytic theory, more recently, neuroscientists have done extensive research on how consciousness and emotions drive decision making. It is not a case of “What you see is what you get” (WYSIWYG), but rather it's “What you don't see is what you get.” Think of fraud, then, as a two-sided coin. On one side is the economics of fraud. Fraud has enormous consequences, economically speaking, so this is what we usually focus on: the numbers, the losses, the techniques, the forged documents, the wire transfers, the shady deals, the adjustments to the general ledger, and so on. The latest (2012) Report to the Nations from the Association of Certified Fraud Examiners estimates that the typical organization loses 5 percent of its revenues to fraud each year. Applied to the 2011 gross world product, this figure translates to more than $3.5 trillion annually.
With much effort devoted to examining the economic results of fraud, accounting as a profession has developed some skill at examining these hard facts. They are numbers on a piece of paper or on a computer screen. We can slice and dice them, detect patterns, and gather evidence to ascertain whether fraud has taken place. In the process, we might even uncover how the fraudsters went about their fraudulent acts and their associated concealment activities. In other words, we know quite a bit about how fraud is perpetrated.
Looking at the economics is important work, but we rarely turn the coin over to look at the other side: the hidden human factor. How do we understand the behaviors and actions that lie behind and motivate fraud?
Fraud is a human endeavor, involving deception, purposeful intent, intensity of desire, risk of apprehension, violation of trust, rationalization, [and so on]. So, it is important to understand the psychological factors that might influence the behavior of fraud perpetrators. The rationale for drawing on behavioral science insights is evident from the intuition that one needs to “think like a crook to catch a crook.”
Many business professionals—particularly those in the accounting, auditing, and finance arena, who are analytically minded—tend to discount behavioral explanations. They think they already know what fraud is; after all, as Judge Edwin R. Holmes observed in 1941, “The law does not define fraud; it needs no definition; it is as old as falsehood and as versatile as human ingenuity.” As the incidence of fraud continues to grow, however, placing the spotlight on behavioral factors may be an important approach not only to fraud detection but to fraud deterrence as well.
Consider a reality check: In the history of human existence, no general ledger or computer has ever committed a fraud. People certainly use these tools and other mechanisms to commit fraud, but the instruments themselves are inert. They are insentient; they have no motive, no desire. They are just things. It is also not about the process, it is about the people!
Such is fraud. We have tended to look at the instruments but not the motivations. It is all quite simple: Fraud is a result of human behavior, actions unique to human beings—nothing more, nothing less. Thus, in this book, we seek to turn the coin over and to look at the hidden part of the iceberg. We begin to examine the simple but crucial question of why.