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Friday, November 21, 2008

The Arrogant More Likely to Commit Fraud

Wharton accounting professor Catherine M. Schrand and doctoral student Sarah L. C. Zechman are developing a paper titled, "Executive Overconfidence and the Slippery Slope to Fraud" that examines patterns in frauds to determine if some frauds evolve, not out of pure self-interest, but because executives are overly optimistic that they can turn their firms around before fraudulent behavior catches up with them.

"The main question is whether we can explain fraudulent behavior using knowledge about human decision making. Some fraudulent behavior is the outcome of managers putting themselves in the position where fraud is their only choice," says Schrand. "They didn't start out thinking they would commit fraud and they were not necessarily trying to hurt anyone, but they ended up being in a position where they felt it was the only way to get out of a bad situation."

Schrand describes the path leading to fraud. An executive believes his firm is experiencing only a bad quarter or patch of bad luck. He also believes it is in the best interest of everyone involved -- management, employees, customers, creditors and shareholders -- to cover up the problem in the short term so that these constituents do not misinterpret the current poor performance as a sign of the future. In addition, he is convinced that down the road the company will make up for the current period of poor performance. It is the optimistic executive or overconfident executive who is more likely to have these beliefs.

Read it all here.

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