Understanding Executive Deviance Related to Fraud Nancy Pasternack , CPA, CFE, CIA KPMG Forensic Advisory Services Wa

1. Understanding Executive Deviance Related to Fraud Nancy Pasternack, CPA, CFE, CIAKPMG Forensic Advisory ServicesWashington, DC

2. Foundational Concepts in Economic Crime Offenses • Deviance defined by Webster: • Different or unacceptable behavior • behavior that is sharply different from the norm or the accepted standard • Deception defined by Webster: • Practice of misleading somebody • deliberately making somebody believe things that are not true • Why does deviance and deception work (Ford, 1996): • People’s belief in inherent goodness of others • Promises and hope of positive financial investments and results • A little is good but more is better • Hope of life being better • Trust based • Culture based

3. Deviant behaviors by some executives are often those same behaviors which have been rewarded within a particular culture for generations (Anderson, 2004)

4. Criminology Theories (ACFE, 2006) • Rational Choice • Predictability • Routine Activities • Available targets, absence of guardians, presence of offenders • Social Process • Social control • Affiliations • Social Learning • Absorbing information • Differential Association • Criminal behavior is learned

5. Are Personality Disorders Possible? (DSM-IV) • Anti-social Personality Disorder (APD) – • Lack of planning; Impulsivity • Disregard for others • Adult criminality • Juvenile delinquency • Upbringing is important as to where APD will lead • Prison, politics or business • Higher rates of APD in inner city then rural • Five times higher with males than females

6. Other Types of Possible Personality Explanations (Hare, 1993) • Sociopaths and Psychopaths • Distortions of reality • Lack of feelings toward others including family • Self love, abandon emotion • Charm, deceive and manipulate to gain trust • Seemingly trusting appearance • Narcissistic – core psychopathic feature • Grandiosity in fantasy or behavior • Believes others are envious of him

7. Smart People Acting Foolishly (Sternberg) • Unrealistic Optimism – one is so smart he does not worry about outcomes • Egocentrism – one’s own interests are the only ones that are important • Omniscience – belief that one is all-knowing • Omnipotence – belief one can do anything because of power he holds • Invulnerability – illusion of protection

8. Egos and Business Executives • The identity of an executive and the business he/she controls can often become one in his/her mind • Owners/founders may be more interested in preserving the business • Hired executives may be more interested in their reputations and compensation packages • Rationalization • If an executive engages in economic crime he/she must maintain non-criminal self concept

9. Rationalizations of Executive Deviance (Cromwell, 1996) • Closing the gap; living the dream • For my family • For the company • Because of employees • Social standing, entitlement • Over-billing clients and employers (doing more than my share) • Passive – hapless pawns

10. Sustainability is Key • Watch for warning signs in the environment that a company may not be sustainable: • High, fast growth companies • Certain industries such as technology • Labor or talent shortages • Dependence on commodity pricing such as energy • Investor perceptions • Regulations • Demand for product • Competition

11. Top 10 Reporting Challenges from Financial Executives International • Internal controls • Uncertain tax positions • Extensible Business Reporting Language (XBRL) • Fair value measurements • Servicing assets and liabilities • Complexity in financial reporting • Derivatives • Pensions • Business combinations • Earnings per share

12. Typical Denials of Rogue Executives (O’Neal, 2001) • Denial of criminal intent – securities fraud, antitrust cases, tax evasion • It was good for the company • It is industry practice; there was no intent to commit a crime • The prosecutors are seeking career advancement • Denial of a crime taking place – fraudulent statements • I’ve committed no crime. • I was setup by associates • I’m the real victim here • Someone else recorded this

13. Endnotes • Alalehto, Tage. (2003). Economic Crime: Does Personality Matter? International Journal of Offender Therapy and Comparative Criminology, 47(3), 335-355. • American Psychiatric Association. Diagnostic and Statistical Manual of Mental Disorders. 4th ed. (DSM-IV). (1994). Washington, DC: American Psychiatric Association. • Anderson, Richard J. and Terrell, Michael E. (2004). Too Good to Be True: CEOs and Financial Reporting Fraud. Consulting Psychology Journal: Practice and Research, 56 (1), 35-43. • Association of Certified Fraud Examiners (ACFE). (2006). Fraud Examiners Manual. Austin, Texas. • Cromwell, Paul, (1999). In Their Own Words. Criminals on Crime. Los Angeles, CA: Roxbury Publishing Co., 97-103. • Ford, Charles V., M.D. (1996). Lies! Lies! Lies! The Psychology of Deceit. Washington, DC: American Psychiatric Press, Inc. • Hare, Robert D., Ph.D., (1993). Without Conscience. The Disturbing World of Psychopaths Among Us. New York, NY: Pocket Books, 103-110. • O’Neal, Scott, (2001, March). Interviewing Self-Confident Artists. The FBI Law Enforcement Bulletin, 70(3). • Sternberg, Robert J. (2004). Why Smart People Can Be So Foolish. European Psychologist, 9(3), 145-150. • Willer, David, Lovaglia, Michael J., Markovsky, Barry. (1997, December 1). Power and influence: A theoretical bridge. Social Forces, 1. • Willott, Sara, (2001, May 1). Snakes and Ladders: Upper-middle class male offenders talk about economic crime. Criminology.

14. Nancy Pasternack KPMG Forensic Washington, DC (202) 533-6263 NPasternack@kpmg.com Questions? Thank You The information contained hereinis of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2007 KPMG LLP,the U.S.member firm of KPMG International, a Swiss cooperative. All rights reserved.Printed in USA.