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Why Is Fraud So Common?

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What makes fraud, corruption, false reporting, and willful misgovernance so prevalent? Why does it happen even when there are so called preventative measures in place? 

Fraud and corruption, mismanagement and misgovernance are omnipresent challenges in all organisations – regardless of size, industry, or location.

Here are just some of the key contributors, organised in categories:

Individual factors

  • Motivations. Greed, desire for power, financial pressure, or ethical lapses can drive individuals to commit fraud, corruption and worse. Speak to any fraud detective and they will tell you this. To figure out what went on and why, you only need to look at three motives.  Follow the desire for power, follow the money, and follow the sex. Sometimes all three are involved.
  • Opportunity. Wrongdoers always need opportunities to thrive. Inadequate internal controls, weak oversight, and lax enforcement of policies create the ideal opportunity for all sorts of nefarious activity and misconduct. If the oversight is absent and yet no crime has been detected, worry not; when you look at the weakest points, areas of scrutiny failure, you can be nearly certain to uncover some hidden naughtiness.
  • Method. Almost always, the means chosen by wrongdoers to exploit the failures of oversight that have been presented to them, are based on the specific nature of the opportunity. Motive and opportunity shape the method chosen.
  • Rationalisation. Almost all organisational wrongdoers will have rationalisations and “justifications” for committing their crimes. People with the greatest potential for crime are typically those, who, when challenged about their conduct, always have someone or something to blame; no problem is ever their fault. Gaslight is a precursor to crime. Such self-perceived angels are almost always the devils. Rational, measured, and balanced people, look to themselves first, and are quick to put right any problem they have caused. Neophyte wrongdoers are the opposite. Their crimes are sparked in the mind, and through rationalisation, they soon become an inferno.
  • High-functioning mental disorders. Psychopaths, narcissists, sociopaths, and Machiavellians, are the prime suspects in any organisational wrongdoing. They typically have their focus on me, me, me. Any casualties of their crimes are of no concern to them. And anyone and everyone who exposes them has to be destroyed. It will come as no surprise that since so many psychopaths are in positions of leadership, almost all organisational wrongdoing starts at, or is exemplified at, the top. This Italian wisdom applies: the fish rots from the head.

Organisational factors

  • Culture. There seem to be at least three interconnected contributory elements of culture that facilitate nefarious activity. A culture that is tolerant of unethical behaviour is a breeding ground for wrongdoing. When short-term gains are prioritised over long-term integrity, corruption is inevitable. If a culture is toxic and psychologically unsafe, the normal balances of internal whistleblowing are removed (often literally). That opens the door to organisational wrongdoers, being able to operate without fear of exposure. It is one of the main reasons that whistleblowers are systematically destroyed by misappropriation of organisational resources, (hiring lawyers who are knowingly happy to defend the indefensible for a suitable fee, paid for by the funds misappropriated by the wrongdoers).
  • Cultural duplicity. For example, when “open, honest, and transparent” communication is espoused, but the exact opposite is enacted, the tight control of information, creation of spin and misinformation foster and normalise dishonesty.  A culture of duplicity makes corruption inevitable. The journey starts with an expedient withholding of information, then escalates to providing a spin on things that go wrong. Emboldened by the effectiveness of the low-level duplicity, the sense of “we can get away with anything” develops to the point of the scandals you read every day in the media.
  • Leadership example. Anyone who has even the remotest idea of what it takes to lead knows that trust and integrity are the backbone of leadership. Leadership is a “goldfish bowl role”; leaders are under scrutiny by staff 24/7/365. Each time trust is breached and integrity has gone AWOL, a leadership example is set: preach ethics, do not practice them. When such behaviour goes unchallenged and the ethically toxic leaders are never held to account, another example is set: unethical behaviour of the kind exhibited by leaders is condoned or tacitly accepted; copy it.
  • Accountability vacuum. When “leaders” have been caught with their pants down (figuratively or literally) and they are not held to account, they are emboldened. More serious wrongdoing inevitably follows, creating a downward spiral of more and more wrongdoing. This lack of accountability sets a dangerous precedent, signalling to others that misconduct is tolerated, further eroding ethical standards. The absence of consequences for such leaders not only damages the morale of those committed to integrity but also undermines the foundational values of the organization. As wrongdoing escalates unchecked, it leads to a deepening crisis of leadership and trust, jeopardising the organization’s stability and reputation.
  • Governance. Weak internal controls, inadequate oversight mechanisms, and limited transparency in decision-making create vulnerabilities that the nefarious are quick to spot and exploit. These vulnerabilities not only enable unethical behaviour but also discourage honest members from voicing concerns, perpetuating a cycle of malpractice. Without robust checks and balances, organisations become susceptible to a culture of corruption, where unethical actions go unchecked. Consequently, the integrity of the entire organisation is compromised, leading to a loss of credibility and trust among stakeholders.
  • Dysfunctional board. A dysfunctional board hinders effective oversight and fraud prevention due to various overlapping issues. These include a lack of commitment, with members more focused on their CVs than their duties, and a fear of conflict leading to inaction despite clear evidence of wrongdoing. Additionally, avoidance of accountability and inattention to results prevent proper responsibility and assessment of outcomes. Furthermore, a lack of trust, especially in boards filled with Machiavellians, narcissists, sociopaths, and psychopaths, creates a toxic environment where honour is absent and individuals of integrity become targets.
  • Politically captured board. If a board has been politically captured by those who have a toxic agenda, they will be so focused on their own political purposes that proper oversight will be impossible. In fact, such a captured board will actively resist proper oversight, because it will reveal that the organisation is being used for purposes other than those legally acceptable.
  • Untrained, incompetent board. Grace and favour, “it’s their turn”, and other utterly inappropriate recruitment approaches can quickly create a untrained and incompetent board. The dysfunctional board then becomes self-perpetuating; competent people of integrity are perceived as a threat, and would never be recruited, because they present a risk of exposing the incompetence.
  • Corrupt board. In many of the corruption scandals over the last few years, the entire board and senior management teams have been fully aware of their shared wrongdoing. Such widespread corruption spreads gradually, using processes that I have documented elsewhere.
  • Conflicted board. When a board has been derelict in its duties of oversight, and a whistleblower has uncovered wrongdoing, what is the derelict board going to do? Thank the whistleblower for exposing their failures, or turn on the whistleblower? Of course, later.  Usually, the process is to start investigations into the “conduct” of the whistleblower, where the terms of reference are written, by the conflicted board, to create the desired outcome. The ”witnesses” are briefed on what to say to the “independent” investigator (who has, of course, been chosen by the conflicted board members). In the worst cases, the conflicted board that has rigged the outcome will, themselves, be “witnesses” giving false testimony to the investigation that they have set up and are running to destroy the whistleblower.
  • Incentives. Compensation systems that reward unethical behaviour or prioritise short-term profits over ethical practices can actively incentivise misconduct. The adage “everyone has their price” is proven true when opportunities for wrongdoing are in plain sight, and are openly rewarded.

External factors

  • Industry norms. In industries with intense competition or a history of unethical practices, there may be less pressure to adhere to ethical standards. In fact, the pressure can euphemistically be expressed as “cutting regulatory corners”, which essentially means, “The rules don’t apply to us.”
  • Regulatory deficit. Weak regulators, a lack of enforcement, corruption, or apathy within regulatory bodies can create an environment where organisational misconduct goes unchallenged and unchecked.
  • Societal values. Societal norms that tolerate or even glorify wealth accumulation, regardless of how it’s achieved, can contribute to a climate where ethical considerations are not a concern. The factors that make wrongdoing possible often interact with and reinforce each other. For example, a culture that tolerates unethical behaviour, combined with weak internal controls, a lack of oversight, and an ineffective regulator, creates a perfect breeding ground for wrongdoers to thrive.
  • Combating fraud and corruption. Preventing organisational crime requires a multi-pronged approach that addresses individual motivations, strengthens organisational controls and culture, promotes ethical leadership by providing clear ethical guidelines, and establishes effective whistleblower protection mechanisms.
  • Box-ticking fraud prevention. Many organisations claim to have appropriate anti-fraud and whistleblower protections in place, but in reality, what exists is merely box-ticking and virtue signalling. At the first sign of corruption being exposed by a whistleblower, wrongdoers often make false accusations, seeking to undermine the credibility and destroy the reputation of the truthteller.

What is missing?

Building a strong ethical foundation, having effective processes of oversight and scrutiny, are essential to preventing and detecting fraud and corruption within any organisation.

Until both the wrongdoers, and those who fail in their duties of oversight are held personally liable, there is no possibility of a reduction in fraud and corruption.

Until whistleblowers are protected from retaliation, by both the wrongdoers and those who failed to scrutinise effectively, most people will know the personal risk of speaking up is too great. They will opt for wilful blindness to, and silent complicity in, the wrongdoing.

Their silence emboldens the wrongdoers and enables more and worse fraud and corruption. Each act of silence deepens the spiral of silent complicity, which makes more serious wrongdoing possible.

Takeaway

In the final analysis, the prevalence of fraud and corruption is due to the actions of multiple parties who either choose to do wrong, fail to do the right thing, or remain silently complicit. Silence is the environment that fosters the growth of fraud and corruption.

How widespread is this issue?

The reality that most whistleblowers become unemployable is alarming. It suggests that those with the highest integrity, who are capable of exposing wrongdoing, are systematically excluded from positions where they could continue to do so.

The reluctance of most employers to hire whistleblowers speaks volumes about the extent of fraud and corruption. It indicates a pervasive culture where exposing unethical practices is punished rather than rewarded, further perpetuating the cycle of malpractice.




Professor Nigel MacLennan runs the performance coaching practice PsyPerform.

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