Why Good People Do Bad Things

by Michael L. Lauzon, CPA, MBA, Audit Manager

Posted on February 13, 2014

When fraud occurs, it is often assumed that the perpetrator will be easily identifiable as an unethical person. Indeed, many organizations’ fraud prevention tactics utilize interviews and background checks during the hiring process, as well as ongoing feedback and interaction from coworkers or supervisors to identify individuals who potentially may commit fraud. However, not all fraud is committed by people with a history of unethical behavior. People who consider themselves ethical (and who may be viewed as good people by their coworkers and supervisors) can commit fraud too.

Think about the examples of fraud that you have heard relayed in seminars and ethics training events. Part of the reason that the stories are so intriguing is the fraudster is often the last person you would suspect – someone’s friend, parent, grandparent or trusted member of the organization. As an organization, we cannot control or necessarily identify an individual’s rationalization or pressure that have motivated fraudulent activity. We can, however, implement procedures to reduce the opportunity for fraud to occur.

When designing and implementing internal controls to help prevent and detect fraud, an important (but often overlooked) element is the establishment of an organizational tone that requires that all decisions include consideration of ethical principles. Psychological studies have shown that the business mind set activates one set of goals – to be competent and successful. On the other hand, the ethical mind set activates another set of goals – to be fair and not hurt others. Therefore, if decisions are presented from a strictly business perspective, employees may not see past the impact of their decision on immediate business results or the achievement of a specific desired outcome. Therefore, individuals are more likely to follow ethical rules when they are asked to consider both business and ethical implications during the decision making process.

The importance of setting an environmental tone that considers ethics in decision making was revealed by a study by a University of Notre Dame psychological researcher, as cited in a story by National Public Radio’s Planet Money. In this study, two groups were presented with a desired outcome (or goal). The instructions for the first group merely indicated that they were to achieve the end result. The second group was instructed to achieve the result but consider the ethical implications of actions taken. When presented with an opportunity to cheat, the second group (who had simply been reminded to consider ethical implications) did not take the bait, but the first group did. This group may not have intentionally intended to make unethical decisions, but nevertheless it occurred in the process of achieving the set goal.

Setting organizational policies and procedures and implementing strong internal controls are key to fraud deterrence and prevention. Internal controls help mitigate opportunities for fraud to be committed or the possibility for someone to be wrongly accused of committing fraud. Terms like micromanaging, lack of trust, red tape, and jumping through hoops are used to describe work processes or environments which seem to have an undue amount of oversight over routine activities. While these extra steps may be perceived as inconvenient to employees, they are put in place to protect the organization itself as well each individual within the organization. To help achieve these goals, your organization should also review your internal control processes with an eye to incorporating ethics as an important aspect of the decisions made by your employees every day.