Mental Health, Psychological Materiality, and Fraud at Work: Are You a Fox or an Owl?
“The market is a place set apart where men may deceive and overreach each other.” Scythian philosopher Anacharsis (c. 600 B.C.)
An organizational psychiatrist, accounting professor with a quantitative psychology Ph.D., and leadership researcher show how a shift in the balance of power and emotions at/around work (and civil society), coupled with rising rates of mental illness, could increase fraud in organizations. They suggest a few ways to respond, including how to become better emotion detectives and put in place solid individual and organizational advisory board.
Fraud has been central to the human condition. An early documented instance of insurance fraud comes to us from 300 BC when two Greek merchants sank their ship on purpose. But already in ancient Egypt, Pharaohs instituted a form of double-entry bookkeeping to keep the sticky-fingered from lining their own pockets.
Fraud has been with us, probably since the very beginning, through millennia, worldwide, and at all levels.
However, digitalization, polarization, more mental illness, and declining respect for business and authority have now converged into a society-wide perfect storm of increased risk to companies, systems, and countries.
To help an organization stay healthy and better manage risks, leaders must understand how fraud happens and how current trends in psychological distress exacerbated by COVID-19 could increase fraud risk at all levels.
Often missing from the discussion is a critical component of fraud detection and prevention — the psychology and behavioral forensics behind why fraud happens.
In this piece, we explore the latest behavioral insights, strategies, trends, and tools to help prevent, deter, and mitigate fraud risk and, as a result, create a more fraud-resistant organization.
What happens when humans enter the world of credits and debits?
In figuring out this pervasive problem, psychology and psychiatry can provide useful lenses with which to explore the human side of the issue. But where do we start? What are the places we believe are a dead end?
The behavior around fraud is fascinating, and we explore below how this behavior relates to power, politics, and emotion.
We will do so while exploring the methods of committing fraud — and in the process, attempt to enter the fraudster’s mindset, learning “how to think like a crook to catch a crook.”
There are three ways to steal money or anything of value: threatening harm (holding up a gunpoint), hauling it away when unaware (stealing jewels in the night), or committing fraud.
With fraud, the victim unknowingly plays a part in an illegal transfer of something of value. We can comprehend the ecology of fraud by understanding this behavior, the context of a trust crime, how temptation becomes a lure, and the role of the gullible victim.
In doing so, we can start to turn the rotten soil of toxic cultures into fertile soil for robust organizational cultures, healthy markets, and exchanges.
At a fundamental level, fraud is a betrayal of trust and is defined as the “wrongful or criminal deception intended to result in financial or personal gain.” Fraudsters play on emotions, rely on trust to provide shade for their malfeasance, figure out how to abuse systems, and exploit lax oversight.
When asked, “greed” and money are not always the underlying motivations for fraud; numerous psychological factors can come into play as well. Then, there is the problem of catching the fraudster. How do they do it?
How does a fraudster trick the system? By tricking people in the system.
Deception is part of (our) nature. From a fawn’s speckled pelt to a tiger shark’s striped skin, it’s clear that nature is a master of deception. And then evolves that deception further, sometimes to extremes. The cuckoo lays its eggs in another’s nest, the mockingbird and the drongo mimic sound, and the corpse flower reeks on purpose. These tactics help sustain species.
Fraud is relatively common. Based on research by the Association of Certified Fraud Examiners, fraud is conservatively estimated to cost the typical organization 5% of its revenues. For the typical organization, this may not be such a large number. Extrapolated to global GDP, this number reaches roughly $4.7 trillion.
Fraud comes in all types. It can be embodied by its charismatic fraud ambassadors and leaders, à la Bernard Madoff (estimated to have cost $64 billion and human lives); high flyer fintech founder Nigerian Dozy Mmobuosi; Charlie Javice, who charmed JPMorganChase into giving her $175 million for her fraudulent venture to simplify financial aid; or Elizabeth Holmes at Theranos.
Enron CEO Ken Lay famously persuaded his employees to keep their stock so he could sell his at $32 before the house of cards crumbled and the stock plunged to $9. One lineman’s investment declined from almost $350,000 to under $1,500.
Fraud can present as an organizational phenomenon — ranging from fake accounts at Wells Fargo, to cheating devices that allowed for fraudulent emissions reporting at Volkswagen, to multi-state lawsuits against Purdue Pharma (including the non-repentant Sackler family) for creating an opioid epidemic, and Facebook for contributing to poor mental health in teens. But behind all these problems is usually a group of core individuals who form, drive, and encourage less-than-optimal organizational behavior.
Fraud can also be systemic. It is sadly pervasive in the healthcare system, such as the multiple scams defrauding the COVID relief government programs or Medicare. Employees also file fraudulent workers compensation (WC) claims or mental health leave. Interestingly, the main share of fraudulent worker’s compensation belongs to employers ($25 billion out of the total of $34 Billion of WC fraud) dodging premiums (through the misclassification of employees — reporting an employee who works in the field as an office worker or under-reporting employees on payroll).
It can be you and me. More familiar types of pretense and camouflage can occur in our online presence, where many of us create an image of what people expect us to be. Those false presentations and their ongoing maintenance come with a different set of costs, most visible in younger cohorts. Also, we are often witnesses to and perhaps innocent contributors to the spectacle of tax fraud (just think of reality TV stars Todd and Julie Chrisley in jail for fraud and tax evasion).
Sometimes, though, employees are active perpetrators. As mentioned earlier, this could be engaging in various types of insurance fraud. But it can also present as willfully under-performing or taking on side gigs, and, in doing so, essentially robbing employers in reverse wage theft and imposing undue burden on colleagues who need to pick up the slack.
Employees exercise organizational power in how their performance and behavior hold up their end of the implicit or explicit deal of work: output/performance and presence in exchange for money. Decreasing effort at work is an age-old power move, strikes and walkouts being the more obvious but less frequent and less pernicious forms.
How does a change in mindset at work shift the balance of power of employment and increase risk?
One important factor for the ecology of fraud can be the sense of distress or absence of options. We see this today in many workplaces. We suspect the interplay of the distress that leads to mental illness in some employees may lead to fraud in others. Research and reports focusing on the US workforce show some clear current data and concerning trends.
Despite all the efforts and focus on employee well-being, employee disengagement remains at around 70%. “An emotional and psychological bond between workers and workplaces,” engagement is defined as “the degree to which an employee works with passion and feels a profound connection to the company.”
An “engaged employee” is usually very positive and enthusiastic about work and actively and positively supports colleagues and the firm. Greater happiness and interest in their work offsets the stress they feel. They are less likely to be diagnosed with anxiety and depression.
The “actively disengaged” (17%) are unproductive and unhappy and actively spread their unhappiness to others. They can have a very negative impact on their immediate surroundings, suppliers, and customers.
In between are 54% of not engaged employees: “mentally checked-out” or “sleepwalking through their workday and putting time — but not passion — into their work.” And, as we showed in our book on Compassionate Management of Mental Health in the Modern Workplace, “disengagement can be really depressing.”
Presenteeism (the act of being at work but not able to perform at expected levels, usually because of a physical or mental illness, and sometimes both) is estimated to cost $150 billion to the U.S. economy alone.
Apathy and distraction are fertile hunting grounds for fraudsters.
More and more people unhappy at work will be more likely to experience distress and disappointment in their home lives. According to Gallup, “the number one determinant of happiness is ‘a good job’: work that is meaningful and done in the company of people we care about.” Unhappy individuals are more likely to be hampered in their ability to be good parents or, for that matter, prosocial citizens. And there is also research suggesting that they may be more vulnerable to scams.
It is easier than ever to evade managerial supervision. Accommodations such as working from home rely on managers trusting employees. Trust must often be earned, but employees demand it from their supervisors. Many workers were productive during the pandemic because there was nothing else to do, but when the world reopened, the work-from-home skeptics were proven right(er).
Anyone with a smartphone and access to the internet can become part of the gig economy. In 2022, an estimated 45% of workers engaged in their side jobs while allegedly working full-time for an employer. The temptation of additional income may be hard to resist — so might the thrill of getting away with double booking.
Social media provides “bad apples” a greater platform. TikTok can rapidly popularize ‘Lazy Girl Jobs,’ ‘quiet quitting,’ and ‘rage applying,’ glorify underworking, and provide examples of passing off ChatGPT as one’s own work without getting caught.
Polls and labor data suggest that Gen Z workers plan to leave their jobs within two years. This makes it harder for employers and managers to invest in these individuals for the longer term but also easier for employees to burn bridges or misbehave, knowing they will be long gone before they can be held accountable.
Is the worker truly putting forth physical and intellectual effort toward organizational goals? Or, as the skeptical manager wonders, are they distracted and feeling taken advantage of by the organization?
What frame of mind and emotional states can we expect from tomorrow’s employees and leaders?
The mental health of kids has been in the news. More than 20% of US teens have seriously considered suicide. According to emergency pediatric psychiatrist Tyler Black, suicidal ideation rises when school starts.
There has also been a lot of reporting about increasing violence in high schools, steadily increasing oppositional behavior among middle school students, and even problematic behavior at the grade school level. With fewer resources, bigger classes, and shorter recess, behavior worsens. Teachers who struggle to control classrooms report more frequent outbursts. Teacher resignations and burnout rates are at an all-time high.
A rise in diagnoses of Oppositional Defiant Disorder, an excessive contrarian and resistant mindset, makes the school experience spiral in the wrong direction. Not just for the problematic individual but for everyone.
ODD in adults (and its overlap with ADHD) can present as a short temper, verbal abuse, and road rage, as well as the inability to regulate, deal with authority figures, and sustain relationships. We see and feel more of that in our daily lives, at work, and in the news.
Finally, college campuses have always been sources of social commentary and political expression, but the large-scale coverage of events and their fractious and polarizing interpretations heighten stress on current college students, who are already reporting much higher mental health issues than predecessor generations.
Schools and colleges are struggling to adapt to a post-COVID reality and impart basic skills, let alone life and social skills required to be functioning members of business organizations and society.
How, then, can we get ahead of the psychology of fraud to understand it better and potentially stop it?
Our book, The A.B.C.’s of Behavioral Forensics, develops a model for how humans deceive other humans by manipulating emotions because fraud uniquely requires the victim to “cooperate.” The text explores the seduction of the victim by seeking to understand what happens to the victim. It is based on a simple model of biologically based emotions, or affects, which are present at birth and common to all human beings. Anyone can be a perpetrator but also a victim (and even both simultaneously). Read on.
Predator-prey dance: ‘Welcome to my parlor,’ said the spider to the fly.
Spiderwebs use stickiness and translucency to capture insects. To ensnare victims, fraudsters appeal to the stickiness of positive emotions, such as the promise of “easy” money, and the translucency of negative emotions, such as fear of missing out. The fraudster, just as the web immobilizes the fly, then assuages any doubts, fears, or sense of guilt and then injects their venom by deepening connections and minimizing negative emotions.
There are situations with more than one fly and more than one spider. It could be a many-to-many interaction, almost like what Anacharsis conceived, a place set apart where the predator-prey dance occurs in full swing and in plain sight (see here for a more modern example of a two-sided information market and consumer fraud).
We wondered early on how fraudsters may recruit others and act less like individuals and more like gangs or the mafia. Thus, we explored the model of the bad Apple to see the bad Bushel and the bad Crop, or the “A.B.C.s” of behavioral forensics or the psychology of fraud characterization:
Enter Psychological Materiality, Exit Financial Materiality
What role does accounting as a profession play?
In accounting and auditing, materiality is a core concept that distinguishes the important from the trivial. In a formal audit, the process starts with the numbers and works back to the people. In mitigating fraud, we start with the people and work up to the numbers,
We want to encourage the reader to see the role humans play as material, and thus, we will consider more than financial materiality. We must, therefore, focus on what is psychological materiality. Evocative symbols, events, stories, and other uniquely human factors matter. And although they exist outside the scope of what is financially material, they determine financial outcomes.
Part of the challenge is emotions. They tend to be misunderstood or ignored, but emotions enter the workplace when we do. What are they?
Emotions are a source of motivation to action and a way to communicate without language. We know when someone is angry, scared, or disgusted when we see the emotion in its pure form. And we know what the emotion motivates us to do. If you have been with a group engrossed in a movie or concert, you have experienced the power of contagious emotion. Economists have referred to the role of emotions in irrational exuberance or fast thinking. We know they influence behavior, and thus, they impact markets. In other words, they have value. They matter.
One of the most important things to appreciate about emotions is that they serve to motivate. The emotional centers of our brains are active in all the intellectual work we do. They are also active in the perceptual work of the brain and how it colors and interprets the events it observes. Therefore, they are present in the behaviors of fraud. And they must also be present in the behaviors of fraud prevention.
People will always create what is psychologically material and emotions can be included in what is important only if we are open to perceiving them and understanding them as valid data.
Sometimes, non-financial factors greatly outweigh the financial factors. Examples of this include “culture wars” or social upheavals, such as in the French Revolution of 1789 or the current mental health crisis. These can become leading indicators of risk at a particular point and place. Being aware of external factors can be as important as knowing what is happening inside the organization.
Psychological materiality, in a nutshell, is a human being’s interactions with physical forms. Humanity is a “species that manipulates material forms to produce specific behavioral and psychological responses.”
Psychological materiality has much greater bandwidth with which to examine the underlying causes of fraud and considers many critically important but non-financial factors. We want to encourage the reader to see the role humans play as material, and thus, we consider not only financial materiality but also psychological materiality. Evocative symbols, events, stories, and other uniquely human factors outside the scope of what is financially material create what is psychologically material.
And is there anything more evocative than political power wielding in the c-suite. How do we consider this?
Exploring fraud as it relates to powerful people inside organizations (and those who should govern them, like boards and auditors) made us appreciate the role of political power. Research has documented that insights from social psychology have been of paramount importance in the study of both political elites and mass political behavior.
Analyzing this power dynamic along the twin lines of those who have Integrity versus those who don’t and those who attend to Politics versus those who are ignorant of them creates an interesting 2 x 2 — the clever Fox, inept Ass/Donkey, innocent Sheep, and wise Owl. Figure 1 shows the model developed by Simon Baddeley and Kim James (1987).
Figure 1: Integrity vs Political Astuteness
This model suggests that the behavior that leads to fraud would obviously lie on the side of manipulation, opposite that of integrity. The foxes would be manipulating the donkeys and even the unsuspecting sheep. But that’s too simple.
Politics, power, legality, and fraud
Rather fail with honor than succeed by fraud. — Sophocles
What is important to remember is that the politics this model is built for, the politics of governing, is entirely legal! Deception is a naturally occurring problem, baked into the hardware of our governing and business systems and central to the landscape of human behavior. But in this model, it is not animals like the tiger shark (at the Darwinian pinnacle of camouflage, speed, and fury) but rather individuals wielding deception through political power.
At the level of this model, deception is not a crime — it skirts at the edges of the law still in the realm of barely immoral and unethical behaviors that can be explained away. Fraud requires harm under the law.
To see where the dance of fraud lies as it relates to political power, we need to insert another axis: the axis of legality. And legality gives us a further lens with which to examine actual fraud.
Figure 2: Adding the Legality Axis
This model suggests that the behavior that leads to fraud would obviously lie on the side of manipulation, opposite that of integrity. The foxes would be manipulating the donkeys and even the unsuspecting sheep.
With this expanded view, we can see a new way to look at power, motivation, and the characters in the ecology of fraud. In fact, adding this supports our ABC model of bad apples, bad bushels, and even bad crops.
Financier Bernie Madoff was clearly a fox, and he manipulated his accountant, as well as his family and subordinates (including his wife Ruth, sons Mark and Andrew, and brother Peter Madoff) who knew or came to know of his Ponzi scheme. Mark committed suicide soon after. And while the SEC named five conspirators, only one, Stanley Chais, was the subject of a criminal inquiry. Sheep or fellow Foxes? or Foxes in Sheep’s clothing?
In addition, Bernie was able to retain clients who should have known better but chose to suspend disbelief in the hope of outsize returns.
We took the model further. For example, within fraud, there’s the criminal (the Sharks) and their enabling Donkeys or “useful idiots” (interestingly, in money laundering, they are called “mules”), but clearly, there must be other categories. The victims are called the Marks. And there are those who act with integrity: the Owls become Larks (witnesses who speak up, like whistleblowers), and the very much-needed Park Rangers (auditors, board members, and regulators — those charged with governance). (Please refer back to Figure 2).
So, how can we use psychological materiality to minimize risk and build fraud-resistant organizations?
1) Audit your menagerie. Who are your Foxes? How do you ensure you recruit and retain wise owls and productive sheep? An open question worth considering in a world where wisdom and reason often get drowned out. In contrast, the cynic gives up but doesn’t shut up. Encouraging feedback, dialogue, and self-awareness in all levels of management will tend to counter the cynic, particularly if the organization acts on the feedback it receives. This can help counter presenteeism and cynicism in general.
Are your Donkeys turning into underground Fox armies? Help the larks and the rangers keep the typical office politics from moving too far away from what is legal. Ask, “What is the right thing to do?” more than “Is this legal?”
Supporting an organization whose people have the courage to report behaviors consistent with fraud requires seeing emotions as data, which is an integral component of psychological materiality. Skilled leaders and managers can recognize fear and more complex emotions, such as envy or contempt, and not be intimidated or gaslit by other into going along.
Returning to our prior examples, these would be the Larks. They and the Park Rangers, who are in charge of governance, will serve your organization by integrating employee and management behavior with the purpose and core values.
Perceiving, managing, and understanding strong emotions is important to the success of any business — because emotions are the motivating engines behind employee behavior, employee satisfaction, mental and physical health, and the long-term viability of the business.
2) Learn and get curious about what is psychologically material — especially emotions — and then help others recognize it, too.
Being able to see emotions as valid data points, understand their basic functions, and recognize the biological-based emotions that are innate to all human beings can help inoculate organizations against fraud. We also know that emotions are contagious. Anyone who has been around someone who is distressed, angry, or scared recognizes the strength of those emotions and needs to take action in themselves to not get subsumed. This is the power of the fraudster: seeing and understanding who is vulnerable to manipulation. In fact, because we all have financial concerns, sharks like Madoff can take advantage of these fears.
In the culture model, there is the tone at the top, the mood in the middle, and the buzz at the bottom.
Each of these can be forces that can encourage or deter fraudulent behavior.
As you consider these factors as they relate to your organization, consider the distress, disengagement, and overall struggle of the people under your care.
Mental health issues and maladaptive behaviors are significant concerns now. They can be addressed with thoughtful and methodical explorations of meaning at work. In this context, leaders and managers who agree with Albert Einstein and understand that “feeling and longing are the motive force behind all human endeavor and human creation” and also understand that ignoring these drives can lead to paralysis and destruction.
3) Take an unblinking (owl’s) view of your board of directors and governance.
Quis custodiet ipsos custodes? is a Latin phrase found in the Satires, a work of the 1st–2nd-century Roman poet Juvenal. It may be translated as “Who will guard the guards themselves?” As an individual and especially as the leader of people, think about what you do to ensure you are on the right side of the matrix and legality axis. What kind of board or informal advisory group board do you keep? Are they Owls or Foxes? Are you making the best use of them and their advice?
4) Do not fall into the traps of classic profiling.
In general, all types of individuals commit fraud. To pursue a profile is only to allow a future fraudster a path to deceiving those who wish to catch him or her. It doesn’t make sense to pursue a list of demographics simplistically. Like educating students about the risk of active shooters, educators must be careful about the audience and, in particular, who is listening.
5) Remember: Thou (and they) shalt not, but most likely will.
In the Christian faith, nearly half of the 10 commandments relate to respect. Don’t steal or covet, honor your father and mother (for happy homes and happy offices), don’t take others’ lives (or wives), nor bear false witness and gossip. These commandments are nearly universal to most religions. They highlight the clarity of the social requirement not to transgress upon what is not one’s own. It is hard for us to keep to these commandments when we are at our best. What happens when we clearly are not? And what, then, when our leaders are not?
6) Recognize that fraud is a constant threat — clear, present, and future.
In many of these instances, regulators and the public find out about corporate malfeasance or fraud via whistleblowers, whose motives might not be pure, either. To expand reporting and give employees agency in fraud detection at lower personal risks, companies can provide systems to enable anonymous reporting. The most successful anti-fraud method is the tipline, in fact, according to the ACFE.
Although the physical structure of the buildings in which we work and the physical structures inside these buildings, such as chairs, tables, and computers, are inorganic; organizations themselves are organic because they are comprised of people. They grow and decay like all organic things.
So enduring and flourishing as a business is about understanding the underlying causes of organizational disease — fraud is a major one.
Thank you to Matthew Hanson for his input and support.
