Magazine article The CPA Journal

Today's Fraud Risk Models Lack Personality

Magazine article The CPA Journal

Today's Fraud Risk Models Lack Personality

Article excerpt

Assessing the risk of fraud requires auditors to have an understanding of which individuals are most likely to commit fraud. The FBI has averred that psychopathy is a crucial concept for understanding white-collar crime in the current business environment (see "Psychopathy: An Important Forensic Concept for the 21st Century," Paul Babiak, et al., FBO Law Enforcement Bulletin, July 2012, https://leb.fbi.gov/2012/july/psychopathy-an-important-forensic-concept-for-the-21st-century). More generally, the existence and prevalence within the executive ranks of so-called "dark triad" personality types challenge the logic of applying the most commonly cited fraud risk models. Even the well-known Cressey Fraud Triangle, which has been integrated into professional standards, may not be very helpful when auditing in the presence of dark triad personalities (Edwin Sutherland and Donald Cressey, "Why Do Trusted Persons Commit Fraud? A Social-Psychological Study of Defalcators," Journal of Accountancy, November 1951).

What Is a Dark Triad Personality?

Recent research in personality psychology has identified at least three abnormal (or deviant) personality types, whose behaviors may imply different risk profiles for audit-and financial reporting fraud-risk assessments, engagement planning, and audit execution (see the decade-long retrospective in Adrian Furnham, Steven C. Richards, and Delroy L. Paulhus, "The Dark Triad of Personality: A 10-Year Review," Social and Personality Psychology Compass, vol. 7, no. 3, 2013, pp. 199-216, as well as Eric N. Johnson, John R. Kuhn Jr., Barbara A. Apostolou, and John M. Hassell, "Auditor Perceptions of Client Narcissism as a Fraud Attitude Risk Factor," Auditing: A Journal of Practice & Theory, February' 2013, vol. 32, no. 1, pp. 203-219). These personality' types have been named narcissism, Machiavellianism, and psychopathy- collectively termed "the dark triad."

The narcissistic personality is characterized by grandiosity', pride, egotism, and a lack of empathy for others. Such persons are excessively preoccupied with personal adequacy, power, prestige, and vanity', and are mentally unable to see the destructive damage they cause to themselves and others. Historically, this was called megalomania, and it is an exaggerated variant of egocentrism.

The Machiavellian personality' is characterized by the manipulation and exploitation of others, a cynical disregard for morality, and a focus on self-interest and deception. Machiavellians are temperamentally predisposed to be cal culating, conniving, and deceptive, using other people as stepping stones to reach their goals. Their tactics include charm, friendliness, self-disclosure, guilt, and pressure. Although they prefer to use subtle tactics when possible to mask their true intentions and provide plausible deniability, they have been known to use pressure and threats when necessary.

Lastly, the psychopathic personality is characterized by enduring antisocial behavior, impulsivity, selfishness, callousness, and remorselessness. Psychopaths commonly exhibit glibness or superficial charm, a grandiose sense of self-worth, a heightened need for stimulation and a low threshold for boredom, a pathological inclination for lying, a shallowness of emotional response, a lack of empathy, a parasitic lifestyle, poor behavioral controls, a lack of realistic long-term goals, a failure to accept responsibility for their actions, and criminal versatility.

Of the three dark triad archetypes, the darkest is psychopathy. Although the three personality types are distinct, some of the traits are found in more than one profile, and over time there has reportedly been "construct creep," which has been caused by the fact that the three concepts share a conceptual resemblance and because their common measures overlap empirically (Furnham et al., 2013).

Although the popular press has frequently classified certain malefactors within one of these types, those characterizations have rarely been based on actual psychological analyses. …

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