FRIDAY, DECEMBER 5, 2008

It’s December 5th, a Friday. On Wednesday and Thursday I covered the first two prongs of the fraud triangle: pressure and rationalization. Today I will discuss the third prong, opportunity.

Shortly after joining Kenny at Bear Stearns, I felt pressure because of my perceived lack of fairness. Even though I was earning far beyond the grasp of most young men, I felt my performance entitled me to more. I rationalized the unfairness. The opportunity presented itself to bank some full commissions in total violation of the partnership agreement. In my mind, it was fair. That type of reasoning differed in remarkable ways from the values of a sportsman. Nevertheless, it seemed acceptable with my sliding code of ethics. It was the triangle of pressure, rationalization and opportunity that eventually led me to fraud.

At Taft Camp I’ve interacted with scores of men who are serving time for white collar crimes. Some engaged in securities fraud while others launched businesses that turned into ponzi schemes. Others manipulated records in transparent and ultimately futile attempts to evade taxes. The crimes may vary, but without exception, the motivation for each followed the familiar pattern of the fraud triangle: pressure, rationalization and opportunity.

As I was resting on my steel rack not too long ago, I reached a conclusion about the crime committed by a neighbor in an adjacent cubicle. We had walked around around the dirt track earlier that morning and Steve (who was released in November after serving 48 months) explained to me how he had been the controller for a privately held distributor of industrial parts. The firm was of moderate size, with $50 million in annual revenues. Steve had suffered a string of gambling losses which threatened to ruin him financially and felt tremendous pressure.

He explained that he had been with the company for longer than a decade and that his contributions enabled the firm to grow its customer base exponentially. The owner relied on Steve to manage the operations but he felt as if the owner neglected to share in the proceeds. Steve told me he was entitled to a higher percentage of the annual bonus pool, yet the owner declined to offer an equitable distribution.

Steve controlled both the billings and receivables. He also prepared the monthly income statement and balance sheet. Those responsibilities offered him ample opportunity to cheat his employer. He opened a straw business with a name that was easily familiar to his employer as well as a straw bank account with the same name. Each month he deposited checks that rightfully belonged to his employer into his straw business account. Over time, those thefts amounted to hundreds of thousands of dollars. As the financial controller of a private company, with millions in monthly revenues, Steve had opportunity to easily conceal his fraud.

Auditors eventually detected his crime. The irony is that as he told me his story, Steve remained adamant that he hadn’t taken anything to which he wasn’t entitled. Despite a 4 year prison term, he was still stuck in the fraud triangle. I feel that his refusal to accept responsibility will keep him in a negative adjustment pattern. We have to learn from our bad decisions.

By diverting commissions from Kenny’s and my joint account and routing them to a personal account, I was able to even the short-term score. With an extra ten thousand here, an extra 15 thousand there, I could take care of myself even if the partnership wouldn’t. Those types of decisions violated a code of ethics that leads to long-term success. Worse, they made it easier for me to succumb further into the triangle.

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