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Financial Executive


Eighty percent of respondents to a National Association of Corporate Directors (NACD) survey of public company audit committees felt that failure resulting from poor risk management couldn't happen to them. However, 50 percent thought it could happen to other companies.

This feeling of relative "invincibility" is similar to the statistically impossible "Lake Wobegon" effect--where "all the women are strong, all the men are good-looking and all the children are above average." Could this Lake Wobegon effect--which results from the human tendency to overestimate one's achievements and capabilities in relation to others--extend to an organization's assessment of its vulnerability to fraud risk?

Fraud is a human endeavor, involving deception, purposeful intent, intensity of desire, risk of apprehension, violation of trust, rationalization, etc. So, it is important to understand the psychological factors that might influence the behavior of fraud perpetrators. The rationale for drawing on behavioral science insights is evident from the intuition that one needs to "think like a crook to catch a crook."

Many business professionals, especially those in the finance arena, tend to discount behavioral explanations. But as the incidence of fraud continues to grow, placing the spotlight on behavioral factors may be an important approach to not only fraud detection, but to deterrence as well.

The 2006 Report to the Nation issued by the Association of Certified Fraud Examiners (ACFE) noted that U.S. organizations lose almost 5 percent of their revenue to fraud, and that the Gross Domestic Product (GDP)-based annual fraud estimate for the U.S. was a whopping $652 billion. In light of such sobering statistics, it behooves each and every organization to understand the root causes of fraud and proactively manage fraud risk.

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