Crisis of Confidence: Steve Albrecht Q&A

steve AlbrechtWhen Marriott Alumni Magazine’s staff wanted to investigate corporate fraud, they knew exactly who to turn to: W. Steve Albrecht. Recognized by Accounting Today as one of the industry’s most influential people, Albrecht has published more than eighty articles in professional journals and numerous books on fraud, personal finance, and accounting. In addition, he has served as an expert witness in twenty-six major fraud cases, the largest of which was $2.8 billion.

MAM: Is fraud more prevalent in the United States than in other developed countries?

WSA: Compared to other developed countries, fraud is more prevalent in the United States. There’s a German organization, Transparency International, that rates corporate corruption in various countries. The corruption index is based on about thirty different surveys. The United States for the last few years has been ranked sixteen or seventeen out of about one hundred in the world. Canada ranks around seven or eight. The most honest countries tend to be in Scandinavia—Denmark, Sweden, and Norway. Less developed countries tend to be closer to the bottom.

You’ve written about the fraud triangle—the role of perceived pressure, perceived opportunity, and rationalization in committing fraud. How do these factors play out when fraud is actually committed?

The fraud triangle can explain any fraud there is. If it’s fraud against an organization, the pressure might be, “I’ve got debts I can’t pay.” The rationalization is, “There are poor controls in the organization, and I’m going to pay it back.” If it’s financial statement fraud, for example, the pressure might be, “We’ve got to meet Wall Street’s earnings forecast.” The opportunity would be the plan, “We’ll bury these fictitious transactions in subsidiaries that the auditors might not get to.” The rationalization is, “As soon as the economy improves, we’ll merge with somebody and create a merger reserve where we can wipe this out.” People rationalize that as soon as the economy improves they’ll stop committing fraud.

Do you feel government regulations, particularly the Sarbanes-Oxley Act, do much to reduce perceived pressures, opportunities, and rationalization?

The act created an oversight board, requires auditor rotations, and requires work papers to be retained longer. It places more burdens on corporate executives. For example, you can no longer leave a CPA firm and become a company executive right away. Certain executives in corporations have to sign off on financial statements. And, companies must have outside directors with financial experience on their boards of directors and audit committees.

I don’t think we’ve done anything to reduce pressures. We still have Wall Street making earnings predictions and companies giving tremendous amounts of stock options. In terms of opportunity, hopefully by having more diligent auditors, opportunities won’t be as great. As for rationalization, if top management has to sign off on the financial statements and take responsibility for their accuracy, they can’t rationalize fraud as easily as before.

What is the Marriott School doing to prepare students to deal with fraud issues?

For starters, we have excellent professors who are marvelous examples. They’re bringing the gospel and good values into the classroom. They are staying up-to-date and using corporate examples to teach lessons of integrity and to teach students how frauds happen. We also bring in business executives as lecturers and role models. In addition, we have a fraud class at BYU. Now, a number of other schools are adding fraud classes. We also have several other classes that present students with ethical dilemmas to help them define who they are.

Do you believe that fraud begets other fraud? People think, “Well, nobody’s being honest, so why should I?”

This happens a lot. When top executives are dishonest other people in the organization see it and justify their own dishonesty. An insurance fraud a number of years ago involved employees creating fictitious people and fictitious policies and then selling those policies to reinsurance companies. One of the employees in the company saw what was going on and said, “We’re creating all these fictitious employees, I might as well get in on it.” It didn’t make sense to have them all live forever, so he had a few of them die and collected the death proceeds. I’m an expert witness in a fraud case right now where there are more than twenty individuals involved in perpetrating the fraud.

Is it possible to reverse the fraud trend?

If we’re going to reverse it, we have to start at home. Then, educational institutions have to pay attention. Business schools aren’t teaching ethics as much as they could or should. Few are teaching anything about fraud. Most of the people who participate in frauds and most of the auditors wouldn’t know fraud if it hit them right between the eyes because they haven’t been taught. I believe teaching about fraud will help.

Crisis of Confidence” originally ran in the Winter 2003 issue of Marriott Alumni Magazine.