Understanding the Causes and Effects of Top Management Fraud
Section snippets
What is top management fraud?
Fraud refers to the deliberate actions taken by management at any level to deceive, con, swindle or cheat investors or other key stakeholders. Fraud can take many forms that include embezzlement, insider trading, self-dealing, lying about facts, failure to disclose facts, corruption, and cover-ups. Top management fraud may also involve intentional misrepresentations in financial statements. Managers might also create schemes to hide or misrepresent what the firm does or how the firm does it.
Top management fraud as a white-collar crime
Wrongdoing in and by corporations has been the subject of considerable concern, study and analysis. Researchers have used numerous labels to describe this phenomenon, such as white-collar crime, corporate wrongdoing, management fraud, managerial vice, and corporate illegal behavior. White-collar crimes have distinctive characteristics that include: the absence of physical violence, the existence of strong financial motivations, and the involvement of individuals who are otherwise considered
Why do top managers commit fraud?
Human beings are subject to a number of influences, and top managers are no exception. There are several societal, industry and organizational factors that can pressure managers and even encourage their fraudulent behaviors. Yet, at a fundamental level, the motivation to commit fraud might be deeply embedded in top managers’ personal ambitions, histories, and complex personality structures. As Fig. 1 indicates, three key sets of factors – societal-, industry-, and company-level – serve as
Individual choice
We have just seen how societal, industry and firm characteristics can affect the incidence of top management fraud. Society, for example, establishes an individual's values through both aspirations and associations. It also sets the institutions and rules that guard against opportunism, deceit and dishonesty, aiming to protect the common good. At the industry level, highly concentrated industry structures, resource scarcity, and rapidly changing environments often intensify managers’
Consequences of top management fraud
Top management fraud has pervasive and wide reaching effects. It has afflicted shareholders, employees, the communities in which firms work, and society at large (Fig. 1). Fraud can also damage managers’ reputations, end their careers, lead to their firing, and cause their imprisonment. Understandably, recent revelations of massive and widespread management fraud around the globe have stirred a heated debate about the roles of auditing firms, corporate boards of directors and regulatory
Conclusion
Despite the public outrage about the prevalence of fraud, we still do not have clear answers to a number of simple but important questions about management fraud. For example, what motivates successful senior managers to engage in fraud? How do these managers succeed in co-opting and involving others in their fraudulent schemes? Why do many members of the organization who uncover fraud, accidentally or otherwise, nevertheless fail to report it? And what perpetuates such silence and compliance
Selected bibliography
Detailed discussions of the pressures that can contribute to managerial fraud, and the personal characteristics that can affect the likelihood of managers bowing to pressure to commit fraud, can be found in M. S. Baucus, “Pressure, Opportunity and Predisposition: A Multivariate Model of Corporate Illegality,” Journal of Management, 1994, 20, 699–721; and in A. J. Daboub, A. M. A. Rasheed, R. L. Priem and D. A. Gray, “Top Management Team Characteristics and Corporate Illegal Activity,” Academy
Shaker A. Zahra is the Robert E. Buuck Chair of Entrepreneurship and a professor in the strategy and organization department at the Carlson School of Management, University of Minnesota, where he co-directs the Center for Entrepreneurial Studies. He has also been a visiting professor in several leading universities outside the U.S. His research has appeared in major scholarly journals. Zahra is chair of the Entrepreneurship Division of the Academy of Management (Tel.: +1 612 626 6623; fax: +1
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Shaker A. Zahra is the Robert E. Buuck Chair of Entrepreneurship and a professor in the strategy and organization department at the Carlson School of Management, University of Minnesota, where he co-directs the Center for Entrepreneurial Studies. He has also been a visiting professor in several leading universities outside the U.S. His research has appeared in major scholarly journals. Zahra is chair of the Entrepreneurship Division of the Academy of Management (Tel.: +1 612 626 6623; fax: +1 612 624 2046; e-mail: [email protected]).
Richard L. Priem is the Robert L. and Sally S. Manegold Professor of Management and Strategic Planning and a professor of management in the Sheldon B. Lubar School of Business at the University of Wisconsin-Milwaukee. He earned his Ph.D. in strategic management from the University of Texas at Arlington. He was a Fulbright scholar at the University College of Belize, and he has visited at the Hong Kong Polytechnic University, HKU.S.T and Groupe ESCEM in Tours, France. His research interests include top management decision-making and processes (Tel.: +1 414 229 6865; fax: +1 414 229 5999; e-mail: [email protected]).
Abdul A. Rasheed received his Ph.D. from the University of Pittsburgh. His research interests include environmental analysis, corporate governance, and international comparisons in strategy, outsourcing, and franchising. He has published in many leading journals such as Academy of Management Review, Strategic Management Journal, Journal of Management Studies, Journal of Management, Management International Review, International Business Review, and Strategic Organization. Rasheed teaches in the areas of strategic management and international business. He has lectured at universities in Singapore, Hong Kong, China, and Korea and India (Tel.: +1 817 272 3867; fax: +1 817 272 3122; e-mail: [email protected]).