Fraud Psychology in Internal Audit

SPEAKER_1 (0:02)

The Institute of Internal Auditors presents All Things Internal Audit. In this episode, Eric Wilson talks with Dr. Kelly Richmond Pope about the psychology behind fraud, why ordinary people commit unethical acts, and how trust, pressure, and culture shape fraud risk. They discuss accidental versus intentional perpetrators, cognitive blind spots, whistleblowing challenges, and what auditors can do to better detect and prevent fraud.

Eric Wilson (0:32)

So I figured we could just jump in. I'm always curious when I meet somebody like yourself, who is a true expert in a particular area. What is it that got you into this field? What was the spark that drew you into it and catch you where you're at, and took you to the level where you're really with this expertise?

Kelly Richmond Pope (0:51)

My spark was my students.

Years ago, I had a student that did a paper on forensic accounting. And I read this paper, and I was unfamiliar with the area at the time. This was a long time ago. And I realized that it was this field that was a combination of financial accounting, auditing, criminology, a little bit of tax, a little bit of sociology, some psychology, and a dash of nosiness, if you're nosy. And so the field spoke to me just from a theoretical foundation. I just wanted to learn more. And at this time, this was the beginning of when American Greed started to come on TV. And so any of our listeners here, I'm sure you have watched the American Greed episode here and there over the years. But what always sort of frustrated me at the beginning of American Greed, when it first started, was you never heard from the perpetrators. You always heard from people talking about them. And I always felt like there's another story there. Like, you know, when someone tells something third hand or second hand, some of the details get lost and some of the explanations get skewed. So I always wanted to talk to the person that they actually committed the crime. And so I started going around the country and doing on-camera interviews with white collar felons, whistleblowers, and victims of fraud. But specifically, we're talking about the whistleblowers or the perpetrators. And as I was doing the interviews, I realized how normal they were, how they were just involved in regular business decisions, regular business meetings. And someone said something that seemed a little questionable. And that happens to all of us. So I realized then that these stories are powerful and they are relatable and they should be shared. So that was the spark of the relatability and really trying to understand the humanity in these situations. Because I don't, we might not admit it, and Eric, you probably, you've had a long career, too. You have sat in a meeting once or twice where the things that people were talking about were like, what might be a little, we might not want to do that. And it's not that it's illegal, but when you think about legality and efficacy, those are very different things. And so that was the spark of me just realizing that the situations that they're in are the high-pressure situations many executives are in, and let's share these stories, and so let's start talking about it differently.

Eric Wilson (3:33)

That background is great because as I got your book and I started looking through it, and one of the things that I really appreciated was, you take this approach of, hey, let's just forget this idea of the stereotypical con artists that you see in the movies and everything else. These are your neighbors, your coworkers, it's you in the wrong situation or under the wrong circumstances.

When you think about from a psychological perspective and with all the work that you've done, most of the time, I would say almost all the time, these are employees who didn't necessarily start out with the idea of, hey, I'm going to go in this company and I'm going to do fraud and I'm sure that does happen on occasion. But typically, it's a trustworthy employee who over time, converts into committing fraud. What is the driver? What is the psychology behind making that transition? What have you seen as being what really causes that to happen for somebody?

Kelly Richmond Pope (4:20)

I want to give the disclaimer. I am not a psychologist.

Eric Wilson (4:23)

Absolutely.

Kelly Richmond Pope (4:24)

I'm a CPA, I'm a CFE, I'm not a psychologist. I'm just a cozy person that likes to just dig and dig and dig and dig and ask questions. I feel like I'm like the Oprah of fraud, maybe that's a good name.

But to go back to your question, when I think about the psychology, I want to talk about, did you ever see Breaking Bad on AMC? Absolutely. Remember the main character, the teacher, Mr. White? If you think about his situation, he thought that he had a terminal illness, he thought that his family was going to be left in ruins when he passed away, and he was a chemistry teacher. He felt as though his back was against the wall. What can I do to earn money quickly and a lot of it? It was the pressure of just life, adulting as we like to say, but just the pressure of feeling like I have a need, and I have an immediate need, how can I fill it fast? I think that although we're talking about a show, I think that is representative of what happens in life as an adult. Whether you have experienced job loss, whether you've experienced an unexpected pregnancy, we know that's a blessing, but unexpected pregnancy, unexpected illness, all of these pressures that happen, and you've got to figure out, how can I get money fast? I think it's the pressure of just all of us face pressures, but many of us don't have a family member that we can borrow $40,000 from. Or, you know, like you think about it, as you get older, the pressures get far more complex. And when you experience one, getting out of it takes layers. And so I think sometimes people, they look around and they realize, how can I get fast cash? What do I have access to? What do I have control over? And oftentimes, it's their companies. Because, you know, you think about it, there are lots of companies that are, that have poor internal controls, that might not be regulated well. And it's not that hard to do. And so it happens and you think you're going to pay it back. So I think it's pressure.