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Econ 050: The slippery slope of corporate misconduct

Date:18 April 2019
Econ 050 is a podcast on the economics and business news that matters to the Netherlands and the wider world, made by the Faculty of Economics and Business and the Northern Times.
Econ 050 is a podcast on the economics and business news that matters to the Netherlands and the wider world, made by the Faculty of Economics and Business and the Northern Times.

Imagine you’re on the banks of a river, watching the white water rapids rage past you. You’re surrounded by a group of your closest friends who booked a rafting trip, but you’re scared. You are deathly afraid that the raft will tip over, and you’ve heard horror stories about people drowning in these waters. In theory, you could still refuse to get into the raft, but everyone else is getting in, and you don’t want to disappoint your friends. So, you get in. The raft starts moving along and gradually gains speed. The waters aren’t too wild yet, so you could still get out at this point, but it’s already a dangerous situation. You keep going and going, faster and faster, and then, the raft flips.

This is how assistant professor Kristina Linke describes the process of how corporate executives find themselves gradually but inevitably crossing ethical lines professionally, in this new episode of podcast Econ 050. In principle, they can see the danger coming from a mile away, but in practice, it can be just as scary to try and get out before certain disaster strikes. Listen to the full episode online now to hear just how easy – and common – it is for corporate staff to slide into financial fraud.

On what the “C-suite” is:

Kristina Linke: A c-suite is everybody with a C in front of the title. So there is CEO, a chief executive officer, CFO, chief financial officer, COO is the chief operating officer. So it’s really the top management of a firm.

On what kinds of industries the convicted former employees worked in:

Traci White: So you’re looking at companies that are listed on the stock market, but can you name any of them or are they deliberately being kept quiet?

Linke: We had to promise everybody that we would keep it a secret, so we cannot tell who is in it and which companies. We gave indications in our paper how many different industries were involved and how large the companies were, but that’s it. I think more important in our study is that we have a clean sample, which means they are only financial executives.

On why employees behave unethically:

Linke: They were not motivated to participate in fraud by money, which was very surprising. Then we looked further and said, what makes them participate? Everybody who is in our study has a master's degree. Some people have two master's degrees, honours degrees. So we’re talking about smart people, and still they are involved. So what happened? It's a process that works very slowly. So it starts off with lines moving and certain unethical acts, and people start to get used to it.

On how fraudulent behaviour starts slowly:

Linke: [An employee] may say for example, “Okay, this amount should be corrected, but it's not large enough”. So in comparison to the numbers of the company, it's a small amount. Does it change the big picture? Probably not. So we’ll just let it go. In technical terms, we call it materiality. So it's not material to be reported. So it's off the table. And then this person sits and says, “Well, according to my education at university, this is what we should correct. But obviously, it's not important enough.” So that’s the first time this financial executive observes somebody else doing adjustments that are questionable and starts to think, well, it seems to be business. This seems to be how people behave.

Is slipping into fraud the exception or the rule?

Linke: No, it's not an exception. It happens more often. So that is the start of what we call the slippery slope. Then this person moves to another job as the controller, and sees his superiors doing the same thing: adjusting numbers and hoping that the auditor doesn't see it, and then this person thinks again, obviously, that is the way businesses are run, and it shifts this person a little further.

On how former c-suite employees convicted of fraud look back on their conduct:

White: Given that you spoke with people who have been charged with these crimes, do they express feeling frustration about how the system seems to be priming them in a sort of way to eventually slide into unethical conduct?

Linke: So three of them are still in denial. Although they were convicted, they say, “we didn't do anything wrong”, which was amazing. The others say, “in retrospect, we regret that we didn't behave differently”. So having gone through all the trouble, we don't know why it was so difficult at the time to go for the right choices.

How do employees justify their gradually changing behaviour?

Linke: There was no need to find other rationalisations or to justify in a different way why they did it. Only after they crossed the line and they were really involved in frauds, at a certain point they realize, “this is really, really bad”, and then they knew that the line has been passed already. And the difficulty was how to get out of it, and that is even more difficult than in this earlier stage where they could easily leave.

Can current and future employees be taught to avoid slipping into fraudulent conduct?

Linke: I believe that we as teachers have a job to educate our students upfront to make them aware of those processes. The second thing that we can do as practitioners it to try and teach them what is going on so that they are aware of it. Also, boards of directors should know how this works. Review their financial stuff and discuss those issues with them. Look at potential items that are involved in the slippery slope. What do they recognise? What can they do about it? If they would do just those three steps, I think that we would be a little closer to avoiding it. And at the end of the day, it's an individual choice and people have to do the right thing.