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Fences as Controls to Reduce Accountants’ Rationalization

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Abstract

Occupational fraud frequently involves the direct or indirect participation of professional accountants (PA). To reduce fraud, companies often focus on the incentive/pressure and opportunity legs of the fraud triangle, perhaps believing that rationalization is beyond their control. We argue that rationalization reduction is necessary to minimize occupational fraud. We propose that educators and PA consider incorporating fences as controls to reduce rationalization. Because they focus on compliance and risk avoidance and are non-negotiable, fences appeal to accountant’s Myers Briggs personalities and conventional level of moral development. Educators can teach students about the fences used in practice, and explain how they help new professionals resist pressures and temptations. By adding fences to existing professional guidance, accountants can reduce the likelihood that they will be a party to fraud.

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Notes

  1. See Trustees of Dartmouth College v. Woodward—17 U.S. 518 (1819), Santa Clara County v. Southern Pacific Railroad - 118 U.S. 394 (1886), and Citizens United v. Federal Election Commission—558 U.S. 310 (2010).

  2. “…the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” (ACFE 2014, p. 6).

  3. Accounting department employees are responsible for the greatest percentage of occupational frauds detected: 17.4 % in 2014, and 22 % in 2012 and 2010 (ACFE 2014).

  4. Tang and Sutarso (2013) provide an in-depth analysis of temptation, and its relationship with unethical intentions.

  5. Income inequality, a form of social conflict (Kawachi and Berkman 2000) may both arise from and pressure people to commit fraud.

  6. Many Jews interpret the purpose of the restrictive dietary laws (Kashrut) as reminders of how to live life. The point of the meat/milk prohibition is to remind us not to mix improperly the harshness of eating meat with the kindness of drinking milk—as well as to care for animals and treat them with respect. Designating chicken as meat occurred at a time when meat was expensive and rare, so families ate chicken instead. Had chicken not been “reclassified,” there would be no “reminders” of the meat/milk prohibition, and people may have forgotten the original purposes of the fence—to remind us to separate harshness and kindness, and to treat animals with respect.

  7. To help alleviate this problem, Shapiro (2015) suggests that narratives can help operationalize, explain, and justify their humanizing principles.

  8. Our discussion and recommendations are directed (and limited) to the aforementioned “accidental fraudsters,” who face situations where they either do not recognize, or cannot resist, pressure or incentives to act unethically.

  9. They are responsible for 31.3 % of billing fraud, 35.7 % of check tampering, and the greatest percentages of payroll and skimming fraud, when compared with other departments (including executives and owners).

  10. While executives/owners commit the greatest percentage of FSF, of the fraud committed by accounting department employees, 8.3% is FSF. These frauds are costly, having the highest median loss per incident ($1M in 2014 and 2012) compared with asset misappropriation $130 K in 2014 and $120 K in 2012) (ACFE 2014).

  11. For a listing of research and findings in this area, see Schwartz (2001).

  12. This action may have been self-serving, allowing the partnership to avoid legal action from the affected client.

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Acknowledgments

We thank Mohammad Abdolmohammadi (Bentley University), Abe Akresh (Retired), Steve Albrecht (Brigham Young University), Philip Beaulieu (University of Calgary), Bruce Burnwell (Light of the World Christian Center), Dave Duprey (Comerica), Becky Heath (Middle Tennessee State University), Jerry Hepp (Gnosis Praxis Ltd.), Mel Houston (Attorney at Law), Brian Shapiro (University of St. Thomas-Minnesota), Dave Sinsaon (Northern Illinois Universty), Greg Thibadoux (University of Tennessee-Chattanooga), Doug Toering (Attorney at Law), Greg Trompeter (University of Central Florida), Paul Williams (North Carolina State University) and Leah Woodall (Google) for their excellent comments on earleir drafts of this paper. Andrew Miller and Omar Zeben provided able research assistance at Wayne State Univesity.

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  1. School of Business, Wayne State University, Detroit, MI, 48202, USA

    Alan Reinstein

  2. Poole College of Management, North Carolina State University, Campus box 8113, Raleigh, NC, 27695-8113, USA

    Eileen Z. Taylor

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Reinstein, A., Taylor, E.Z. Fences as Controls to Reduce Accountants’ Rationalization. J Bus Ethics 141, 477–488 (2017). https://doi.org/10.1007/s10551-015-2701-6

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