"In addition to misreading people by failing to spot their 'mismatched' behavior, another main source of misunderstanding, according to Gladwell, 'has to do with our inability to make sense of the stranger as an individual.'"
From a financial crimes perspective, some of our greatest risks derive from not knowing enough about our customers, employees, and partners, OR misunderstanding what we do know about them. Malcolm Gladwell illustrates how personal interactions may be deceiving when judging personalities, behavior and intent. Pointedly, consider these employee fraud statistics:
- The Association of Certified Fraud Examiners estimates that businesses lose 5% of their annual revenue to employee fraud and abuse;
- 75% of employees have stolen from their employer at least once, according to the U.S. Chamber of Commerce;
- The Chamber also found that up to 30% of business failures may be the result of employee fraud and abuse; and
- A report on white collar crime released by the insurance company Hiscox found that over 80% of thefts occur at companies that have fewer than 150 employees; half occur at companies with 25 or fewer employees.
These numbers point to the fact that we may not be as good at understanding our employees, their motivations, and our ability to implement effective controls to prevent and detect internal fraud as we think. Part of effective leadership is knowing our teammates, at least within our small teams and business units. A potential downfall in "knowing" your people well is the comfort we develop in being able to accurately assess their performance and, for this discussion, red flags indicating employee misbehavior. In another term, "leadership hubris."
This isn't to say that mistrusting our employees is a preferred management style. However, it is important that we understand:
- stoicism and skepticism can be healthy tools, in doses, in monitoring internal fraud red flags;
- familiarity can breed limitations in our ability to serve as unbiased judges of character and behavior; and
- independence of investigations is vital when employee fraud is detected.
Perhaps one shouldn’t always feel bad about getting someone utterly wrong. Sometimes one is bested by a master. In November 2004, I went to interview Bernard Madoff for The Economist and was won over. I told friends that I trusted this quiet, thoughtful man more than I trusted any of the dozen Wall Street loudmouths I’d talked to that year. It emerged in 2008 that he had been one of the biggest con men in history.