• Frauds by executives or upper management: 18%

• Frauds by perpetrators living beyond their means: 39%

• Frauds by perpetrators experiencing financial difficulty at the time of the fraud: 34%

Thou Shalt Not Commit Fraud
Employees can resist everything but temptation.

Who might cheat? Talk to Dan Ariely, author of Predictably Irrational: The Hidden Forces that Shape Our Decisions, and he'll tell you practically anyone. In a series of behavioral tests, Ariely and two colleagues tempted more than 2,000 people to cheat. Most did, despite Ivy League pedigrees and not much to gain.

Behavioral psychologists blame a trait called "reframing," in which someone about to cheat adjusts the definition of cheating to exclude his or her actions. "People who would never take $5 from petty cash have no problem paying for a drink for a stranger and putting it on the company tab," says Ariely, the James B. Duke Professor of Behavioral Economics at Duke University.

To measure the inclination to cheat, Ariely posed 10 questions about science and culture to groups of college students and paid them 10 cents per correct answer. Control groups gave their answer sheets to proctors. Subsequent groups had increasing leeway to cheat. One group could alter answers before turning them in, another could self-report the number of correct answers, and a third group could simply take 10 cents per correct answer from a jar without reporting results.

Control groups averaged 32.6 percent correct. Scores increased for the other groups, suggesting cheating, but not in strict accordance with increased opportunity. For example, the group allowed to change its answers had the highest scores, at 36.2 percent correct, while the group that paid itself directly cheated slightly less, and the group that self-reported to proctors cheated least.

Clear standards, Ariely says, provide a powerful deterrent. Prior to answering questions, one group was asked to name 10 books they had read, while a second was asked to name as many of the Ten Commandments as they could recall. Both had the opportunity to cheat; scores suggested that those who recalled the Ten Commandments did not. Likewise, no cheating was evident by MIT students who signed, in advance, a statement defining the study as falling within the university's honor system.

"What this means for CFOs," says Ariely, "is that they should think very carefully about the culture they want to create, and understand that it will have a big effect on what people will be willing, and not willing, to do." — S.L.M.

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