Know your leader : Assesing fraud risk in the government

Know your leader : Assesing fraud risk in the government Hendi Yogi Prabowo  ;   The director of the Center for Forensic Accounting Studies at the Islamic University of Indonesia, Yogyakarta. He obtained his Doctorate in forensic accounting from the University of Wollongong, Australia

JAKARTA POST, 08 April 2014

                                      

                                                                                         

                                                             

Indonesia is electing a new government, which — many hope — will tackle the endemic corruption plaguing the country that is undermining development. Deputy chief of the Corruption Eradication Commission (KPK) Busyro Muqoddas said the 2009 election had resulted in a corrupt regime, as evinced by the fact that many public officials had been arrested or convicted of graft. Now people expect the new leaders to redeem promises of change, rewrite the political script and establish a leadership that stands on the principles of good governance, anticorruption and rule of law. An important measure of a good government is its low fraud risk, which is essentially the likeliness of potential fraud offenders to commit graft, which will in turn affect the governance system. Assessing fraud risk itself is an important process in the prevention, detection and investigation of fraud within organizations. For example, in fraud investigation, generally the amount of resources allocated to gathering evidence will be greater if higher fraud risk is identified due to, among others, possible alteration or destruction of evidence by offenders. Over half a decade ago, criminologist Donald R. Cressey proposed what is known as the “Fraud Triangle” where, in relation to fraud risk, the propensity of fraud to occur is largely influenced by the presence of pressure (or motivation), opportunity and rationalization (justification of one’s wrongful act). Leadership has been identified by anti-fraud experts as a determining factor for Fraud Triangle elements within an organization. Leadership style will influence the propensity of fraud to occur within an organization or even a country. The role of leadership in corruption, for example, has been seen as an evolution of processes of transformation from caution, honesty, respect and valuing others to the thrill and excitement of selfishness, narcissistic and omnipotent gratuity. A good leader must possess moral strength, perception and empathy and is a role model for his or her people. Unfortunately, some individuals in leadership positions are simply not cut out to lead. Narcissistic leaders, for example, have been identified by various studies as a major cause of corruption and other fraud problems. Former leaders of fallen giant corporations such as Enron and WorldCom as well as some country leaders have been deemed the modern day incarnations of Narcissus. Many believe that narcissistic leaders can be identified by their authority, superiority, self-admiration and entitlement. For example, there have been numerous critics on the excessively high salaries of the members of the Indonesian House of Representatives (DPR) that do not seem to match their performance. According to data from the Independent Parliamentary Standards Authority and the International Monetary Fund cited in The Economist, the salaries of the House members (US$65,800 per year) is the fourth highest in the world in comparison to the country’s per capita income (around 18 times per capita income of the year). Even in the US, representatives’ $174,000 salary per year is only three times the country’s per capita income. Some behavioral scientists have been using salary as a proxy for measuring leaders’ level of narcissism as in many cases leaders will have considerable influence over their salaries. For example, in terms of authority, a high compensation will put him or her in the center of attention. In terms of superiority, he or she may think they must be rewarded for being more superior to others. In terms of self-admiration, he or she is an extraordinary individual who must be handsomely compensated. Overall, because of these perceptions, in terms of entitlement, an individual believes that he or she deserves the highest remuneration. Other means that can be used to identify narcissistic leaders include the way they present themselves in the media. Leaders or potential leaders who like to put their faces all over the place, for example, are said by behavioral experts as possessing high level of narcissism. Fraud has been known to spread in organizations like a cancer. Bad leadership is a major cause of the disease. According to a leadership expert, Mike Myatt, a sign of bad leadership is when a leader does not understand the concept of “service above self”, thus, he or she will not gain the trust, confidence and loyalty of his or her followers. Good leadership traits do not include much ego, pride and arrogance. Evidence suggests that bad leadership and fraud often come hand in hand with fraud. This is so since a narcissistic leader might think that he or she lives in a fantasy world where everything is his or her for the taking, thus, they will be more likely to engage in bold action that crosses the line. Living in the fantasy world will enable them to rationalize their misconducts and reduce internal disequilibrium (e.g. guilt and fear) from such action. Fraud risk in leadership must be minimized to reduce the propensity of fraud such as corruption to occur within the government. Having the right leaders with strong moral compass is of upmost importance in ensuring that the government will not become corrupt and tyrannous and end up as nothing more than a means to satisfy corrupt politicians’ insatiable greed. ●