Loaded gun
Everybody does it – don't they? John Taylor discusses the triggers of fraud in law firms
Several senior members of the UK legal profession have been brought low by their own failings. Distinguished litigator Christopher Grierson was sacked for claiming over £1m in fictitious expenses. Addleshaw Goddard’s commercial real estate partner Mark Gilbert resigned over discrepancies relating to expenses and disbursements. Ince & Co’s energy deals partner Andrew Iyer has been removed from the partnership for allegedly defrauding clients of something in the region of £3m. Rumour has it that there are more to come and that three other City lawyers are under investigation by the Solicitors Regulation Authority.
All of these individuals were high flyers and yet, allegedly, resorted to fraud in order to boost already substantial incomes. Indeed, so well fixed was Grierson that he agreed to repay £1m within 14 days of being outed and presumably didn’t have to borrow it. Apparently, like Michael Fielding of glorious memory, whatever wealth they had wasn’t enough to support either their high lives or their titanic egos (or both). We can only speculate.
This article explores how senior members of the profession, whose business is the law and who are bound by a code of ethical behaviour, justify their illegal actions to themselves, and also how law firms themselves can create the conditions for fraud and other illegal acts.
The fraudster within
The professional criminal looks on incarceration as an acceptable risk and the average burglar or drug dealer might expect to spend some time in jail in the normal course of events. They can cope with this and may even come from a society where short spells of imprisonment are considered routine or even a badge of honour.
By contrast, the part of society that the white collar criminal inhabits does not see a spell of imprisonment as any form of honourable behaviour, indeed the opposite is true. Capture is likely to involve the loss of everything he had previously held dear – qualification, job, reputation, position in society and possibly even family.
The fraudster has to cope with the hidden knowledge of what he is doing and thus with the fear of discovery and its consequences. Some people are able to do this without displaying any apparent change in behaviour.
They appear able to cope with the increased stress of this secret without displaying any of the normal symptoms of pressure, such as short temperedness, increased sickness absence, reluctance to communicate, or increasing instances of antisocial behaviour, such as rudeness. But most do not – the strain of what they are doing affects them in some way.
Unless their personal moral and ethical belief systems have been replaced by a new and less stringent code, they have to find a way of justifying dysfunctional behaviour so that it fits in with their personal standards of what they consider to be right or wrong. Otherwise they experience what psychologists call cognitive dissonance.
Cognitive dissonance is the mental conflict which appears when an individual attempts to hold two conflicting views at the same time. This produces uncomfortable feelings in the individual who must then attempt to reduce those feelings by either changing his behaviour or by rationalising his activities so that the cause of the dissonance is removed or minimised. The fraudster thus has to adopt mechanisms to justify his behaviour to himself.
The way of doing this is for the criminal to distance himself from the victim. Consequently, perpetrators of crime often adopt various false rationalisations. Figure 1 shows examples of some of the internal rationalisations adopted by fraudsters to justify their behaviours.
It is only by adopting such distancing techniques, by treating the crime as if it was some sort of game in which there are no real victims, by pretending that it isn’t real and, even if it is, that nothing bad will happen, that white collar criminals go some way in justifying their actions to themselves.
Figure 1: Criminal rationalisations
Rationalisation
Examples
Denial of responsibility – the perpetrator’s actions were caused by forces beyond his control
- “What else could I do? - I really needed the money because…”
Condemnation of the condemners – anyone condemning the actions of the perpetrator is doing so out of spite as it is really not his fault
- “I’m only doing what everyone else in the firm does”
- “I don’t know what came over me”
Denial of the victim – the victim is demeaned, seen as stupid or somehow culpable
- “Serves them right – it’s wide open”
- “They’re too busy ripping off clients to check what I’m doing”
- “The auditors are useless”
Denial of injury – loss or damage to the victim is minimised
- “Doesn’t matter – they’re insured”
- “They can afford it/won’t miss it”
Based on ‘Techniques of Neutralisation’, Gresham M. Sykes and David Matza, American Sociological Review, 1957
Changes in behaviour
Fraudsters still have to deal with some level of dissonance, however, and this inner struggle is what often leads to changes in behaviour which can draw attention to them and arouse suspicion. These changes in behaviour can be a warning sign that all is not well and should prompt some form of investigation by the firm, however discreet.
Unfortunately, cognitive dissonance is not usually sufficiently powerful to stop an individual from continuing with his fraud once he has started. Uncomfortable feelings can often be reduced the longer the fraud goes undetected, causing the fraudulent behaviour to become ‘normal’.
Some changes in behaviour will become permanent, as the inner conflict does not go away until the fraud is detected. Too often, behavioural changes are put down to stress or overwork, but they may have a more sinister underlying cause.
Firm culture
Rationalisations for the solo fraudster committing fraud against either clients or his firm are one thing. But another, often overlooked, consideration is the culture of the organisation itself. Individuals experience pressures not only as a result of their own fraudulent behaviours but also as a result of being asked or required by their firms to act in unethical ways.
In a recent Legal Week survey, 72 per cent of respondents said they believe that law firm partners have better ethical standards than their counterparts in banking (no brainer) and accountancy (wrong). They clearly feel that there has been no compromising of ethical standards in the transformation of City law firms from detail nitpickers to being part of the deal-making process. Unfortunately, it is this transformation that appears to be very much at the root of many of the current scandals.
Barbara Ley Toffler, a former partner in defunct accounting firm Arthur Andersen, described in her book Final Accounting how employees were pressured, among other things, to:
- ‘keep the client happy’ even if this resulted in unethical practices;
- compromise audit objectivity by selling consultancy services which were much more lucrative than audit fees; and
- aggressively sell services to clients, irrespective of whether the clients needed the services. Money brought into the firm was what was valued the most and, the more services they sold, the bigger their bonuses. So, the more aggressive employees were more highly rewarded, irrespective of the quality of their work.
This culture devalued ethical or moral behaviour in favour of ‘business’. The consequence was that corporate ethics were fundamentally subordinated to making money. In the closed world of the firm, any employee who pointed out this distortion of values was resented and marginalised.
As the leadership of the organisation was seen to place so little value on ethical behaviour, the message sent to subordinates was that results were all that mattered, the pursuit of fees was what was rewarded and there was always a way of getting around or rationalising some inconvenient moral or ethical issue.
Clearly, this message was subliminal – partners and employees were not instructed to cheat or overcharge clients – it was just ‘the way we do things around here’. In other words, pushing fee levels to the maximum was what was required. This attitude, of course, ultimately contributed to the destruction of the firm.
The danger is that the culture of a law firm can become corrupted to the extent that fraud can almost be justified as normal behaviour. This is justified by another example of rationalisation – the appeal to higher loyalties – where dysfunctional behaviour is represented as being for the good of the firm or for a clique within the firm.
If aggressive fee-focused behaviour which requires some level of unethical practice, such as overcharging, carrying out unnecessary work, misleading clients or misrepresentation, is what is rewarded the most in the firm, and if employees or partners who behave in that way are considered to be the most successful or admirable, it can be a small step from there to criminal fraud.
Similarly, when senior members of the firm are seen to be exploiting clients by charging excessive costs or expenses to them, particularly to larger clients who ‘won’t miss it’, the example set is that it is acceptable for all client-facing staff to do this. Expense claims are consequently inflated and hours worked and difficulties encountered are exaggerated to justify inflated costs.
Individuals who do not conform to this behaviour are faced with two choices. Either they go along with it and perhaps suffer some degree of cognitive dissonance, which will make them uncomfortable or unhappy, or they leave the firm.
They leave because their refusal to conform to the prevailing culture means they are devalued by the firm. The quality of their work is not what is considered valuable; it is their capacity to generate fees which is seen to be most important and they cannot compete with their more aggressive colleagues. Employees who complain or who attempt to blow the whistle on what they see as unethical behaviour can also be forced out and their concerns ignored.
Consequently, care has to be taken by the leaders and senior partners of every law firm (see box: Reducing the risk of fraud). If unethical behaviour is somehow seen as normal, then the rationalisation for fraud is complete and dysfunctional behaviour becomes routine. If equity partners become corrupt, the firm will become corrupt and will almost certainly come to disaster in future.
Reducing the risk of fraud
How is the danger of the rogue partner to be avoided? There are several key steps which equity partners, who don’t have their hands in the till, should take.
- Set the culture of the organisation. This is known in management speak as ‘tone at the top’. Avoid the ill-fated Andersen approach and concentrate on delivering quality of service, not simply expensive services.
- Lead by example. Travelling first class and staying in five-star hotels at the client’s expense sends a profligate message to junior partners and staff that clients are there to be exploited and to provide a good life.
- Establish a firmwide ethics policy and enforce it. It applies to everybody – including you.
- Tighten up financial controls. Deny opportunity to fraudsters – limit money transfers based on one signature and avoid letting partners sign their own expenses. Ask a forensic accountant to review your internal systems and listen to what he says.
jtaylor1951@hotmail.co.uk