DFC | 1

DRAFT For discussion purposes onlyDo not quote or reproduce without the authors permission.

A Disposition-Based Fraud Model: Theoretical Integration and Research AgendaVasant Raval(vraval@creighton.edu)Heider College of BusinessCreighton University

ABSTRACTFor several decades, most discussion on financial fraud has centered on the fraud triangle, which has evolved over time through various extensions and reinterpretations. While this has served the profession well, a void exists in the identification of the human side of the act. This research is dedicated to developing a model to explain the role of human desires, intentions, and actions in indulgence of, or resistance to, the act of financial fraud. Evidence from religion, philosophy, sociology, and social psychology is integrated to identify and support a new fraud model, called the disposition-based fraud cycle (DFC). To articulate the model, its two primary components, disposition and temptation, are further developed and extended. Although generally applicable any act of fraud, the paper primarily focuses on the executive fraud. The similarities and differences between the DFC and theory of planned behavior, fraud triangle, and Hunt and Vitell model are discussed. Additionally, some of the previously undecipherable mysteries of financial fraud are interpreted using the DFC model, suggestions for further research are offered, and the DFCs strengths and limitations are noted.Keywords: Financial fraud, disposition, temptation, ego depletion, self-efficacy, executive fraudINTRODUCTIONMuch of our current understanding of why perpetrators commit fraud is grounded in the Fraud Trianlge (hereafter, FT) (Dorminey et al, 2010). Undoubtedly, the FT seems to have served moderately well in a fight to tame financial fraud (Hogan et al, 2008). The FTs presence in the auditing pronouncements (see AICPA, AU 316) signals its importance in controlling financial fraud. Given its permanence, several revisions to the FT have been proposed over time. For example, Albrecht et al (1984) advocate replacing rationalizations with a more observable construct, personal integrity, measured using what they call a fraud scale. Wolfe and Hermanson (2004) proposed that the triangle might better serve financial fraud prevention and detection if it were turned into a diamond, with the actors capability as the fourth condition. Choo and Tan (2007) appended the Broken Trust Theory introduced by Albrecht et al (2004) and an American Dream theory to the FT with a view to extend its explanatory power. Dorminey et al (2012) speak of MICE (Money, Ideology, Coercion, and Ego (entitlement)), an idea under discussion in recent years, that could offer a way to assess the actors motivation to commit fraud a question that the FT does not fully address.Understandably, we likely would focus on what has made reasonable sense in deciphering our past experiences. However, vigilance requires that we heed Kahneman (2011, pp. 277-290): once you have accepted a theory and used it as a tool in your thinking, it is extraordinarily difficult to notice its flaws. If you come upon an observation that does not seem to fit the model, you assume that there must be a perfectly good explanation that you are somehow missing (p.277). So, not unlike patch management in the software industry, we have seen a number of updates, modifications, and extensions around the FT in the spirit of creating perfectly good explanations of what the original FT cant explain. The familiar is so difficult to give up, to make room for a new thought (Kuhn, 1962). This is a powerful motivation for this study: to search for a fraud model that is holistic and potentially more effective.Undoubtedly, a great deal of research on fraud risk factors has been accomplished in recent years, and many of these studies have sprouted independent of the FT. However, if researchers attempted to anchor their results to some theoretical paradigm, with some exceptions, their choice was almost always the FT. In the absence of a viable alternative model, interpretations from rather rigorous research attempts would likely be somewhat limited or may not even surface on the radar. Furthermore, the absence of an alternative that could supplant the FTs weaknesses could limit research in propositions that dont anchor well on the FT. In turn, this may have limited our insights from the research efforts and may even have constrained free thinking on possibilities of fraud risk factors beyond the bounded space provided within the triangle. In sympathy with what is lacking, we often hear that any fraud is, after all, a human act (Ramamoorti, 2008). However, in the absence of articulation of the process behind the act, the message seems to lose its appeal over time. This study views financial fraud from a different perspective: the human disposition grounded in virtue ethics. In an earlier exploratory effort, Raval (2013a) searched for an alternative to the FT. Leaning on the teachings of Eastern metaphysics, he (2013b) identified key parameters of the model which he named the Disposition-based Fraud Cycle (hereafter, DFC), an open-system framework that separates the actor from the act itself and accounts for the interaction between the actor and the circumstances of the act. It identifies the true nature of the actor and traces the possibilities of an act of fraud in a separate cycle. This paper clarifies the DFC model and presents related empirical evidence.Whereas the DFC is generally applicable, our attempt here is to focus on the chief executive for various reasons. First, the SEC continues to name senior management in its enforcement releases for some level of involvement in fraud, with the CEO/CFO named in almost all cases[footnoteRef:1] (Beasley et al, 2010). Second, the failure of leadership to self-regulate often translates into devastating impact on the companys stakeholders. If an organization is vulnerable to material fraud, chances are it is the leadership of the organization that plays a role in the episode.[footnoteRef:2] The COSO 1998-2007 Report (Beasley et al, 2010, p. 2) notes that the high level of involvement of top management has important implications for the control environment. Finally, the upper echelon perspective (Hambrick and Mason, 1984) suggests that organizational outcomes are reflections of the values and cognitive bases of powerful actors in the organization. Without limiting the DFC, we therefore focus on a particular group of actors, the executive leadership. [1: Table 5 of the report (p. 14) shows that an overwhelming majority was composed of senior management, including vice-president, controller, CEO, CFO, and CEO/CFO.] [2: This notion is supported by the studies suggesting tone at the top as a key fraud risk factor (see, e.g., Apostolou et al, 2001).]

The organization of this paper is as follows. We begin with a brief summary of the FT and review selected studies on financial fraud using the theory of planned behavior (TPB). Next, we describe the DFC. And where possible, we provide support for the model, drawing on past studies in various fields. Importantly, we draw from the model unique fraud risk factors, reinforce some existing ones, and deemphasize others. Finally, we discuss limitations of the DFC and offer suggestions for new directions in financial fraud research.THE FRAUD TRIANGLE AND ITS EXTENSIONSCressey (1953) hypothesized that for an act of fraud to occur, each of three criteria must be present: 1) the actor experiences a non-shareable financial problem (pressure), 2) the actor has an opportunity to violate a position of trust (opportunity), and 3) the actor is able to adjust his self-perception such that he believes such a violation does not constitute criminal behavior (rationalization). Taking roots in the findings of Cresseys work (1953), the FT emerged: the presence of the three conditions indicate the possibility of a financial fraud. Over time, the FT has been somewhat modified and extended (see Dorminey et al, 2012) as a reaction to perceived deficiencies of the original FT.[footnoteRef:3] [3: For example, it is proposed that the condition, rationalization, should be replaced by integrity (Albrecht et al, 1984) and Dorminey and colleagues (2010, p. 21) warn that sources of pressure may include other than personal financial need. ]

A fundamental weakness of the FT is that the attributes of the actor and circumstances under which the act occurs are not separately identified. The three conditions of the triangle do not logically lead to the process involved. Thus, a mere transactional view of such indiscretions limits our holistic understanding of the act. The FT does not explain why under certain conditions a fraudulent act may not occur, or why a fraudster could resist the indulgence under different circumstances. Or, under identical conditions in two firms, why one executive commits fraud, while the other resists it. The whole universe of non-actors executives who did not and may not commit fraud is not considered in the FT. The alternative proposed here promises the explanatory power to address such unanswered questions.THE THEORY OF PLANNED BEHAVIOR (TPB)One of the leading contenders among the behavioral models with potential explanatory power in financial fraud cases is the Theory of Planned Behavior (hereafter, TPB) introduced by Ajzen (1991) and his colleagues (Fishbein and Ajzen, 1975). An integrated model of behavior, the TPB a more comprehensive consideration of the Theory of Reasoned Action is not a fraud model as such; however, its purpose is to explain any planned, or intentioned, action. Since fraudulent acts are essentially planned behaviors contingent upon the will of the actor, the TPB framework is relevant in financial fraud research. The TPB exclusively concerns volitional actions of individuals, involving an intention to act (or not act) in a particular context. Four variables interact to influence the decision: attitude, subjective norms, perceived behavioral control, and moral obligation. A persons attitude toward the behavior is a measure of the persons evaluation of behavior as good or bad, following a consideration by the person of both behavioral beliefs and outcomes evaluation. A subjective norm concerns the individuals general social pressure to perform (or not to perform) the behavior. Perceived behavioral control is a measure of the persons ability to perform the behavior, based on their past experience, competence, and any obstacles they may face. Moral obligation refers to a duty or obligation a persons moral belief system triggers as the right thing to do.Numerous empirical studies, many of which are unrelated to the question of financial fraud, have attempted to experiment with the TPB. This heightened examination over more than 30 years has further resulted in several meta-analysis efforts (Randall and Wolff, 1994; Sheeran and Orbell, 1998; Armitage and Conner, 2001). In a quantitative integration and review of research encompassing 185 studies, Armitage and Conner (2001) found that the TPB accounted for 27% and 39% of the variance in behavior and intention, respectively. The perceived behavioral control (PBC) construct accounted for significant amount of variance in intention and behavior. Attitude, subjective norm, and the PBC account for significantly more of the variance in individuals desires than intentions, but intention was a better predictor of behavior, while the subjective norm was found to be a weak predictor of intentions. The latter observation, the authors believe, is partly attributable to a combination of poor measurement and the need for expansion of the normative component. Several studies have focused on an application of the TPB to the financial fraud puzzle. Carpenter and Reimers (2005) conducted a survey, followed by an experimental design to study the relevance of the TPB in the context of fraudulent financial reporting by managers. They examined the effects of attitude, subjective norm, and PBC on a mangers decision to improperly defer the recognition of expenses so that the company can meet an earnings target. The results suggest that attitude and subjective norm both have significant influence on prediction of behavioral intent, while the PBC did not contribute much to this influence. The authors surmise that this last result may have to do with the nature of the sample and possible lack of relevant experience of the subjects. They assert that the results of the two studies provide strong evidence that the TPB can help explain ethical decision making by business managers.Recognizing the potential of the TPB in explaining financial fraud as a human act, Cohen et al (2010) sought to implant the TPB dimensions in the FT. They amplified the rationalization condition of the FT with the four specific dimensions of the TPB: attitude (toward fraud), subjective norms, perceived behavioral control (PBC), and moral obligation. They searched for evidence from U.S. press coverage contained in the Factiva database regarding the reported 39 corporate fraud cases. Using content analysis, they identified frequencies of the two FT conditions (incentive/pressures, opportunities) and the four TPB elements (which replaced the rationalization condition) in media coverage through content analysis of the articles. Tracking the presence of each element in media coverage, they revealed that with the exception of subjective norms, frequencies were present for each of the elements. The component, subjective norms, is less prevalent in the press, probably because it is more difficult to identify, even with the hindsight perspective of journalists (Cohen et al, 2010, p. 285). The authors traced these frequencies to the auditing pronouncements and thus suggested several additional fraud risk factors not currently considered in the auditing pronouncements.In sum, the limitations of the FT are evident and research to enhance our understanding of financial reporting fraud has received attention. It seems, however, that a patchwork approach to remodel the FT is constrained by the initial visualization of the fraud triangle. A fresh look at the nature of financial fraud with particular attention to the human side is warranted.DISPOSITION-BASED FRAUD CYCLE (DFC)Behavioral outcomes are inevitably a function of a complex interaction between organism and environment (Bem and Funder, 1978, pp. 485-486). Therefore, a complete model of human behavior has to include two interacting elements: organism (agent) and environment (context[footnoteRef:4]). An agents behavior is expressed as a series of occurrences; each occurrence is a representation of a specific interaction of the organism with specific environmental conditions. Whereas the agents traits change little over time, the context of each act is different, causing variety in episodes of the actors behavior. Since fraud is a deliberate behavioral outcome, its explanation involves both organism and its environment. To quote Willem Bonger (1905): As always it is the environment that is the cause of the crimes taking place; it is the individual differences which explain in part who is the one to commit them (p. 137). [4: Context is also indicated by the usage of terms such as Maya or Matrix.]

The fundamental premise upon which the DFC is built is roughly as follows: People commit fraud by indulging in a moral temptation leading to an intentional act; since people are dispositionally different, some are more likely to indulge in such temptation while others may be able to resist it. Disposition belongs to the organism, while temptations that lure people are constantly emerging in the environment. In our discussion of the DFC model, we begin with the environment where stimuli for temptation come into view, then proceed to discuss individual differences in the form of human disposition. We reiterate: the DFC model is applicable to any kind of fraudulent act, although our focus in this paper is entirely on the powerful corporate executives. The DFC model in its most basic form is shown in Figure 1.Figure 1. The Primary Elements of the DFC

TEMPTATIONTemptation has been studied over centuries in various disciplines, including religion (St. Ignatius, 1548), philosophy (Holton, 2009; Bratman, 1987; Hume, 2000), sociology and social psychology (Bandura, 2002; Baumeister, 1996), and health care (Trope and Fishback, 2000). In the New Testament, the word temptation has been used to convey meanings such as to test, examine, or put on trial.[footnoteRef:5] Temptation forces one to evaluate volitional choices. Falling prey to temptation involves compromising the future for something potentially less valuable or even harmful, but can be indulged into at the very moment. Temptations carry a sense of immediacy; they have a short shelf-life for you to entertain them (Raval, 2013b). And the indulgence releases a whole range of emotional responses. It is what you crave,[footnoteRef:6] independent of what and how much you have. Kozlowski, the former Tyco CEO, had enough, yet he succumbed. [5: According to New Testament, temptation approaches human beings in diverse ways and tries to motivate them to follow the voice of egoism, anxiety, strive for power and profit, instead of listening to what is according to conscience.] [6: According to Kennett (2001, p. 57), the craving provides a context in which the less desirable object becomes more attractive without the benefit of any supporting change in the beliefs.]

Temptation has to do with volitional exercise of ones intentions. Holton (2009) considers ones resolutions as a class of intentions, and suggests that yielding to temptation involves an unreasonable revision of a resolve in the face of pressures from contrary inclinations. The process of being tempted into an indulgence takes several sub-steps. Although the number and description of these steps vary across sources, the general pattern of how temptation works is well established. The Gita (2.62-2.63, 3.06) discusses the general sequence in the degradation and downfall of a person (Easwaran, 1988, pp. 123-128; Tilak, 2004, p. 903):(1) One contemplates on the objects of senses.(2) Intimacy with the objects of senses grows with continued contemplation.(3) Intimacy intensifies the desire to possess the object of senses.(4) The person becomes obsessed to possess the object of senses.(5) Obstructions, if any, in the way of fulfilling this desire elicit anger and aversion.(6) Bewilderment overtakes the agent.(7) As a result, the person fails to distinguish right from wrong.(8) The person succumbs to the temptation. A compromise of ones resolve materializes.In his discussion of volitional actions (freedom of the will) or choice, Holton (2009, p. 57) invokes a normative four-stage model that typically characterizes the exercise of choice:1. Deliberating: Considering the options that are available, and their likely consequences.2. Judging: Deciding that a certain action is best, given the considerations raised in the process of deliberation. Judging results in a belief.3. Choosing: Deciding to do the action. Choosing results in an intention.4. Acting: Doing that thing and coordinating other actions and intentions around it.Holton (2009) further clarifies (p. 67-68) that forming an intention can sometimes seem more like a rolling ball finding its equilibrium settling point, than like the tripping of a switch. Even though the choice is something of which we are conscious, the mechanism by which we arrive at it can involve a drawn-out process of which we are not aware.[footnoteRef:7] [7: If asked, would the executives who have committed financial fraud be able to articulate the process they followed to come to their intentional act? Perhaps not.]

A first step in the sequence is contemplation on some object of desire.[footnoteRef:8] The object itself can be intangible, such as the desire to overstate income (e.g., WorldCom) or manipulate reported earnings in line with the analysts expectations (e.g., Enron). Littman (2010, p. 35) asserts that power and drive are responsible for temptations to commit fraud, and modern executives possess both in abundance. The powerful and passionate executive gets attached to certain expected results of performance (e.g., ratios that meet covenants). As the executive traverses through the stages of attachment, this attachment grows from contemplation to intimacy, to intensification, and finally to obsession. The obsessed executives attachment to the unpossessed object exerts a magnet-like force, with a got-to-have-it attitude. If the executive is weak willed,[footnoteRef:9] he succumbs to the temptation as the connection between Reason (buddhi) and Will temporarily fades, permitting the clouded judgment to prevail. [8: To quote Holton (2009, p. 102): desire pulls me to a course of action: that I have an urge, or, in more extreme cases, a craving, something that moves me to do it. . . . Desire in the sense we are after is a state that preoccupies an agents attention with an urge to perform a certain action.] [9: Weakness of will is one of several reasons why people yield to temptation. ]

A promising antidote for temptation is self-regulation. If everyone was effective in self-regulation, temptations would probably have little effect on private and work life. Self-regulation, often called self-control, represents ones capacity to regulate oneself. Baumeister, Heatherton, and Tice (1994, p. 7) define self-regulation as any effort by a human being to alter its own response, which may include actions, thoughts, feelings, desires, and performances. Self-regulation relies on a feedback loop composed of standards, monitoring, and corrective response. In the absence of standards, it would be difficult to determine what is expected. Once a standard is set, one needs to self-monitor the current state and determine its divergence, if any, from the standard. Any divergence calls for the need to regulate; that is, override responses that drift the person away from the standard.A hierarchy of multiple processes at higher and lower levels is involved in self-regulation (Carver and Scheier, 1981, 1982). Higher processes involve longer time spans, more extensive networks of meaningful associations and interpretations, and more distal or abstract goals (Baumeister et al, 1994, p.8). Self-regulation means the override of lower processes (e.g., impulse to smoke a cigarette) by the higher processes (e.g., the resolution to quit smoking), which is termed transcendence. For the executive, the higher process dictates staying firm with the moral resolve (e.g., not to cook the books) but the lower process reminds of immediate consequences (e.g., increase in interest rate on loans due to a breach of loan covenant). Transcendence can only happen when higher processes carry enough strength to override lower processes. When such override fails, self-regulation fails; one might say that in such cases, the person yields to temptation. Indulgence can be interpreted as ones failure to self-stop; that is, failure to intervene in ones response pattern in order to bring it to a halt. Acts of fraud can be interpreted as failure to stop, allowing lower processes to take charge, thus yielding to temptation on hand. An act of fraud is an engagement with a temptation to deceive; deception in financial reporting fraud may occur through misrepresentation of information or misappropriation of assets. The fiduciary responsibility of the fraudster is thus compromised and the trust of the principal is violated.With so much at stake in the life of a corporation, a powerful executive at the helm is trusted to do the right thing. In the context of the agency theory, the agent can be held responsible to self-regulate in the matters of business conduct. Particularly, yielding to moral temptation compromises the executives integrity. Executive frauds could lead to failure of the organization, sometimes with grave consequences to its stakeholders (see Littman, 2010, for examples of executive fraud). The ACFE Report to the Nation (2012) finds that perpetrators with higher levels of authority tend to cause much larger losses. Whereas antidotes can be implemented to detect or prevent fraud at lower levels in the organization, it is widely recognized that there are not many effective measures available to guard the guardian.[footnoteRef:10] If they fail, the company they lead fails. [10: This phrase is quoted from Littman (2010, p. 34).]

Moral TemptationTemptation can be perceived as non-moral (eating candy instead of carrots) or moral (stealing instead of buying). Holton (2009) argues that one would expect revisions to some resolutions, while others are expected to remain firm. Moral intentions are a special kind of intentions; they should not be subject to reconsideration. If revised in light of contrary inclinations, it simply means that the agents resolve is gone, that she likely would yield to the temptation on hand. A series of reasonable revisions to a non-moral resolve (e.g., wavering in a decision to pick a restaurant for dinner) may not be of any significance, though it may prove the person capricious. On the other hand, a revision to the executives resolve to protect the assets of the company is unreasonable and compromising, signaling a breakdown in agency.Human nature is such that acts of indiscretion occur, and when they occur, they point to the persons moral reasoning. To quote Prescott (1847): Where there is no free agency, there can be no morality. Where there is no temptation, there can be little claim to virtue. And as Samuel Richardson puts it, we can all be good when we have no temptation or provocation to the contrary.[footnoteRef:11] Temptations test resolve; moral temptations test moral resolve. Brinkmann (2005, p. 183) describes moral temptation as an objective action opportunity that turns up, which is subjectively perceived as attractive and which presents a test of an individuals (or perhaps groups) morality, or more specifically of ones character, ones principles, or ones will. Executive financial fraud is a breakdown in agency due to the executives failure to hold on to the moral resolve. [11: Whereas we cite a broad spectrum of studies on non-moral temptation in our discussion, the DFC exclusively focuses on moral temptation.]

A moral resolve reflects the persons virtue; a moral temptation represents circumstances leading to the possible occurrence of a compromise, that is, an ethical dilemma. Holtons definition of indulgence an unreasonable revision of a resolve in favor of contrary inclinations is inclusive; it suggests that in some cases, the resolve that is revised has a moral dimension. Moreover, moral temptations clearly involve agency and therefore, trust of the principal. Presumably, the sphere of immediate influence of non-moral indulgence may be limited to the persons private life, while moral compromises may have a broader influence.[footnoteRef:12] [12: In the long run, the society may be affected. For example, smoking may lead to cancer, and may therefore cause financial and non-financial burdens on the society.]

Intentional ActionBratman (1987) argues that when an agent forms an intention, he resolves to perform the action, either by an explicit conscious process or some less deliberate process. In either case, the resolution, if not reconsidered, leads to action that aligns with the resolution now and in the future. Once formed, intentions have a tendency to persist, providing stability to ones actions. This state of stability is relative, not absolute, for at times, there may be perfectly valid grounds for the agent to revise his intentions. The state of stability and the consequent persistence of the agents intention provides for efficiency in information processing, for well-formed intentions will not require reconsideration and, therefore, possible revisions in the future. Thus, having intentions is helpful in terms of control and stability. From a psychological-physiological perspective, temptation to break ones resolve emerges when the agent has a choice of immediate rewards that compete with longer-term gains. At this stage, the person (1) is successful in avoiding the temptation, or (2) succumbs to it and indulges in the immediate gratification of rewards. One who indulgences essentially goes through a shift in the perception of what is best: immediate rewards or long-term gains.Judgment shiftJudgment shift occurs when the agent abandons her resolve in favor of immediate rewards. As a result, the evaluation of choices on hand becomes biased in favor of breaking the resolve. In almost all cases of temptation, giving in to the urge is caused by the judgment shift (Holton, 2009). A judgment shift is necessary in situations of ordinary temptation (as distinguished from addiction-like temptation, discussed later) where the agent at the time of indulging undervalues the preferred option. To overcome cognitive dissonance triggered by the judgment shift, the agent formulates rationalizations to justify the act resulting from the temptation.Karniol and Miller (1983) conducted an experiment on judgment shift with eight year-old children. The children were shown marshmallows and chewing gum (and these were then left in the childrens plain sight) and asked for their preference. Half the children are then told that they can have their first choice, but only after the experimenter returns from some tasks that she has to do. The other half are provided additional instruction: at any point they can ring a bell to summon the experimenter, in which case they will get their second choice. The experimenter returns after 10 minutes and declares that she is not yet in a position to give the rewards, but she forgot to ask a question earlier: On a scale of one to five, what value would you put on the two options? Interestingly, the group with a choice to ring the bell gave a significantly lower value to their preferred choice compared to the group that did not have the chance to ring the bell. The valuations of those who had no chance to ring the bell are the same as those of the control group who did not have to wait.According to Holton (2009, p. 102), this undermining of the preferred choice (judgment shift) takes place as follows: (1) the tempted children find their attention focused on the immediately available sweet; (2) consequently, to get it right away, they have a strong urge to ring the bell; (3) as they become aware that they are likely to succumb to this urge, they change the evaluation of their options to avoid cognitive dissonance. Thus, cognitive dissonance and the resulting rationalizations are side effects, not active drivers of fraud.A dominant reason for the judgment shift is the weakness of will, a failure to hold on to ones moral intentions and thus, a failure of self-regulation. The weakness of will, however temporary, creates a window where the person is likely to falter. What is good for the person in the long term becomes minor in deciding whether to indulge. In Kennetts (2001, p. 57) words: The craving frames the options in such a way that in its grip the individual focuses on the loss involved in giving up the immediate state rather than the gains in the terminal state. . . . [T]here is evidence that losses in the intermediate state are weighted more heavily than the gains in the terminal state.[footnoteRef:13] Temptation feels like a bargain (Luke 4:1-13). What happens ultimately may not occur to the actor as either significant or relevant; what matters most at the time is the experience offered by the temptation (Raval, 2013a, p. 11). Citing a number of studies, Trope and Fishbach (2000, p. 504) confirm: (immediate) temptations often prevent people from sticking to their long-term preferences. [13: Kennett (2001) argues that the yielding to an urge results when motivating reasons outpace normative reasons.]

While specific instances of judgment shift in executive fraud may vary, a generic rationalization driving the shift could be in the spirit of saving the corporation in the short run. This may be in the form of, for example, patching up ratios for meeting covenants, or overstating revenues to report revenues in line with investor expectations. The thought that might tip the scale toward breaking the resolve would probably rest on the notion that if this is not done, the corporation may face an uphill battle (higher costs, lower share prices, etc.) in its survival.In sum, judgment shift drives the closure on an act of being tempted into indulgence. It is the fundamental transformation in the process of evaluation. Neither the immediately available reward nor the long-term gain has changed; only the evaluation of options becomes biased, resulting in the breakdown of resolve and a failure of transcendence. Addiction-like TemptationRepeated offenses are more like the behavior of addicts. Addiction-like breakdown in moral resolve is like yielding to the temptation repeatedly over time. In a case of ordinary temptation, the agent who yields to temptation may never again repeat the indulgence; however, this is unlikely in most cases. Commonly, self-regulation failure may gradually snowball; the crucial thing is for the failure to get started, and regaining and reasserting self-control will become progressively more difficult (Baumeister et al, 1994). Beaumeister et al (1994) call this phenomenon psychological inertia: the longer someone is doing something, the more difficult it may be for that person to stop.Psychological inertia was vividly present the Satyam Computers fraud. In a letter to the Board, the CEO noted the following: The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years. . . What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. . . . Every attempt made to eliminate the gap failed. . . . It was like riding a tiger, not knowing how to get off without being eaten.[footnoteRef:14] [14: See http://timesofindia.indiatimes.com/business/india-business/Full-text-of-Rajus-resignation-letter-to-the-Board/articleshow/3946538.cms?referral=PM, accessed May 5, 2014.]

Beasley and his colleagues (2010, p. 17) report that fraud periods extended on average for 31.4 months, and many of the frauds began with misstatements of interim financial statements that were continued in annual financial statement filings. This cycle of quarterly reporting followed by annual filing could involve repeated frauds of the same kind; instances that follow the first fraud seem to fit the description of addiction-like temptations giving into the psychological inertia.In moral breakdowns, addiction-like cases should be differentiated from ordinary temptations. In the case of ordinary temptation, a comparison of immediate and long-term rewards may neutralize the temptation. In contrast, subsequent to the initial incursion, addicts no longer compare the immediate gains with long-term benefits (Holton, 2009). Thus, the addictive behavior can persist even when the person is convinced of the disparity in outcomes. While weakness of will plays a role in yielding to ordinary temptation, it bears little significance in the case of a repeated offense, for it has already actualized once. Thus, a judgment shift is less likely to occur in addiction-like temptation. While ordinary temptation is marked by the collaboration of wanting and liking, addiction-like temptation persists on only the wanting, even if the agent dislikes subsequent indulgences. As a consequence, addicts may succumb to temptation by just thinking that resistance is impossible. SELF-REGULATION FAILURESThe locus of self-regulation failure is somewhere along the loop: standard setting and awareness of what the standards are, self-monitoring of the divergence of actual states from the standard, and taking corrective action (i.e., self-stopping from indulgence). In the absence of standards, there is no self-regulation possible. If there are multiple standards and they are conflicting (e.g., companys code of ethics does not resonate with the executives inner beliefs), confusion takes over and the exercise in self-regulation may be futile. A discrepant, conflicting internal set of standards leads to muddled, indecisive, unsure, and rebellious responses, confusion about identity, and emotional stress (Van Hook and Higgins, 1988). Children in an experiment effectively obeyed instructions that prohibited a certain behavior, even weeks after the instructions were given. However, if the two experimental authority figures disagreed about the rules, the children were not likely to conform to their instructions (Maphet and Miller, 1988).A lack of standards, or the presence of conflicting standards, is vividly present in the Ponzi schemes. In a fraud of this type, everything from a beginning to the height of its manipulation is maneuvered by a single executive, drawing upon the self-efficacy that is built on reliance on a few trusted persons that the actor recruits in the process of building the organization. The actor in a Ponzi scheme never has a moral resolve; sheer desire to want more at any cost drives his actions. Hence, this type of fraud fits the addiction-like failure of self-regulation; there is total absence of judgment shift, the schemer has decided well before the beginning of the enterprise that this is what he will do.Where standards exist, the agent may fail to self-regulate because she forgets about them, thus lowering the threshold of attention paid to the standards. Renegade attention poses a significant risk because managing attention is likely the most generally effective technique of self-regulation (Kirschenbaum, 1987). Since it is more effective to avoid temptation than to resist it, attention to the standards and constant awareness of stimuli are important in the prevention of self-regulation failures. Myrseth and Fishbach (2009) conducted a series of experiments on temptations and related rewards. Their studies suggest a two-stage model of how a tempted person might overcome the temptation. A first stage is that the person is aware that the dilemma exists. We believe the awareness is rooted in ones disposition which mirrors his or her moral stage development. People with high moral stage development are more likely to be aware of conflict and therefore, can potentially stand firm on their moral resolve. Self-regulation Failures and Psychological InertiaWhen self-regulation occurs, higher processes prevail over lower processes; the immediate urge is stopped in favor of the resolution. Self-stopping is perhaps the easiest way to self-regulate. To a degree, successful self-regulation depends on the timing of the response. The psychological inertia progressively sets in as the agent moves from contemplation to intimacy, to intensification, and to obsession; it becomes harder along the way to stop running into indulgence. The sooner the control action is taken, the greater the likelihood of self-regulation success. The founder of the Jesuits, St. Ignatius of Loyola, writes in his widely known Spiritual Exercises: I resist [an evil thought] promptly and it is overcome; the second I resist it, it recurs again and again and I keep on resisting until the thought goes away defeated.The difficulty in self-stopping results from psychological inertia (Baumeister et al, 1994): an agent already in the midst of an indulgence will have great difficulty in withdrawing from it what is in motion cannot be easily stopped. Psychological inertia is not new; the widely known Zeigarnik effect suggests that a response sequence in progress is difficult to interrupt. And in most religious scriptures, exercise of moderation is advised to inhibit ones advance into progressively deeper stages of failure in regulation (see, for example, The Gita, 4:26).[footnoteRef:15] One reason why a person may not be able to avoid temptation (or stop it in its early stages) is called ego depletion, which we discuss next. [15: Buddha described the discipline of moderation as madhyamarg, which translates as the middle road.]

Self-Regulation Failures and Ego depletionStanowich and West (2008) researched how the mind engages itself in making volitional choices. They identified two separate systems, involved in the process: System 1, which works on automated tasks, and System 2, which is engaged when attention is required in processing information to arrive at the choice. System 1 is intuitive and lazy, while System 2 is effort-intensive. Most routine tasks (e.g., adding two numbers) are undertaken by System 1; System 2 does the heavy-duty work (e.g., driving on a crowded street in Mumbai) where attention is required and information processing is complex. Kahneman (2011, p. 41) asserts that self-control and deliberate thought (cognitive effort) are the forms of mental work of System 2. People who are concurrently challenged by a demanding cognitive task and by a temptation are more likely to yield to the temptation. Because System 2 is busy with the demanding task, System 1 takes over the processing of tempting stimuli. System 1 has more influence on behavior when System 2 is busy, and has a tendency to indulge. Baumeister and his colleagues (1998) have proved that voluntary effort in any form cognitive, emotional, or physical draws on the mental energy. An effort of will, or self-control, is tiring. They describe the phenomenon, called ego depletion: a demanding effort of self-control leaves one with less to effectively cope with the next challenge.[footnoteRef:16] To quote Kahneman (2011, pp. 42-43), [A]ctivities that impose high demands on System 2 require self-control, and the exertion of self-control is depleting and unpleasant. . . . After exerting self-control in one task, you do not feel like making an effort in another. . . Intuitive errors are much more frequent among ego-depleted people. [16: The use of the term ego in ego depletion is not clear. Ego in Sanskrit equates to Aham, or pride, which is a dispositional property of Swabhava, or ones character.]

A general phenomenon operating in various contexts, ego depletion also applies to temptation-related behaviors. The CEO of an automaker in the midst of a recall of a few million cars at work or cathartic divorce proceedings at home would likely have much less left to stay focused on the higher processes, and this could result in a compromise on moral grounds. Recently, KPMG senior partner Scott London admitted that he passed tips to a golfing buddy about KPMG clients. He notes that even though he knew it was wrong, he thinks some element of burnout may have impaired his judgment, which in turn resulted in the compromise.[footnoteRef:17] Undoubtedly, ego depletion does not justify a breakdown in moral resolve, although it may result in rationalization of the act. [17: Prison-Bound KPMG Ex-Partner Remorseful for Insider Tips, M. Rapoport, The Wall Street Journal, June 26, 2014, C3.]

The state of inadequate strength due to depletion of mental and/or physical energy is usually temporary and varies over time, depending on the challenges or relatively quiet periods the person faces over time. Fighting the strains of a deep recession or serious regulatory actions would suggest low strength (high depletion), while a booming economy and favorable trends of the business could result in little depletion in the executive. This could explain why in rough economic times in the life of a company, executive financial fraud may be more noticeable than in times of prosperity. Ego depletion may or may not be involved in causing the judgment shift, but it provides a possible pre-condition for temptation to override the persons resolve; it facilitates the temptation to succeed and in this sense, it explains why ordinary, decent, capable people sometimes fall prey to temptations. According to the 2012 ACFE Report to the Nation, approximately 87% of occupational fraudsters had never been charged or convicted of a fraud-related offense, and 84% had never been punished or terminated by an employer for fraud-related conduct.Self-regulation failures Addiction-like temptationsIf ordinary temptation is difficult to avoid, addiction-like temptation is even harder to overcome. In fact, addiction-like temptation begins with an already failed state, a condition that makes rebounding of the person to the state of transcendence (preferring higher processes over lower ones) an uphill climb. Due to the lapse that has already occurred, cases of compromise that follow could snowball into larger violations over time. This drifting of the person has been explained as abstinence violation effects (with particular reference to impulse control). Following the lapse in ones resolve, the person feels like going on a binge. Lapse-activated, or snowballing, failures occur due to various reasons, including zero-tolerance beliefs, emotional reaction to the initial lapse, and a reduction of monitoring (Baumeister et al, 1994). A zero-tolerance for breakdowns in resolve would lead to strong frontline safeguards, but once these are broken, there is no further diligence imposed. Breaking the barriers, however well-guarded, could lead to the feeling that the resolve is no longer relevant. It is also likely that the person would lower the threshold on seeking feedback of further divergence, if any, since the breakdown has already been accepted.In sum, abstinence violation effects could potentially explain addiction-like failures. As discussed previously, such failures are illustrative of psychological inertia. In repeated failures of the same kind over time, it is unlikely that ego depletion would explain the act, for it may be rare to find consistently same levels of ego depletion at the time of each occurrence. SELF-EFFICACYIn a breakdown of resolve suggesting compromise of trust, the indulgence is entertained in a well-calculated manner. A prospective actor would not want to yield to a temptation knowing that the indulgence would be exposed, resulting in severe negative consequences for him and possibly for the organization he leads. Therefore, the actor evaluates whether the indulgence on hand can be materialized without any hindrances, and if its anticipated after-effects can be managed.The notion of feasibility evaluation in light of ones capacity involves a careful consideration of anticipated obstacles that may come in the way of indulgence. In financial fraud, the agent most likely identifies and evaluates specific controls that could hinder the indulgence on hand and considers possible ways including collusion and overrides in which to negate the effect of such controls. A series of actions to commit, conceal, and convert will require an understanding of people and procedures that could present roadblocks and how these might be coped with in a fraud.Corporate frauds often require more capacity than a top executive alone possesses. We therefore suggest a broader view of self-efficacy, where collusion at the top level might be necessary to commit the fraud and hide it from others. Specifically, the executive may enroll members of the top management team to collaborate in the act of fraud. Bernard Madoffs decade-long Ponzi scheme warranted a vast array of technical, accounting, and marketing skills; to harness these, he recruited and controlled the continued loyalty of five of his staff members in addition to the CFO.[footnoteRef:18] In the Satyam Computers case, the CEO resorted to a comprehensive manipulation of financial accounting information. Over time, even employee count, payroll, customer accounts, and cost of sales were manipulated to lend apparent validity to the financial misrepresentation. This would require an in-depth understanding of the financial accounting system; to get these results, knowledge of and access to accounting systems was necessary, and override of top-level financial accounting controls was required. For this, he induced his CFO to join him in the act.[footnoteRef:19] At Enron, Jeffrey Skilling and Andrew Fastow united to produce an unprecedented financial fraud. [18: In a verdict issued in the Federal Court in Manhattan, the jury found five former employees guilty of collaborating with Bernard Madoff in his Ponzi scheme: two computer programmers (Jerome OHara and George Perez), two portfolio managers (Annette Bongiorno and JoAnn Crupi), and operations director Daniel Bonventre. (Jury Finds Staff Aided Madoff Con, The Wall Street Journal, Tuesday, March 25, 2014, A1-2).] [19: This trend seems pervasive in financial reporting fraud. During the period 1998-2007, the SEC named CEO and/or CFO in 89 percent of fraud cases for some level of involvement in financial fraud (Beasley et al, 2010).]

Finally, several constructs overlap with self-efficacy. Particularly, Setiyas (2007, p. 99-106) concept of instrumentalism and its derivative, means-ends efficiency, and Perceived Behavioral Control identified in the TPB are similar in nature. And the idea of embedding capability as an additional condition in the fraud triangle (Wolfe and Hermanson, 2004) signifies the need for inclusion of some variation of self-efficacy in an explanatory fraud model.ObstaclesWe define obstacles[footnoteRef:20] as any position or procedure that may ruin the experience of indulgence at any stage of the act, which may last an undetermined period of time. Relevant obstacles affect self-efficacy and thereby prevent or detect financial fraud. During the tenure of a compromise, roadblocks may come up; the prospective actor has to identify and evaluate the feasibility of overcoming these obstructions. The most recognized obstructions within a company are the internal controls, viewed as antidotes for opportunities. For example, an internal control related to work roles concerns segregation of duties between the CEO and the CFO, and an internal control related to procedures is the requirement of certification by the CFO and the CEO concerning the effectiveness of their companys control system. [20: We use the terms obstacle and obstruction interchangeably since both indicate a disruptive outcome.]

Temptations are stimuli that may (1) relate to specific existing opportunities or (2) prompt the agent to create new opportunities to suit the temptation on hand. Since only the relevant controls can be effective obstacles, a control framework that casts a wide net to catch almost anything imaginable is likely to be inefficient. On the flip side, because a specific temptation might not be present in the generic set of opportunities, the temptation may not face a relevant obstacle. The design of internal control systems based on an anticipated universe of opportunities may result in redundancy and yet, may fail to catch the act of indulgence. Obstacles include more than a narrowly defined set of internal controls. For example, they may include change in the behavior of the collaborator in the scheme, or an incident report on the whistleblower system. We need a much wider definition of obstructions beyond just internal controls anchored to address recognized opportunities based on a better understanding of self-efficacy and how the actor might maneuver it. An investment in opportunity-neutral controls, such as a whistleblower system, can have across-the-board applicability and organization-wide reach to become more effective. Clearly, additional research is needed to fully grasp differences between opportunities as generally understood, and temptations.Finally, an important distinction should be made between foreseeable obstacles at the time of the act and any subsequent developments, or post hoc obstacles. If the act of indulgence needs continuing cover up, at the time of indulgence it would be necessary for the actor to identify any new obstacles and determine how to deal with them. Post hoc obstacles may not have been anticipated by the agent and may in fact be troublesome or impossible to deal with. Assuming the executive possesses a high degree of self-efficacy to launch the fraud, what may reveal the act ultimately would likely be a trigger from post hoc obstacles. Presumably, the executive pondering a temptation would also subject post hoc obstacles to a new round of self-efficacy tests as and when they surface. Besides learning about the nature of such obstacles, it would be of interest to study the feasibility of implementing controls that would disclose such obstacles to those in charge of governance sooner rather than later following the fraud.In most experiments of temptation, there usually is limited or no manipulation of obstacles. Consequently, very little is known about how obstacles actually work in acts of indulgence, or how self-efficacy is operationalized to thwart relevant obstacles. In financial fraud research, the examination of temptation as a trigger has been rare.A PARTIAL VIEW OF THE DFCThus far, we have focused on temptation and variables that may cause the temptation to succeed in an intentional action to commit a breach of moral resolve. Additionally, we discussed the role of obstacles pre- and post-compromise and the significance of self-efficacy (to the agent) in deciding to commit the indiscretion. Figure 2 presents a partial view of the key variables and their relationship.[footnoteRef:21] [21: Although the model does not explicitly incorporate emotional responses of the actor, it should be acknowledged that such responses would surface across the entire process, from consideration to break the resolve, to indulgence, to post hoc consequences of yielding to the urge. Emotional responses include guilt, shame, anger, fear, frustration, and rage any of these could occur at different stages in the cycle. A detailed analysis of emotional responses in the DFC model is beyond the scope of this paper.]

Figure 2. A partial view of the DFCResisting Moral TemptationOur interest is more in finding how powerful executives could resist rather than yield to an unreasonable inclination to break the resolve. An understanding of the dispositional bent of the resistors could provide unique insights on how they cope with moral temptations, skipping the whole cycle of misdeeds. Once identified, such traits may prove valuable in devising relevant and effective antidotes to the act of fraud.One way to resist temptation is to disregard it altogether. In well-known writings called Spiritual Exercises, St. Ignatius of Loyola shares the following:There are two ways of gaining merit when an evil thought comes from outside. . . . I resist it promptly and it is overcome. . . . [or] I resist it, [but] it recurs again and again and I keep on resisting until the thought goes away defeated. One sins venially when one . . . gives ear to it, . . . or when there is some negligence in rejecting this thought.[footnoteRef:22] [22: Ignatius of Loyola, Spiritual Exercises, 1548, p. 291.]

If instead of rejecting the evil thoughts, one continues to brood over the desire for unpossessed objects (e.g., corporate earnings in line with guidance), one undoubtedly obtains it, fictitiously if not factually, in the case of financial reporting fraud. When brooding over evil thoughts persists, invariably the result is that these thoughts get executed.[footnoteRef:23] And yet, while withdrawal from the stimuli is one option, it is perhaps quite difficult for many due to the psychological inertia. [23: Patel (2000, Stanza 44, p. 27). ]

A person may be able to resist temptation if his mind is aligned to what he can control or impact. For example, the chief executive may be able to control the organizations strategy and its execution. But he may not have total control over actual gross margins or profits, for these are subject to vagaries of markets and macroeconomic changes in the business environment. Even the most effective and well-executed strategy may not produce desired results, even if everything under the executives control is done correctly. Recognizing that effort is within and outcomes are beyond ones influence is likely to stop the executive from chasing a mirage. According to the The Gita (3.47): A persons authority extends only to the performance of action; obtaining or not-obtaining the result is never within the persons authority or control. Therefore, do not be the one who performs action with the (avaricious) motive (in the mind) that a particular result should be obtained of ones action.The belief that you have control over outcomes is wrong. You must do everything that your talents and capacities allow you to do to achieve the results; however, you should remain unattached to the outcomes. The renowned ethicist T. H. Green (1906, p. 367) echoes the same idea: If indeed the question . . . could leave me under the impression that in doing so and so I was all that I should have been, it would be important for me to be reminded that the action may have had evil consequences which I did not foresee but which yet are a part of my act. . . [M]oral function of my act is fully served without supplementary enquiry into unforeseen consequences of the conduct. The outcomes we typically attribute to the leader are clearly influenced by many exogenous factors. In the case of a CEO, for example, the financial outcomes are affected by economic factors, competition, political uncertainty, or regulatory changes. Since the CEO does not control many of these significant influences on his companys financial performance, he should be constantly aware of this and should act only to exert the best possible effort. And while doing so, recognize fully that the results may be quite different than the company guidelines or analyst expectations. This sort of non-attachment to outcomes while fully committing to the efforts is what the CEO and her team can do best. The CEO behavior guided by such mindset would likely help her resist, for example, the temptation of doctoring financial results. Unfortunately, emphasis on getting the numbers expected by the securities market is built into the CEOs performance measurement; efforts to achieve the performance count very little. But the reality seems even worse. As Jennings (2006, p. 17) observes, there is not just a focus on numbers and results, but an unreasonable and unrealistic obsession with meeting quantitative goals. Since a judgment shift plays a key role in the indulgence, it would be of interest to investigate how the judgment shift occurs in an act of fraud and how an executive could better resist the temptation. For example, for a judgment shift to occur, the tempted person has to value the long-term gains (e.g., value of restricted stock units awarded over time) less than the immediate rewards (e.g., loss of current compensation due to losing job for poor performance). Is it likely that if the magnitude of difference between the immediate and long-term rewards is significant, the judgment shift would probably not occur, for it will be difficult to justify in ones own mind (rationalize) that the immediate gains are more attractive on balance than the long-term gains?Regulation Internal and ExternalAs already discussed, one and perhaps the ideal approach is to rely on the executive to self-regulate. Today, it seems that lawmakers, enforcement agencies, and auditors consider it a foregone conclusion that it is the failure to self-regulate that we need to contain, not the comfort in how well top executives regulate themselves. Apparently, the idea that self-regulation works is already discarded. And the thought of allowing self-regulation to govern is presumably lacking acceptance amongst the concerned professions and regulatory forces close to the problem of executive fraud.If regulation does not happen from within, the option is governance through an ecosystem comprised of antidotes, monitoring and rewarding the executive, and exerting force of external regulation. This external system of antidotes to expected fraud risks may sound holistic; however, several limitations remain. The governance measures from outside almost exclusively deal with the environment and not the organism. Yes, there is some talk about the executives lifestyle, ego, and such other dispositional variables, but the role of such attributes does not seem convincing, is rather soft in nature, and has not been central to the existing governance ecosystems. This may be due in part to implementation issues inherent in such an approach. It is much easier to defend, for example, how controls would limit the fraudster from seeking opportunities. However, the evidence in this regard is not always converging. Smith, Tiras, and Vichitlekarn (2000) studied whether the strength of internal controls is inversely related to the propensity of a manager to commit fraud. Using an auditors allocation of efforts between control testing and substantive testing, they found that the likelihood of detecting the fraud does not increase when the auditor exerts effort to assess controls.Any ecosystem built from concrete past experience relies on our understanding of the history of financial fraud, thus limiting what we choose to build into the ecosystem.[footnoteRef:24] The solutions proposed often reflect political stance, or may be based on limited prior fraud evidence. So the value of the governance web in preventing or detecting fraud remains suspect. For example, despite elaborate provisions for control and disclosure of related-party transactions (RPT), Gordon and colleagues (2007) report that RPT does not appear to increase auditor risk assessments, although it is one of the top reasons cited for audit failure when a fraud does occur. In a sample of 261 firms, Bonner and colleagues (1998) found that 20 percent of their sample had fraud issues that concerned RPTs. According to the COSO Report (Beasley et al, 2010, p. 33), 79 percent of fraud firms disclosed RPTs compared to 71 percent of no-fraud firms (p=0.065); however, that difference was not statistically significant in either of the two sub-periods (1991-99 and 2001-04) examined. For the RPTs in which top leadership is involved (founder, CEO, other senior officers, and board members), for each group, there was no difference between fraud and no-fraud firms. The signals from RPT governance measures are mixed and it seems this effortful oversight has low payoff in fraud prevention or detection. [24: The problem is similar to what the Transportation Security Administration (TSA) in the United States is facing. The screening processes built primarily on the knowledge of existing violations leave the system vulnerable to yet unexplored tricks to beat the system. ]

Current ecosystems of governance also stress heavily the role of audit and compensation committees. But the recent COSO Report (Beasley et al, 2010) observes the following: Relatively few differences existed in the characteristics of audit committees and compensation committees between fraud and no-fraud firms.This is not to say that governance from outside has no role to play. The real challenge comes from incorporation in the design of governance structures the vulnerability of the human side. To bridge this void, we lean on the idea of self-regulation and further elaborate on human virtue expressed through human disposition. We propose two major categories of disposition and discuss their characteristics. Finally, we identify the role of dispositional properties in the urge to yield to, or resist, moral temptations.DISPOSITION OF THE EXECUTIVEA moral action is volitional and is a result of character interacting with circumstances; it is the expression of a persons character as it reacts upon and responds to given circumstances (Green, 1906, p. 120). As Green (1906, p. 176) asserts, there are two distinct objects of moral approbation or disapprobation: intentional action and motive or character of an agent. Motive indicates a good or bad habitual disposition a bent of character from which useful or hurtful actions are likely to arise (p. 176). Green further articulates that any life the individual can possibly live is at best limited by the necessities of his position. The position in life in turn determines the moral capacity, actualized through habits.Since virtues are traits of character, [the virtue theory of practical reason] is more readily framed in terms of our dispositions to engage in a practical thought (Setiya, 2007, p.8). Philosophers and theologians have studied human disposition for millennia (see, for example, Hume, 2000[footnoteRef:25]).[footnoteRef:26] Among the researchers, Ryle (1949) has analyzed more fully the nature and role of disposition. Discussion of virtues (and vices) and their relationship with the constituent elements of a persons nature called disposition is evident across religions. The Gita, about 3,500 years in existence, shows the way of living (Radhakrishnan, 1979), a model that transcends millennia of human history with constancy of eternal truth. Throughout its text, the Gita heavily integrates the role of human disposition in the quality of ones life. It extensively discusses in various contexts the three gunas (enlightened, passionate, and indolent), also called inner nature or essential character (svabhava), and how their presence in different degrees makes the person dispositionally different from others. This is shraddha (faith) that drives a person to pursuits of his choice. In Aurobindos words (1996, p. 492): The souls faith, not mere intellectual belief, but its concordant will to know, to see, to believe and to do and be according to its vision and knowledge is that which determines . . . the measure of our possibilities of becoming. [25: Hume first published The Treatise of Human Nature during 1730s.] [26: For a discussion of disposition and its relationship with morality, see Raval (2013a).]

It is important to differentiate between disposition and an occurrence. Ryle (1949, p. 124) contends that our proneness, or bent, to act in certain ways is stable and predictable such that we could regard it as an inference ticket. A CEOs lifestyle, for example, mirrors her disposition and thus offers potential to work as an inference ticket. However, while a certain lifestyle may suggest proneness to indulgence, it by no means proves that every CEO with the given lifestyle would invariably indulge in improper behavior. To quote Ryle (1949, p. 116): To say that a person knows something . . . is not to say that he is at a particular moment in process of doing or undergoing anything, but that he is able to do certain things, when the need arises, or that he is prone to do and feel certain things in situations of certain sorts. Ryle further explains the difference between disposition (e.g., glass is brittle) and occurrence (if the glass ever is struck, it would fly into fragments); the disposition (brittleness) materializes into an actual happening (shattered glass). Green (1906, p. 174) articulates disposition and occurrence as the will in possibility and the will in actuality, respectively.A persons disposition translates into motivation for desires of different kinds depending on the predominance of one of the three gunas: sattvik, rajsik, and tamsik. Thus, a person is considered (1) sattvik or enlightened (passionate and possesses existential knowledge of right from wrong (hereafter, P(E)); (2) rajsik or passionate and ignorant (active, but does not possess existential knowledge of right from wrong (hereafter, P(I)); or (3) tamsik or indolent, who possesses neither passion nor knowledge. Tamsik, Rajsik, and Sattvik dispositions are also described as nescient, subcoscient, and coscient, respectively. Nescient disposition indicates inertia of knowledge and of action. A person of this disposition does not know right from wrong and suffers from inaction. In contrast, people of both subscient and coscient disposition are full of energy and drive. One thing they have in common is the desire for action; however, the difference between the two is as follows. The passionate being, P(I), is ignorant of right action; thus, he is vulnerable to express and implement desires that are morally unsound. In contrast, enlightened individuals, P(E)s, express high levels of moral grounding, being aware of distinctions between what is right and wrong, and therefore are likely to act according to their moral compass. Although all three gunas are present in every being, ones disposition is influenced by the most dominant guna in a person. We focus on the first two, P(E) and P(I),[footnoteRef:27] since both include the presence of passion, which is a required characteristic of chief executives; indolent people with little or no passion are rarely found to be viable business leaders, for they lack intensity to pursue any kind of action.[footnoteRef:28] [27: The classification, R(s) and R(t), in Raval (2013a) is simplified here as P(E) and P(I), respectively, for ease of communication and recall.] [28: Interestingly, other religions also point to the role of disposition. For example, Rumi (Baldock, 2006, pp. 164-167) suggests this classification: Angels, Descendents of Adam, and Beasts, roughly comparable to the enlightened, passionate, and indolent disposition, respectively, deeply rooted in the Gitas teachings.]

Ones disposition (svabhava) and duty (svadharma) are interrelated. Any talk of virtue without reference to moral obligation is indeed meaningless. What we see as our duty is in large part a matter of inner conscience, inner qualities that define our disposition, based on the degree of presence of gunas. Since disposition is reflected in ones behavior whether it is at the physical, mental, or moral level it also represents the moral stage development of the person; that is, the moral fabric of a person is invariably tied to his disposition. Consequently, disposition and duty are coincident in the sense that a persons character mirrors his moral grounding. Taking six stages of moral development (Kohlberg, 1984), we surmise that the lowest three (social norms, self-interest orientation, and obedience and punishment orientation) align with P(I)s and the highest three (law and order morality, social contract orientation, and universal ethical principles), with P(E)s.[footnoteRef:29] This binary classification is comparable to Greens (1906, p. 377) descriptions of those with unwholesome preoccupation with self and those with eagerness in disinterested service, respectively. Table 1 summarizes the characteristics of the three gunas and related expressed behaviors. [29: For a detailed discussion, see Raval (2013a), p. 5-6.]

Table 1. Characteristics of the three gunasDispositiontypeBasic descriptionNotationusedExpressedBehaviorKohlbergs moral stage identification

Existential knowledge(moral stage development)Motivation for desire(passion)

Tamsik (Nescient)NONONegligent, error-prone, slothful, inattentive, dull, inactive, lack goal or direction.

Rajsik (Subcoscient)NOYESP(I)Liking and longing, desire for unpossessed satisfaction, passion to seek whatever appeals to them, unrestful, feverish, excitedObedience and punishment orientation to compliance; self-interest; social norms.

Sattvik (Coscient)YESYESP(E)Goodness, seeking lasting happiness, contentment, harmoniousLaw and order morality; social contract orientation; universal ethical principles.

The presence of moral dimension in human disposition suggests that, while there can be brute force means available to achieve the end, it may not be the most virtuous path to success. And yet, it can be the chosen path for some. As Setiya (2007, p. 3) suggests, one need not have the virtues of character in order to be good at getting what one wants. And if one is selfish but efficient, the virtues . . . may seem to get in the way. In our classification of disposition, P(I)s stand on a low moral ground; they tend to be selfish or self-regarding, and are vulnerable to take shortcuts. P(E)s stand on a high moral ground; they are other-regarding and are unlikely to indulge in indiscretion. Green (1906, p. 379) articulates the difference very well: A true Moral Philosophy does not recognize any value in a universal rule, simply as such, but only in . . . the readiness to sacrifice every lower inclination to do the right for the sake of doing it. The followers of only the rules are more likely P(I)s, and those who take the high road are P(E)s.The profound thinker and scholar of Hinduism, Aurobindo (1996, pp. 460-490) describes P(I)s as the human representation of the titans and P(E)s as the gods. According to him, the normal man is ordinarily a mixture, but one or the other tendency is more pronounced, which tends to make him predominantly rajaso-tamsik [the titans] or sattvo-rajsik [the gods] and can be said to be preparing him for either culmination: for the titanic turbulence, or divine clarity, respectively. The titans are ostentatious, possessing characteristics of egoistic greatness, satisfaction of desire (attachment),[footnoteRef:30] and indulgence. Driven by desire and ego, they are arrogant, full of self-esteem, and proud. Misguided, they persist in false and obstinate aims and pursue impure resolution of their longings. They imagine that desire and enjoyment are all the aim of life. And they seek to impose on the world their personality for their own pride, glory, and pleasure. In contrast, the human representation of the gods reflects temperance, humility, knowledge and awareness, self-control, beneficence, and perfection.[footnoteRef:31] [30: The Gita (4:26) says the following: Rajas is passion, bleeding selfish desire and attachment. These bind the person to compulsive action.] [31: Aurobindo (1996, p. 471) is aware of the limitations of this classification. He states that [t]he distinction . . . is not comprehensive of all humanity, not rigidly applicable to all individuals, neither is it sharp and definite in all stages of moral or spiritual history of the race or in all phases of the individual evolution.]

While being passionate about the goal is an absolute must for a successful business leader, its downside is that the executive is vulnerable to making errors in judgment when he faces moral temptation. Because they are enlightened, P(E)s in all likelihood are safe from committing indiscretion, while P(I)s, passionate in action but morally weak, are vulnerable and might break their resolve. Note, however, that any vulnerability does not automatically transpire into an act.Beginning with early efforts of Parameswaran (1969), various researchers have attempted to design and validate psychometric inventory to measure disposition (Das, 1987; Pathak et al, 1992; Marutham et al, 1998; Stempel et al, 2006; Matthew, 2010). Dasa (1999) refined the Vedic Personality Inventory of disposition and tested the validity of the constructs using several convergent and construct validity measures. Collectively, these attempts show that disposition as a variable has potential for use in validating the DFC.

Whereas such measures of disposition could lead to significant insights in laboratory experiments with other subjects, there are two distinct concerns regarding their use with executives. First, the executives are likely to resort to impression management; consequently, valid data may not be obtained. Second, top corporate executives are busy and may not respond, which could result in a low response rate. There are, however, indirect or derived measures that may work as surrogates. The media coverage of the executive is one potential source to identify patterns of the executive disposition. Also, those who have significant exposure to the executive (e.g., directors, external auditors, analysts) may be able to provide unique insights into the executives disposition. Raval (2013c) analyzed the nature of disposition from the philanthropies of executives of U.S. corporations who had committed financial fraud during the period 1992-2005. He found sufficient data only on the executives philanthropy in one case, on the disposition of the executive in 21 cases, and both on philanthropy and disposition in the remaining 11 cases. Given the limited data, he formed two tentative conclusions: Based on broad behavioral descriptions of their traits, most executives in the sample exhibited the P(I) disposition; an analysis of the occurrences of philanthropies from a dispositional viewpoint showed that in all 11 cases (about 52%) the nature of executive philanthropy confirmed P(I) disposition of the executive. In summary, passionate executives are an epitome of business success. An organization thrives on their drive and energy. However, among them, those on the weaker moral ground (P(I)s) are likely to fall prey to temptations; and those on a stronger footing (P(E)s) are unlikely to act in a fraudulent manner. Morality stems from character, and ones character is reflected in ones disposition. The motivation for desire, triggered by ones disposition, is seeded in the inner qualities of the individual. For a fraud to occur, it provides a basis for possibilities, it is a necessary condition; however, by itself, it is not sufficient to determine whether an act of fraud would actually occur. It only provides a strong and necessary signal regarding the executives vulnerability to fraudulent behavior. WillpowerThe concept of will appears to be magical, ethereal, and abstract. Citing dozens of studies, Baumeister and Tierney (2011) discuss at length the concept of willpower and its various behavioral implications. In its simplest description, willpower is strength, more like a muscle, that disciplines the mind to follow ones resolve. It is, in a sense, the energy of a being to control the mind, not to waiver and shift, but rather to stay committed to ones resolve. It is thus a means of thought control that regulates ones intentional actions. Strong willpower would permit one to sustain higher order processes; weak will is vulnerable to degrade intentional actions to lower order processes.Much like other energies, willpower can be deployed under various conditions (e.g., in test-taking or obeying a rule). Baumeister and Tierney (2011, pp. 16-17) identify four broad categories of uses of willpower: the control of thoughts, control of emotions (e.g., trying to escape from bad moods), impulse control (e.g., resisting temptation), and performance control (e.g., managing time). Much like an overused muscle, willpower can be subject to fatigue, described as ego depletion; the more you use it, the more likely you have less of it, at least temporarily. People in a state of depleted willpower are likely to make judgment errors.Willpower is the backbone of self-regulation, a character trait essential to building a good life. It can be viewed as a collection of habits, bents, and proneness to behave in certain ways, and these are all expressions of human disposition. Consequently, human disposition is likely related to willpower. Willpower can be improved over time through consistent use of appropriate exercises of body, mind, and spirit. It is likely, for example, that those CEOs who follow strict regimen of yoga exercises will not suffer from low strength of willpower. Whereas habits, proneness, and bents cannot be changed overnight, they are malleable and can be worked on for improvement over a period of time.It appears that willpower cannot be defined, exemplified, or described without the bedrock of disposition. It is from the disposition of a person that strength of will emerges. For example, as self-regarding individuals attached to worldly desires, P(I)s are vulnerable to compulsive action. They are likely more involved in proximal goals and find the link between proximal and distal goals rather tenuous. When not bridged to distal goals, proximal goals could lead to moral failures. This is because the agent might perceive immediate rewards as more attractive. On the other hand, P(E)s, having knowledge of action and also knowledge of purpose in life, are more likely to develop a strong bridge between proximal and distal goals. This in turn could lead to fewer moral failures among them.In his analysis of weakness versus strength of will, Holton (2009) identifies three factors interacting in the process of resisting (or yielding to) temptation: The strength of willpower, degree of articulation of the resolution, and motivation to abide by the resolution. A. The strength of willpower can be built up by a rigorous regimen of exercise; however, willpower at any given moment is affected by ego depletion, which needs to be considered in cases of temptations. Depleted willpower does not necessarily mean the person would indulge, for the strength of motivation to stick with the resolve may permit resistance even when weakness of will exists. B. With respect to articulation of ones resolve, Holton suggests that many moral commitments are general policies. Explicit resolutions are not necessary for successful resistance of a moral resolve; they may have been arrived at through a slow process of education; some could even be innate. We believe innate formation of resolutions has to do with ones disposition: P(I)s are on a morally weak ground in this regard, while P(E)s have high moral standards. Thus, the interpretation of broad policies could be practically rule-based (Am I breaking the law?) rather than principles-based (Is this right thing to do?). C. The motivation to abide by the resolution is in many ways the first critical signal. The strength of motivation to fight the conflicting desires is clearly at play in temptation scenarios. We believe this strength is directly related to ones disposition. P(E)s with high moral stage development are in a much better shape in terms of moral strength than the P(I)s.Having discussed all of the key variables involved in the DFC, we now introduce the complete model in Figure 3. The hard lines connect the core of the model; the dotted lines show the relationship with associated variables that surface as a consequence of, or as a driver of, the core process.Figure 3. A complete view of the DFC

Comparison with Other ModelsHunt and Vitell (1986) proposed a general framework model suggesting that environmental factors (cultural, industrial, and organizational) interact with personal experiences, thus forming ones perception of the existence of an ethical problem, alternatives, and consequences. Through deontological and teleological evaluations, these result in ethical judgments operational in the development of intentions. The intentions interact with situational variables to produce behavior, which leads to consequences and adds to ones personal experiences. Common to both Hunt and Vitell model and the DFC are: The recognition of environmental variables, the person-environment interaction in ethical problem solving, and the interaction between intentions and situational constraints (which we believe is comparable to self-efficacy). However, there are significant differences in perspective. For example, the role of human disposition and temptation, two components in the DFC, is not explicitly incorporated in the Hunt and Vitell model. The DFC model incorporates some of the characteristics of the FT; for example, it includes rationalizations, albeit only as outcomes of indulgence (rather than as a condition for fraud to occur), and preserves the role of obstacles, which are somewhat comparable to internal controls. The variable attitude often seen as a replacement for the rationalization condition in the FT, is absent in the DFC. Instead, the inclusion of human disposition is logically well founded in the DFC. The DFC exhibits much greater clarity, for it posits that integrity stems from disposition, self-efficacy incorporates the consideration by the fraudster whether he will actually be able to pull it off, and rationalizations are outcomes of indulgence. The DFC describes the interactions between nature and disposition explicitly. Importantly, one-time occurrences and repeated offenses are explained by the model, and the drama of Ponzi schemes, which elude professionals and regulators, is now framed in proper context in this model. The model intuitively shows why executives who commit fraud have no prior record of any violations or any need for more wealth. Greed as an explanation has unfortunately muddied the discussion in the past; the DFC model does not incorporate greed as a driver of financial fraud.[footnoteRef:32] And it explicitly accounts for not just the actors, but also non-actors of fraud. [32: An argument can be made, however, that greed drives the perception of short-term rewards as more attractive than long-term gains.]

The theory of planned behavior (TPB) puts forth the relationship between intention and behavior. The TPB originally incorporated three variables: The agents favorable or unfavorable evaluation (or appraisal) of the behavior under consideration (attitude), perceived influence of significant others on the agent (subjective norms), and the agents perceived ability to perform the behavior (perceived behavioral control (PBC)). Beck and Ajzen (1991) in their study of dishonest actions added a variable: the responsibility to perform (or resist) a certain behavior (moral obligation). In the DFC model, the variable attitude does not appear as a separate variable, nor is there any role of subjective norms. The PBC is comparable to self-efficacy (Ajzen, 1991, p. 184). And moral obligation in the DFC model is implicit in resolutions those intentions that should remain firm and unchanging. An important distinction is that in the DFC model, disposition and moral obligation are an integral part of the process of occurrences of (or resistance to) dishonest action. It seems that the variable attitude as defined in the TBP model is only partially related to the variable disposition in the DFC model. In a study to examine whether PBC can be empirically distinguished from self-efficacy, Manstead and Van Eekelen (1998) found that behavior was predicted better by self-efficacy than by intentions, and intentions were more closely related to self-efficacy than to attitudes, subjective norms, or PBC.P(I) Disposition and Narcissistic PersonalityP(I) disposition is passion, breeding selfish desire and attachment, which bind the person to attachment (The Gita, 14:7). The Gita further declares that selfish desire is to be found at all levels in the senses, mind, and intellect, misleading them and burying the understanding in delusion (4:40). In fact, the entire Chapter 4 in The Gita is devoted to selfless service and its significance in defining lifes mission a path that P(E)s are better suited to take. Throughout The Gita, P(I)s have been described as ostentatious, outward, and self-centric. The ostentatious nature of P(I) is surprisingly similar to the key characteristics of narcissistic personality. DuBrin (2012, pp. 11-15) discusses behavioral symptoms of people with a high standing on the trait of narcissism: self-admiration, statement of superiority, incessant talking, interrupting others, temper tantrums, expectation of special attention, dependence on others for reinforcement of the self-image, perfectionism and compulsivity, and limited empathy. People with narcissistic personality are not necessarily selfish; however their focus is still on the self. In the narcissism checklist of 25 items, DuBrin (2012, p. 10) includes the following: Believes that he or she can accomplish anything with proper effort. Thus, the sense of entitlement to outcomes a tendency that leads people into breaking their resolve is ingrained in narcissistic personality.The notion of how individuals perceive, comprehend, and interpret the behavior of others toward themselves is known as self-construal. The research on self-construal suggests that the content and structure of the inner self may differ considerably between persons, depending on their view of the self and the relationship between the self and others (Markus and Kitayama, 1991). Since human disposition is in some ways a representation of the inner self, it would seem that self-construal is related to the binary classification of P(I) and P(E), where the former is focused on oneself and the latter, on the collective. Extending the concept of self-construal to ethical leadership, Gils et al (2010) suggest the following relationship: the focus on the individual (self) is consistent with pre-conventional level in Kohlbergs moral stage development, and the focus on the collective, with post-conventional level. In the DFC model, the same parallels exist: P(I)s are self-centric while P(E)s are other-centric. P(E)s are potentially better suited for fiduciary responsibility of serving the stakeholders of a company.Studies show that narcissism is related to white-collar crime (Blickle et al, 2006). Addressing narcissistic tendencies in an audit environment, Johnson et al (2013) studied managerial narcissism as an indicator of fraud attitude. In a client-(audit) manager context, they found that narcissism was significantly associated with