How the brain's sensitivity for emotions causes accounting fraud Tuesday, 26 April 2016
World-shaking accounting scandals often originate in financial reporting from internal accountants. By studying internal accountants’ brain activity, Professor Frank Hartmann of Rotterdam School of Management, Erasmus University (RSM) discovered that some misreporting comes from a neurological make-up that makes them more vulnerable to social pressure from managers promoting their own personal interests. Hartmann says the results shed a different light on who should – and who shouldn’t ‒ be hired for internal accountants’ positions.
Internal accountants, those working within businesses ‒ often called financial controllers ‒ can become stuck between a rock and hard place. The company’s top management expects them to preserve the integrity of financial reporting at all times. Unit managers, on the other hand, are known to exert considerable social pressure on controllers to paint a prettier financial picture of their projects. This can be to the benefit of the organisation, for example when a risky but promising project is rescued by reporting its costs in the ‘wrong’ year.
Managers often pressure their controllers to manipulate financial reporting because of personal interests such as securing a promotion or a bonus, or avoiding being fired. This type of pressure is hard to resist by some controllers because of their neurological characteristics, as Prof. Hartmann’s team shows in their research.
More active mirror neurons
Reactions to emotional pressure are linked to mirror neuron activity, which as been observed in several parts of the brain, Hartmann says. The level of activity of this mirror neuron system varies between individuals and is largely innate. People with a naturally more reactive mirror neuron system detect other people’s emotions more easily and tend to adjust their behaviour accordingly.
When managers benefit
To find out how this brain function affects financial reporting, the researchers first measured the natural responsiveness of the mirror neuron system in the brains of financial controllers. They did this by making an electroencephalogram (EEG), which traces electric impulses in the brain using electrodes placed on the scalp, while these controllers were observing movie clips of people showing various emotional facial expressions.
The financial controllers were also asked to judge several scenarios in which a manager tries to change the financial reporting by either telling the financial controller it was for personal interest, or by asking the financial controller to change the reporting to benefit the organisation. The results showed that people with a very responsive mirror neuron system were more likely to agree to the manager’s suggestions when the manager personally benefits from it. When managers gave organisational reasons for having the financial numbers changed, the effect was minimal.
Better to be cold and aloof
Hartmann says this study shows that financial controllers don’t start out with bad intentions. They simply cannot help giving in to social pressure because of the way their brains function; some controllers simply think they are doing the right thing and give in to the manager’s emotional pressure without conscious deliberation.
Hartmann points out that the findings of this study question the wisdom of an industry-wide call for more socially competent financial controllers that function in close co-operation with their managers. Rather, the study makes a case for the often-loathed stereotype of the accountancy professional as a ‘cold and aloof’ character, he says. Having these unsociable characteristics might actually be beneficial because such people respond less readily to inappropriate social pressure.
The sector should be aware that some people are neurologically less well suited to being financial controllers, Hartmann says, and this cannot simply be countered by new rules or appeals for ethical behaviour. The results also support the current renewed interest in getting people with autistic spectrum disorder into jobs that demand high-level data processing and great integrity, he concludes.
The paper: Philip I. Eskenazi,Frank G.H. Hartmann,Wim J.R. Rietdijk, Why Controllers Compromise on their Fiduciary Duties: EEG Evidence on the Role of the Human Mirror Neuron System, Accounting, Organizations and Society, Available online 19 February 2016
Rotterdam School of Management, Erasmus University (RSM) is one of Europe’s leading business schools, and ranked among the top three for research. RSM provides ground-breaking research and education furthering excellence in all aspects of management and is based in the international port city of Rotterdam – a vital nexus of business, logistics and trade. RSM’s primary focus is on developing business leaders with international careers who carry their innovative mindset into a sustainable future thanks to a first-class range of bachelor, master, MBA, PhD and executive programmes. RSM also has offices in Chengdu, China, and Taipei, Taiwan. www.rsm.nl
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