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Mindset and motivation for fraud: understanding groupthink

By Staff

In part one of a four-part series, Toronto forensic accountant and chartered business valuator Patricia Harris explores the origins of the groupthink theory.

What do many cases of financial fraud and President John F. Kennedy’s catastrophic Bay of Pigs raid have in common? Plenty, according to Toronto forensic accountant and chartered business valuator Patricia Harris.

Harris, a partner with Fuller Landau LLP, tells that the Bay of Pigs disaster, a CIA-backed failed invasion of Cuba by around 1,400 exiled islanders, is considered a classic example of groupthink.

In fact, the incident formed the basis for the term, coined by legendary psychology professor Irving L. Janis, to describe the deterioration of mental efficiency, reality testing, and moral judgment as a result of in-group pressures, and helped historians understand how a smart man like Kennedy could ever have endorsed such a hare-brained plan.

But military disasters aren’t the only place where the theory applies, Harris says.

“In cases of financial statement fraud, this is a concept that is very helpful for us in trying to understand what happened and how, in terms of the mindset and motivation of participants,” she says. “People wonder how questionable entries could have made their way through the hands of so many accountants and auditors, and in my view, corporate groupthink provides an answer.”

Harris says most cases of groupthink exhibit three key precursors:

  • High group cohesiveness, with a unified and organized membership behind a clear leader chasing common goals.
  • Structural faults, including insulation from outside influences that may encourage secrecy, impartial leadership, a lack of norms requiring methodological procedures, and homogeneity of members' social backgrounds and ideology.
  • A situational context of stressful external threats, recent failures, or moral dilemmas.

Once the train has been set in motion, Harris says Janis identifies a number of common symptoms of groupthink:

  • An illusion of invulnerability, leading to excessive optimism and extreme risk-taking
  • Collective rationalization downplaying warnings that might otherwise lead group members to reconsider their assumptions
  • Unquestioned belief in the group’s inherent morality, which encourages its members to ignore the ethical or moral consequences of decisions
  • Stereotyped views of enemy leaders, who are characterized as too evil or too weak to warrant serious responses
  • Direct pressure on dissenting group members who question its stereotypes, illusions, or commitments
  • Self-censorship of deviations from consensus within the group, minimizing the significance of doubts or counterarguments
  • A shared illusion of unanimity concerning judgments, augmented by the false assumption that silence means consent
  • The emergence of self-appointed "mindguards" who shield the group from adverse information that might cause them to question their decisions.

“Ultimately, the result of groupthink is defective decision-making,” which fails to adequately assess alternative actions or objectives, underestimates the risks of the preferred choice and ignores contingency planning, Harris says.

Stay tuned for part two of the series, when Harris looks more closely at groupthink in the context of financial statement fraud.

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