Fraud-Perception, Superegos, and Cultural Spread of Unethical Behaviour: Theory and Evidence from Enron

In recent years, the corporate sector has been rocked by managerial fraud and scandals. In this paper, we analyse, employing a behavioural and sychoanalytical game theoretic approach, two particular phenomena that may lead to managerial fraud in the corporate sector: a) the tendency for fraud to start on a small scale, perceived by perpetrators as insignificant and inconsequential, but which may 'mount up' over time to large cumulative fraud. b) Formerly ethical managers becoming 'infected' by the behaviour of unethical managers within an organisation. We consider a simple model in which a manager commits a series of small frauds over time (initially perceived as insignificant). At some critical point the frauds accumulate to a magnitude where they 'activate' the manager's super-ego. At that point, guilt looms large, which may be sufficient to motivate the manager to cease his fraudulent behaviour, and to admit to previous indiscretions. However, if regret dominates, the manager may be 'entrapped' into continuing to further hide fraud. In a second version of the model, we consider an organisation consisting of two managers: one ethical/non-fraudulent and one unethical/fraudulent. We consider how the unethical manager's behaviour may 'infect' the ethical manager, so that the latter is induced to commit fraud, due to the unethical culture of the organisation. We employ our theoretical analysis to help to understand a real-world fraud case (Enron) in which fraud began at small individualistic levels, but quickly escalated and became institutionalized throughout the organization, destroying the company. We conclude with policy and ethical implications, and suggestions for future research.