The Brain’s Sensitivity to Emotions Can Cause Accounting Fraud

World-shaking accounting scandals often originate in financial reporting from internal accountants. By studying internal accountants’ brain activity, Professor Frank Hartmann  Professor in the Department of Accounting & Control, 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 Professor Hartmann’s team shows in their research.

Read more here.

In Dutch here.

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.