The Biggest Red Flag of Accounting Fraud: CEO Ego?

Ego230An academic review of 15 Canadian corporate fraud cases between 1995 and 2005 suggests that the biggest red flag for potential accounting fraud is a surprising one: CEOs with egos inflated by media or analysts praise.

Michel Magnan, a business professor at Concordia University in Montreal and one of the authors of the report, says that the extent to which the company’s chief executive officer is lauded in the media or by analysts appears to be a key factor.  According to the Globe and Mail, his study showed that

generous doses of external praise can lead an egotistical executive to start to believe his or her own press, creating hubris or an exaggerated sense of self-confidence that leads CEOs to believe they can do whatever they want and get away with it.

“In most of these cases, these companies and the executives involved were quite present in the media or closely followed by analysts – they were market darlings, so to speak,” Prof. Magnan said in a recent interview.

The study considered cases of alleged fraud at companies including Bre-X Minerals Ltd., Cinar Corp., Hollinger Inc., Livent Inc., Philip Services Corp., Mount Real Corp. and YBM Magnex International Inc., and others.

Read the Globe and Mail article.