This thesis will investigate the factors and characteristics that are driving and facilitating the fraudulent behavior of founders in an environment of startups, leading to the following research question: What are the characteristics and factors that drive startup founders to commit entrepreneurial fraud?
To show a highly accurate depiction of the origins of entrepreneurial fraud, this thesis will conduct a quantitative case study. The utilization of the case study approach is particularly advantageous when there is a requirement to gain a profound understanding of a specific issue, event, or phenomenon within its authentic real-life context.
In recent years, startups emerged as a driving force behind job creation and innovation. The startup sector in Germany employed over 415,000 individuals in 2020, with numbers expected to grow even further. North America dominates the global unicorn landscape, accounting for 51% of the total, while Asia follows closely behind with 34%. Europe, on the other hand, only represents 12% of the world’s unicorns. As of 2022, 25 of these unicorns – startups with a valuation of more than $1 billion – are based in Germany. Many of these fledgling businesses are characterized by a high innovative potential as well as the risk of failure.
Table of Contents
1 INTRODUCTION
2 THEORETICAL BACKGROUND
2.1 UNDERSTANDING ENTREPRENEURIAL FRAUD
2.1.1 Defining entrepreneurial fraud
2.1.2 Profiling a Fraudster
2.1.3 Antecedents of entrepreneurial fraud
2.2 THE FRAUD TRIANGLE THEORY BY DONALD R. CRESSEY
2.2.1 Pressure / Incentive
2.2.2 Opportunity
2.2.3 Rationalization
2.2.4 Expanding the triangle: Capability
2.3 INTRODUCTION TO FRAUD PREVENTION AND DETECTION
3 OUTCOME HEALTH
3.1 COMPANY HISTORY AND BACKGROUND
3.2 FRAUDULENT ACTIVITIES OF OUTCOME HEALTH
3.3 UNDERSTANDING THE ROLE OF THE FOUNDERS
4 ANALYZING THE FRAUD CASE OF OUTCOME HEALTH USING THE FRAUD TRIANGLE/DIAMOND THEORY
4.1 THE PRESSURE/INCENTIVE COMPONENT
4.2 THE OPPORTUNITY COMPONENT
4.3 THE RATIONALIZATION COMPONENT
4.4 THE CAPABILITY COMPONENT
5 WHAT TO LEARN AND LOOKING FURTHER
Objectives and Topics
This essay investigates the driving factors and characteristics that facilitate fraudulent behavior among startup founders, utilizing the Outcome Health case study to highlight real-life applications. The primary research question addresses the specific traits and environmental conditions that motivate founders to engage in entrepreneurial fraud.
- The theoretical application of the Fraud Triangle and Fraud Diamond models in a startup context.
- Analysis of individual, organizational, and industry-specific antecedents of entrepreneurial fraud.
- Investigation into how founder narcissism, Machiavellianism, and power dynamics correlate with unethical decision-making.
- Evaluation of internal control deficiencies and the "fake it till you make it" culture in startups.
- Assessment of fraud prevention and detection strategies, including internal auditing and whistleblowing systems.
Excerpt from the Book
3.2 Fraudulent activities of Outcome Health
During the second half of 2016, Outcome Health engaged in talks with its investors to raise capital. To showcase the company’s growth in revenue, the company presented material, including audited financial statements from 2014 to 2015, as well as non-audited statements from 2016, and 28 ROI studies that were conducted by an independent third party (Leiman et al., 2019, p. 7). Overall, the shown materials highlighted the company’s unstoppable-seeming success, as its revenue doubled from $62 million in 2015 to $129 million in 2016. Moreover, the ROI studies indicated a 5:1 ratio in return on investment, which would make it superior to any other form of advertisement (Leiman et al., 2019, pp. 7–8). This allowed Outcome Health to raise its capital to around $1 billion (Stempel, 2019). However, the information presented was materially false, as Outcome Health routinely failed to deliver the promised ad services, making the financial statements false, with recognized revenue that had not been earned. To hide the shortcomings and to maintain their illusion of success, the third-party ROI studies were manipulated (Leiman et al., 2019, p. 9).
Summary of Chapters
1 INTRODUCTION: This chapter defines the significance of startups in the modern economy and outlines the emergence of risks associated with fraudulent founder behavior, establishing the research question.
2 THEORETICAL BACKGROUND: This section provides a conceptual framework for entrepreneurial fraud, detailing the Fraud Triangle and the expanded Fraud Diamond model, alongside strategies for prevention.
3 OUTCOME HEALTH: This chapter presents the company history, the specific nature of the fraud committed by its founders, and the roles held by key members of the "inner circle".
4 ANALYZING THE FRAUD CASE OF OUTCOME HEALTH USING THE FRAUD TRIANGLE/DIAMOND THEORY: This section applies the theoretical models to the specific actions and motivations of the Outcome Health leadership team to explain how the fraud was facilitated.
5 WHAT TO LEARN AND LOOKING FURTHER: This final chapter synthesizes the study's findings, discusses practical implications for stakeholders, outlines research limitations, and suggests future avenues for investigation.
Keywords
Entrepreneurial fraud, Startup, Fraud Triangle, Fraud Diamond, Outcome Health, Rishi Shah, Corporate crime, White-collar crime, Financial misconduct, Investors, Internal controls, Narcissism, Machiavellianism, Fraud detection, Corporate governance
Frequently Asked Questions
What is the core focus of this work?
The essay explores the factors and character traits that drive startup founders to commit fraudulent acts, with a particular focus on understanding the origins of entrepreneurial fraud within the startup ecosystem.
What are the primary thematic areas covered?
The core themes include the application of criminological theories (Fraud Triangle and Diamond) to business, the organizational and psychological drivers of fraud, and practical strategies for fraud prevention.
What is the primary research question?
The research question asks: "What are the characteristics and factors that drive startup founders to commit entrepreneurial fraud?"
Which scientific methods were employed?
The analysis utilizes a qualitative case study approach, drawing upon extensive literature review and empirical documentation from the Outcome Health case to test established theories of fraud.
What does the main body explore?
The main body breaks down the fraud at Outcome Health by applying the components of the Fraud Diamond—Pressure, Opportunity, Rationalization, and Capability—to analyze how the leadership manipulated financial success and misled investors.
Which keywords best characterize this research?
The work is characterized by terms such as entrepreneurial fraud, startup, fraud diamond, corporate governance, and ethical leadership.
How were the internal controls at Outcome Health exploited?
The founders exploited their position as an "inner circle" to restrict oversight, falsify financial reports, and withhold critical performance data from auditors and employees, effectively circumventing standard internal control mechanisms.
What role did psychological traits play in the fraud committed by the leadership?
The text suggests that founders like Rishi Shah exhibited Machiavellian and narcissistic tendencies, which diminished their moral burden and fostered an environment where risky and unethical actions were justified to maintain an image of success.
- Quote paper
- Dennis Güc (Author), 2023, Exploring the origins of entrepreneurial fraud among startup founders, Munich, GRIN Verlag, https://www.grin.com/document/1460039
