(Note: On June 20, two of our bloggers will be presenting to the 2018 National Consultants’ Conference of the National Association of Certified Valuators and Analysts (NACVA) in Las Vegas. Drs. Daven Morrison and Sridhar Ramamoorti’s presentation is titled, Beliefs, Behaviors, and Fraud in Valuations. It is based on the thoughts presented below.)
(By Sri Ramamoorti and Daven Morrison)
“Beliefs are the basis for most of our behavior, and it’s impossible to mask them. If you totally believe in what you sell, that belief will come through loud and clear with no effort on your part. The opposite is also true.”–Anthony Parinello in Secrets of VITO (Very Important Top Officer): Think and Sell Like a CEO, 2006, Entrepreneur Media, Inc.
“It is useless to attempt to reason a man out of a thing he was never reasoned into.”
― Jonathan Swift
In an earlier blog, one of our fellow bloggers made a persuasive case for teaching critical thinking. Now, critical thinking must be carefully nurtured and cultivated. Because, as The Critical Thinking Community laments, “…much of our thinking, left to itself, is biased, distorted, partial, uninformed, or downright prejudiced…[hence] critical thinking [must be] self-directed, self-disciplined, self-monitored, and self-corrective thinking.” (http://www.criticalthinking.org/pages/our-concept-of-critical-thinking/411).
One of the most enduring and relevant maxims for fraud examiners is: “If it is too good to be true, it probably is.” Any sleuthing tendency demands a high degree of professional skepticism. In other words, you must have the ability to challenge your beliefs, no matter if everyone else appears persuaded, and it is part of “conventional wisdom.”
We have emphasized the importance of judgment in our shared writings and the need for good judgment is now more paramount than ever. So our plan is straightforward. Using Parinello’s approach (quoted in the epigraph), we will try to provide a way to query your most cherished beliefs, question the obvious, delve deeper, remove bias, and thus help you come closer to learning the objective facts.
However, we must also note a caveat right from inception. One of the most compelling ideas being explored throughout boardrooms, the executive suite, and in business schools is the concept of fast and slow thinking made fashionable by Nobel Laureate Daniel Kahneman (in Thinking Fast and Slow, NY: Farrar, Strauss and Giroux, 2011). In recent writings he has emphatically noted the single most important lesson from his lifetime spent exploring the limits of bad decisions is “over confidence.” Clearly, Parinello’s frame of mind places anyone who follows his overly simplistic recommendation at significant risk of over confidence—so, you must exercise care and caution as well.
Let’s start with a story.
“The table was set for a lovely Thanksgiving dinner. Just before the honey-cured ham went into the oven, Doris cut about one inch off each side and then placed the ham squarely into the pan. Why, her husband asked, did she cut the ends off the ham?
“That’s the way my mother taught me,” she answered. “I’ve been doing it this way for years—it must have something to do with preserving the flavor.”
Sure enough, the ham came out sweet and moist. After dinner, Doris’s husband couldn’t help asking his mother-in-law how cutting off an inch of ham on each side helped to retain flavor in the meat.
“That’s the way my mother taught me,” came the response. “I don’t know why it makes the ham taste better, but it must do something.”
There was a strange pause. Then Grandma spoke up in a soft voice. “Oh honey—I only cut the edge of the ham off because we never had a pot big enough to hold a good-sized ham.” (p. 188)
Family traditions and social conventions exert a powerful influence on belief-formation processes. And because many such beliefs get developed during our childhood and formative years, they tend to be left unquestioned and unexamined. These same dynamics exist in organizations as well. Arthur Andersen famously double-checked the work of calculators with adding machines and other familiar tools because of the gnawing skepticism that calculators would really work. In the course of fraud and accounting forensic investigations, accepting whatever is told at face value and remaining a passive listener can be suicidal for the forensic operator. Instead you should take the attitude of “I wonder what the assumptions are behind your facts.”
Confirmation bias has proven to be one of the most insidious and pernicious but nevertheless durable realities of human bias in judgment and decision making by decades of psychology research. More broadly, motivated reasoning refers to emotion-biased decision-making employing an “inferred justification strategy” which is used to mitigate cognitive dissonance (i.e., the incongruence between beliefs and actions, something has to give, and our concern is when truth is the casualty). When people form and cling to false beliefs relying on selective perception and despite overwhelming contradictory evidence, they are using “motivated reasoning” to justify their beliefs. For most of us, it is difficult not to engage in motivated reasoning and rather easy to fall prey to confirmation bias—even engaging in “willful blindness.” (Heffernan, “Willful Blindness: Why We Ignore the Obvious At Our Peril,” 2011, NY: Walker Publishing). When the hypotheses are retained, despite data proving the contrary, you are no longer practicing the art of science, but rather drifting down the path that leads to prejudice and dogma.
When reviewing fraud allegations, nothing has been proven yet, all bets are off. Thus, a skeptical attitude towards the asserted, but so-called “facts” is critically important. Following Benjamin Franklin’s “prudential algebra” methodology (September 19, 1772) here is a way to examine your beliefs.
If you want to change any belief you have, says Parinello (2006, p. 190-191), ask yourself the following questions paying heed to your intuition (these questions have been adapted and modified for a forensic accounting context, relying on our experience):
1. SOURCE CREDIBILITY: Where did I get this belief? Was it from direct, personal/professional experience or indirect, through hearsay?
2. SOURCE CONTEXT AND TIMING: How long ago did I adopt this belief? Was it within the past year? Earlier cases investigated or other experience? Or perhaps from your childhood years?
3. PLAYING CONTRARIAN: Have I ever compromised this belief? If so, how many times? In which cases? How long ago? Why? (Note: the more specific and accurate you can be about the “why” in this question, the better your chance will be of changing your belief)
4. PROS: What have been the consequences, if any, of compromising this belief? Here again, be as specific as possible. Did it help you better understand the case fact pattern?
5. CONS: What have been the consequences, if any, of maintaining this belief? Does having this belief limit you in any way? Does it force you down a certain path? Selective perception?
6. USING PRUDENTIAL ALGEBRA: On balance, regarding the case at hand, is it better or worse for you to maintain or jettison your core belief regarding one or more assertions that appear questionable in some way? Your intuition, gut instinct or sixth sense is urging you to revisit your spontaneous reaction to accept the “facts.” Just do it!
To dive deeper into this method, wonder to yourself about the person who is acquiring and reporting the financial records. Consider also his or her team and others (consultants or external accountants) who may have access to the information. Are there incentives for them to engage in self-deception, or to become biased? Numbers people can be at times quite rigid and unyielding, and even proud of their rigidity. Yet, too much rigor can produce rigor mortis.
Engaging in self-reflection may take time and effort initially, but soon becomes part of your natural, skeptical nature. As we have maintained in our ABC book, computers and Excel spread sheets do not generate fraudulent financial reports, people do. Your skepticism and ability to thoughtfully reflect on the people in front of you will serve your clients and your reputation well. Interestingly, when others become aware of your skeptical orientation, they will be careful not to present patently false and laughably incorrect information for your consideration. In other words, your approach “disciplines” the conversation and does not allow truth to become a casualty. In addition, be disciplined to not become infatuated with your reputation. Gather around you a “kitchen cabinet of people who will tell you when you are wrong and where your biases are.” As the Irish say, “When everyone around you says you’re drunk, it is best to shut up and sit down!” Blindspots do not declare themselves. You, too, must be vigilant over time to new beliefs that must be questioned.
It is useful to heed Isaac Asimov’s advice: “Your assumptions are your windows on the world. Scrub them off every once in a while, or the light won’t come in.”
BEHAVIORAL FORENSICS GROUPTM LLC
The Behavioral Forensics GroupTM LLC is a team of professionals with vast experience in detecting fraud, understanding why it occurs, and in recommending steps to mitigate fraud incidence within the corporate workplace, particularly within higher-level (and therefore more costly to the enterprise) executives. The fields of investigation, organizational psychiatry, accounting and behavioral forensics, and law enforcement are represented within the Behavioral Forensics GroupTM LLC. Acting in synergy to help organizations prevent, find, and/or reduce fraud, B4GTM is a premier, pioneering practice in this field.
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