Category Archives: Audit

Tom Brady, Flat Footballs and Angry Monkeys

Accounting, Audit, Behavioral Forensics

This is a story about Underinflated Footballs and Angry Capuchin Monkeys.

It is for those of you who manage the finances – the purse strings – of an organization. Read on to see if this post goes where you think it might . . .

(By Daven Morrison) The New England Patriots are currently awaiting their punishment for breaking the rules. They removed air from the footballs they used in the NFC championship game and the presumption is they did it for a competitive advantage. Most who comment on this story note that the devious scheming did not make a difference as the game was an easy victory for the Patriots. Their conclusion is: A leopard doesn’t change its spots (New England has bent and broken the rules before under their current coach) and they will get a minor punishment that fits the otherwise ignorable infraction.

Chapter closed.

But for those who rooted for their opponents, The Indianapolis Colts, that conclusion rings hollow. If there had been an unfair advantage this would have started in the initial plays of the game. The Patriot’s quarterback Brady would have gained confidence (as would his team) seeing progress and this would reinforce success as the team began well pulling out to an early lead. Meanwhile, on the other sideline, Andrew Luck and his team would be taking a turn for the worse as passes are dropped or inaccurate. Confidence drops. Then panic sets in as scoring appears impossible, and will not be enough to catch up.

Seen in this light, the lopsided final score does not diminish the rule breaking. In fact it may justify serious and meaningful punishment for the cheating. In financial terms, the cheating was “material”. The reason it is “material” is because it had serious psychological weight. The psychological weight comes from the impact on the confidence of the psychology of both teams. One positive (Patriots), the other negative (Colts).

All of us have experienced a situation like the Colts find themselves in after the game – the winners cheated. On many levels this never feels fair.

We react viscerally when a situation is not just –

the sibling who gets preferential treatment,
the teacher who changes grades for a class pet,
the charmer who gets a warning and not a ticket for speeding,
the player who gets cut because she’s not the right ethnicity.
The reason we react viscerally is we are biologically wired for equality. We know, and are vigilant for, justice. And we know when there is injustice.

What does this visceral response look like? See for yourself: https://www.youtube.com/watch?v=meiU6TxysCg

This video of two monkeys being rewarded for completing a task is rapidly becoming a famous video clip in the behavioral sciences. One monkey gets a grape (sweeter and preferred) the other gets a cucumber (not sweet, not preferred) for completion of the same task. The result, as you can see, is obvious outrage. The game is rigged against her.

The task is the same and the monkeys know each other. Yet one monkey gets a sweeter reward. It is like our jobs. Seriously.

You will hear the audience laugh, when you watch it (it is under 3 minutes long). But take the time and watch it again. It is not funny the second time. See yourself, one of your ancestors, or perhaps a close friend who has been a victim when the fix is in.

Notice these aspects as you watch:

The agitation of the monkey who was treated unfairly
The calm of the monkey who takes advantage of the outcomes
The increased agitation with a repetition of the unfair rewards
So, at this point, you should now see the monkey and football connection. There are other lessons to take, for example, from the beloved teacher or coach, or parent who has sat us down and told us “life is not fair”. It is an important lesson to learn as we have all been victims of the prejudice of someone in power. But that does not mean we do not give up on our ideals.

In a football game, the context is framed to be fair. So, our response to cheating is strong and it is normal. The capuchin monkey research shows this response has a basis in our animal instincts. This anger is not something “airy-fairy” or “soft” that is drummed up or imagined; our value of justice is part of us. It therefore matters how we handle issues of justice in the workplace and beyond.

The Man who fights for his ideals is the man who is alive.

Cervantes, Author of Don Quixote

In our text The ABCs of Behavioral Forensics we refer to the capuchin study as a evidence demonstrating why individuals switch their motivations from following the rules to cheating. We believe, the workplace is a context that is framed to be fair. Thus, in a context of cheating or unfairness, there is a fertile ground for resentment and retaliation. We note this has ties to Financial Fraud in our text, but it likely has ties to workplace sabotage (hacking, stealing) and also violence.

So, if you are a leader, and you have “P&L” responsibility, then people are watching you. I strongly recommend you reflect on these questions, as they relate to how your employees see you and leadership:

How does your organization “rig the game”?
How do employees show their agitation around injustice?
What risks do you take in ignoring their agitation/concerns?
Perceived injustice is one of many perception problems for the C-suite to manage. They should not feel they have to manage it alone. They ought to also consider: How well does middle management help in correcting misunderstandings? And relatedly, what perception of injustice does middle management have?

The workplace is not a football game. There are many different contexts at work, and some aspects are simply not fair. Performance reviews (formal and informal) are the most natural and frequent places for all levels of management to make these repairs. These conversations are essential requirements of work. Good listeners will uncover resentments. That is the beginning step of a repair.

These emotional responses of employees may seem trivial, “soft stuff”, but misunderstandings about perceived injustice is real. Those who ignore them miss the lessons learned by the NFL, a large successful organization, with Ray Rice and domestic violence, as well as lessons learned at Andersen and AIG in the recent past.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.

“Technological Giants, Ethical Infants (Continued)”

Audit

Joe Koletar notes an article (The Economist, November 22, 2014, page 68), “Lying, Cheating Bankers.”   He writes, “Researchers split a group of 128 bankers with an average of twelve years’ banking experience into two groups.  The control group was asked a series of harmless questions about how much they watched television and similar questions.  The test group was asked a series of questions about their banking careers.  All of this was via computer.  Each group was then asked to privately report the results of a remote and SELF-ADMINISTERED test.  They were to predict the results of flipping a coin ten times.  The accuracy of their predictions would be rewarded:  When they guessed correctly, they received an immediate $20 per flip ($200 for ten out of ten).  The control group reported a 52% success rate, slightly above the statistical norm of 50%.  The TEST group reported a 58% success rate, the odds of which are 1:1000.  So, questions about their banking careers may have shifted them into the psychology of maximizing profits—in short, they’d appear to be more prone to cheating.

This report ignited several reactions.

Daven Morrison, MD:  “Love the audacity {displayed}.  Both groups cheated.  But among those in the banking frame of mind, the tendency to cheat increased 4X!”

Sri Ramamoorti:  “In 2004, I wrote (with Dr. Marcia Weidenmier of Mississippi State) a review of the pervasive impact of information technology on internal auditing… A quote from that piece: ‘What we have today are technological giants but ethical infants.’  I think this remark applies to select members of the financial services industry with great force…”

Daven Morrison:  “You’re the king of quotes, Sri.  ‘Ethical infants’ fits JP Morgan Chase: They were all about how to make money, little about managing the risk.  Even for the risk manager herself!  We need tee-shirts imprinted with ‘WHERE’S THE OUTRAGE?’”

Joe Koletar:  “Sri, great quote.  I have a great cartoon that shows a corporate conference room with one empty seat at the table.  The chairman is saying, ‘Wilson won’t be with us today.  He called in ethical.’

These anecdotes are signals of what seems to be happening with at least part of our business culture.  More telling examples: The Wall Street Journal of December 12, 2014, in an article, ‘Big Banks Slapped for Offering Glowing Research to Win IPO:’  includes these quotes— ‘I would crawl on broken glass dragging my exposed junk to get this deal.’  ‘My whole life is about posturing for the Toys R Us deal.’” Glowing examples of questionable values.

Values drive choices.  Cultures help to shape values.  The longer-term implications of these trends are troubling.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.

“TECHNOLOGICAL GIANTS, ETHICAL INFANTS”

Audit

(A Roundup of Quotable Notes from our Bloggers)
Notice how thin the line is getting between propriety and unethical/illegal behavior in today’s business miasma? The shameless chase for personal wealth takes on many dimensions.

Our blogger contributors—highly alert for signals of such compromising behaviors—have been chatting among themselves.
Joe Koletar: “The December 10 issue of the Wall Street Journal (page C-3) tells about Jonathan Hoffman, a global rates trader for Lehman. Hoffman received an $84 million bonus and is now arguing that he now deserves a SECOND $84 million bonus from Barclays, because they bought Lehman. Forget psychology! …(An aside: 30+ years ago, Mark Mosely, the great kicker for the Washington Redskins, had a clause in his contract that he would get of $50K bonus if he broke the NFL record for field goals in a season. After breaking that record, he kicked six more field goals, and his lawyer argued that he deserved $350K, since he broke the record seven times.”

These examples seem legal. Are they ethical?
Joe Koletar (again): “The next day, the Wall Street Journal publishes an article entitled ‘Ruling Puts Dent in Insider Probes,’ where the Second U.S. Circuit Court of Appeals is reported to have reversed two insider trading convictions. The ruling created what I call the ‘barroom/frat brother’ rule: If the person disclosing insider information doesn’t realize they are breaching their fiduciary responsibility and gets no financial benefit from so doing, the other person receiving the information is free to act on it.”
Is that court making unethical AND illegal actions legal, now?
And then Joe sparked a series of comments about a third and illuminating article—to be posted next.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.

WHEN THE FOX IS INSPECTOR GENERAL OF THE HEN HOUSES

Audit

See previous posts (See “Does a Leopard Change Its Spots: New Case Reprise, Nov 1; “Where’s the Personal Accountability, Nov 2, and “The Whole Thing is Largely a Joke, Nov 3).
Our blogging team has moved into a new, but related, quadrant of thought about bank recidivism in returning to illegal behaviors, ushered in by Joe Koletar’s observations regarding the motivations of the prosecutors involved. Joe adds, “I could go on and on about this. I saw it in 1969, when I first got involved in Federal law enforcement. It is a structural issue. Probably no more than 5% of Federal prosecutors serve a full, 20-30 year career. Most want to get their ticket punched and then move on for financial or political reasons. “
Daven Morrison’s reaction: “Sheesh. That can make any one be even more cynical. I think this is what Geithner did – punched his ticket and joined a hedge fund—the same financial industry “clique” that almost caused a collapse in 1999 with LTCM.”
And now, we hear from Sridhar Ramamoorti: “To continue the Fox and Chicken House analogy, indeed it seems that the chickens have come home to roost after “Mr. Fox” was appointed Treasury Secretary (you should read his book, “Stress Test”). A new name for LTCM : Long Term Chicken Management!
What you have described re government employees leaving for the private sector or vice versa (a conflict of interest, ever since the shameful episode of Tom White at Enron, more on this below) is now called the “revolving door problem.”
From Wikipedia: While serving as Vice Chairman of Enron Energy Services, Thomas E. White had actively pursued military contracts for the company and in 1999 had secured a prototype deal at Fort Hamilton for privatizing the power supply of army bases. Enron had been the only bidder for this deal after White had controversially used his government and military contacts to secure key concessions.
In his first speech just “two weeks after he became secretary of the Army, White vowed to speed up the awarding of such contracts” like the Enron Ft. Hamilton contract, despite the fact that he still held a considerable interest in Enron. A Pentagon spokeswoman responded to suggestions of a possible conflict of interest by saying that “Defense Secretary Donald Rumsfeld sees no conflict and has complete confidence in the Army secretary”.
The Washington Post reported that in late October 2001, White made numerous phone calls to Enron executives including Vice President Jude Rolfes, former CEO Jeff Skilling and the then current CEO Ken Lay. Shortly after the calls were made, White unloaded 200,000 Enron shares for $12 million.”

In the book, “The A.B.C.’s of Behavioral Forensics (Wiley 2013), Koletar, Morrison, and Ramamoorti describe the hidden costs of fraud. We’d like to hear YOUR views regarding the hidden costs of fraud prosecutors punching their tickets and then exiting through the revolving door.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.

AIR TIME FOR ONE OF OUR BLOGGERS!

Audit

Daven Morrison, MD, is scheduled for a live interview on the online radio program, “FraudTalk.” Timing of the interview: Monday, December 15, 9:00 am CST, 7:00 am Pacific Time, hosted by Chris Marquet. FraudTalk is an informative weekly program covering recent fraud cases, trends, characteristics and preventive strategies—an ideal venue for one of our authors of “The A.B.C.’s of Behavioral Forensics (Wiley 2013).” Program host Chris Marquet, a veteran investigator and security consultant, has recently published reports on Ponzi Schemes and embezzlements; the interview is likely to zero in on the behavioral forensics of such cases. To tune in, click on www.voiceamerica.com/show

Politics, Deception and Fraud: Unrelated or Close Cousins?

Accounting, Audit, Behavioral Forensics, Presentations

We hang the petty thieves and appoint the great ones to public office.
~Aesop

Answering a Question

Northwestern University has a Masters in Public Policy and Administration program and this program has a comprehensive course on the finance. Over the past year I have been a guest lecturer on fraud. As the year reached completion, the elections were of interest to Bob Kiely a co-leader of the course and City Manager of Lake Forest Illinois. The most recent course, in fact, had the fraud lecture following the national and local elections by exactly one week. Professor Kiely wondered: “How did the promises made by elected officials compare and contrast with those of fraud? “

In our text, The A.B.C.s of Behavioral Forensics, regarding the question of breaking the law, we use a continuum around psychopathy we discuss a novel observation:  “subclinical psychopathy”. Subclinical denotes the person can have some shared behaviors of a psychopath while not completely crossing over into what is described by the layman as a “monster”.

Subclinical psychopathy might explain what happens when people deceive or are caught outright telling lies in politics. I used two fictional characters: Mr. Smith who never tells a lie and “straightens up” politics through the force of his will and good intentions. On the other end, I used Mephistopheles, one of many classical iterations of the devil, or the “king of lies” who promised Faust what every he wanted in exchange for his soul.  Using the standard definition of fraud:  one who, embracing all multifarious means which human ingenuity can devise, (takes) advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated. . . .. (adapted from Black’s Law Dictionary) we stepped into what became a pretty easy case to make that political promises are pretty close to, if not flat out, fraudulent.

A politician is a fellow who will lay down your life for his country.
~Tex Guinan~

This led to a discussion around the promises of politicians. There were many that were concerning, and recent:

  • The Quincome tax: a tax by Illinois Governor Quinn that was promised to be temporary, but given the revenue shortfall in Illinois, it was obvious to most observers that it must become permanent – thus breaking the promise.
  • The teachers’ Union highly risky speculation of their pension in auction rate debt. From the Chicago Tribune, as the Mayor scolded the Union for taking too much risk with borrowing, noted their report (November 7, 2014) found that CPS’ 2003-07 issuance of $1 billion in risky auction-rate debt paired with interest-rate swaps will likely cost the district $100 million more than traditional fixed-rate bonds would have.
  • The challenger to Mitch McConnell who claimed as a Democrat she had not and would not vote with the President who was also a Democrat.  

Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other.

~Oscar Ameringer~

Lies, Damn Lies, and Political Ads

Then, we reviewed with the class recent negative advertisements in which small disclaimers are made at the end of highly provocative ads, or groups with known biases are supporting candidates but do so in clandestine, untraceable ways. In addition, how is the American Public served when the accounting for something as expensive as the Global War on Terror is not placed formally into the budget? In terms of tactics, our fraud blog team (Bigelow) suggested the classic tactic of what he called “pivoting” in which politicians refuse to answer a pointed question and instead ask a favorable question about a non-issue. In the class we used: You may be curious about my history as a sexual predator, but the American people are really curious to know is why is congress not doing anything to help the middle class – I promise to shake up the congress and bring about real change.

Politicians are the same all over. They promise to build a bridge even where there is no river.
~Nikita Khrushchev~

As a class, we revisited classic accounting techniques that are known to be used to cover up fraudulent transactions:

Masking: Failing to record or disclose an expense or a liability.

Dazzling: Disclosing information in the footnotes to the statements rather than in showing it in the body of the text.

Decoying: Emphasizing legal issues (blind alleys) that after a close examination turn out to be immaterial or handled appropriately.

Repackaging: Changing the descriptions or labels that characterize economic entities or reframing issues to maliciously justify the use of favorable accounting procedures.

Mimicking: Creating fictitious transactions or transactions without substance.

Double play: Improperly applying general accepted accounting principles to an item that is not individually material.

These known tactics that serve to camouflage fraud do have ties to electioneering:

  • How does Quinn’s promise to have a short-term temporary tax that became a permanent tax fit with these tactics?
  • How does the “off the books” financing of the wars in Afghanistan and Iraq fit with these tactics: is this “Masking”, “Dazzling” or something else?
  • What of the vague or later proven false negative advertisements? Is this “Dazzling”?
  • What of the false accusations or inferences (“Soft on crime”, “sending jobs overseas”, etc), are they “Mimicking?”
  • What of organizations that extend beyond US borders are influenced by local politics including corrupt officials?

Political electioneering is an ugly side of democracy that has been a concern since the birth of the Union. Washington in fact was famously critical of the idea of political parties and urged them to not be created.  It undermines trust of government and harms the overall confidence in a democratic process.

Implications

Municipal organizations do not exist in a Milton Friedman market-place as do privately owned organizations.  This is important to emphasize because they have no back up. If they fail, there are not other “competitors” that can fill in for their role: they create an environment for which it is safe to have markets in the first place. In terms of finance in particular, governments are different than private industry – they must be more conservative in terms of investing their financial resources.

Municipal Organizations, too, are composed of human beings who can be defrauded. In fact, subsequent to the course, Downers Grove, a generally well-run community outside of Chicago, was a victim of a significant fraud scheme. According to the Tribune: Downers Grove recently announced that $587,000 of its money is being withheld by the Illinois Metropolitan Investment Fund as a fraud investigation continues. The story goes on to note that this suburb financial troubles are part of a larger fraud scheme orchestrated by Nikesh A. Patel. Using an intermediary, Nikesh created fake documentation that ultimately were used or adapted in a total of $150M of bad loans.  The predatory fraudster discussed in our class had come to life in the real world. Trust but verify, a central tenant of accounting had been ignored.

In the end, the administrators, the often ridiculed “government bureaucrats”, are essential to our government, and thus our market places staying as well functioning as possible.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.

“THE WHOLE THING IS LARGELY A JOKE” (OR, EVEN CORPORATE ACCOUNTABILITY LOOKS TO BE LOST!)

Audit

(By Joe Koletar) An important, and often over-looked, element in cases like the one discussed in the previous two posts is the personality of the US Attorney (the lead prosecutor.) Many have political ambitions down the road (e.g. Rudy Guiliani in NYC.)
Judges also play a role, in two ways. Some just want to be presented with a proposed settlement to avoid a long, time-consuming trial. Then there is their personality (the lawyers dress this up and call it “a judge’s temperament”). They can be tougher on some violations than others.

Lastly, the whole thing is largely a joke. In 1996, when I was with Deloitte & Touche, I did a study of the National Fine Center. It was located in the Eastern District of VA. The idea was good – U.S. Attorney’s Offices do not want to mess with collecting fines. Their headlines come from convictions, not collecting fines, which is a ton of paperwork. When I studied the Fine Center in 1996 they were sitting on billions of dollars of uncollected Federal fines, which expire after a set number of years.

The Dept. of Justice finally got smart and hired retired Federal Agents to pursue these things.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com. >

WHERE’S THE PERSONAL ACCOUNTABILITY?

Audit

(By Dr. Sri Ramamoorti) I was particularly struck by the following comments in that article (see previous post), which are uncannily reminiscent of the comments I made during the Q&A period at an FBI panel session that Vic [Hartman] moderated in Indianapolis in late August this year.

“Even now that prosecutors are examining repeat offenses on Wall Street, they are likely to seek punishments more symbolic than sweeping. Top executives are not expected to land in prison, nor are any problem banks in jeopardy of shutting down.”

I still do not understand why it is so difficult to impose “personal accountability,” except that I did read in the same article that the banks are retaining the finest lawyers to protect and defend their interests. We have entered an interesting era in corporate governance where lawyers will determine whether anyone will be held responsible for the most egregious offenses. By focusing on ultimate root cause of fraud and white collar crime–the human being(s) behind the perpetrated acts–we have persuasively argued in our A.B.C.’s of Behavioral Forensics book that the entire discussion must necessarily focus on the human element.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.

DOES A LEOPARD CHANGE ITS SPOTS? (NEW CASE REPRISE!)

Audit, Behavioral Forensics

(By Jack Bigelow) An article in the October 29 New York Times describes a pattern of what is believed to be a series of broken promises (to be good) among big banks caught in illegal transactions. The article, authored by Ben Protess and Jessica Silver-Greenberg, describes the pattern as the “Wall Street equivalent of a parole violation.”
The article makes specific references to reopened or potentially reopened investigations of Standard Chartered (“at risk of becoming Exhibit A of corporate backsliding…”), Bank of Tokyo-Mitsubishi UFJ, Barclays, and UBS. Prosecutors are apparently realizing that current punishment strategies fall short in preventing further wrong-doing. Also implicated are consultants (PricewaterhouseCoopers is named) suspected of compromising “independence” in assessing the scope of wrongdoing to favor the firms (including defense lawyers) paying their fees.
The typical case goes like this:
• Investigation discloses illegalities;
• Prosecutors agree to suspend charges if bank pays a fine and promises to behave;
• The magnitude of the wrongdoing (hence the use of consultants to determine it) drives the size of the fine;
• The fine is paid, the wrist is slapped, the promise is made;
• And it’s back to business as usual.
And apparently, “as usual” can sometimes mean more transgressions. It is, as the article describes it, “a cycle of misbehavior …difficult to break,” blamed by regulators and prosecutors on a culture that puts profit over compliance. The book, “A.B.C.s of Behavioral Forensics” would label that culture “a bad crop (rather than just a bad apple or bushel).”
I read the article with growing rage that the execution of justice just isn’t taking place.
Several posts concerning the implications and behavioral forensics in this sordid state of affairs will follow. And the first will address one element of justice.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.

THIS SOUNDS SO GOOD IT CAN’T BE WRONG

Audit

(By Daven Morrison)To build on earlier posts regarding the Steve Wessel Case (see previous two posts):

As the cardiologist assesses the heart, the psychiatrist assesses the mind. When the heart or the mind malfunctions, the physician seeks to understand what happened and what can be done to get things back on track. In the workplace, the organizational psychiatrist is generally asked to assess whether or not the right work is getting done. The right work is determined by making the right effort, and the right effort is a result of the right decisions. When projects or entire organizations derail, clearly someone (or some team) made the wrong decisions. And bad decisions come from bad judgment.

When it works it looks like this:

Good Judgment  Right Decisions  Targeted Efforts  Desired Outcomes

When it goes wrong it looks like this:

Poor Judgment  Wrong Decisions  Disjointed Efforts  Poor Outcomes

As Vic Hartman points out, there are many things that can go wrong in a Ponzi scheme leading all involved to fail. The irony is it is all clear from the beginning of the story that it was doomed to fail, yet instead of going away, these financial failures just keep popping up like dandelions.

As Atty Hartman notes, in a Ponzi scheme, there are several factors that lead to the failure:
• The central “Ponzi” character is charismatic, charming and attractive – he literally draws people in like a magnet.
• The promised returns are unrealistic, and the risk is described as minimal or virtually none
• The investors never fully understand how this works and believe in the “magic” of the Ponzi character
How does this work? I believe it ties to two factors which make up an Achilles heel of judgment in all human beings:
• People are inherently lazy in their thinking and do not make an effort to understand problems that ask them “to think;”
• People are not particularly competent in recognizing and managing the emotional data in their lives – and immodest charismatic people take advantage.

In our book, The ABCs of Behavioral Forensics, we outline how the emotional dynamics work between predator and prey. These tactics are there in our lives every day, from email scams to a neighbor’s plan to “beat Vegas,” the hook that the fraud sets in us is the thrill that we are special and that we can get easy money. There is a light in the eye that predators look and listen for to know that the hook is set. The core biologically wired emotion, or “Affect” is excitement. As the scam evolves, the predator manipulates and distracts his victim from the warning affects of fear, distress and the normal naturally defensive affect of anger. Unfortunately, this comes out as rage as was seen in the broad swath of victims in the Madoff catastrophe. Also outlined in our book is the role of the relationship and how charisma plays a role in attracting and sustaining the positive affect of excitement, but also the positive affect of safety: enjoyment. These are worth understanding and can be explored through Chapters 5-7 of our text. But what of “lazy thinking”? This is perhaps most intriguing, as Atty Hartman found.

Others have written about the challenge of thinking, especially in groups, when the group falls in love with an idea. Specifically, group think. The ideas are so exciting that the group literally falls in love with them. This is not necessarily hyperbole to say, as Freud noted, that the only time it is normal to be psychotic (out of touch with reality) is when we are in love. The positive feelings are so strong in both the teenager in love as well as the Ponzi victim that both of them cannot see the world as it really is. As the friend asked his heartbroken buddy: What were you thinking? You must have been nuts!” This is easily asked of both the Ponzi victim and the person grieving a break up.

Daniel Kahneman notes that human beings stop after a point and do not think through hard problems. He outlines how this happens in many ways around problems as common as simple mathematical calculations, to more complex problems like scoping out a project. In scoping out a project, people also see only the most positive outcomes and progress and do not plan for setbacks – despite how common setbacks are to all projects.

What’s missing in the Ponzi scheme – especially those where not only the victims are out of touch, but also (as Hartman notes) the fraudster himself:

• Competence about affects;
• And the ability to question: Is this really so good it can’t be wrong?

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.