(By Sri Ramamoorti) In, A.B.C.’s of Behavioral Forensics: Applying Psychology to Financial Fraud Prevention and Detection (Wiley, 2013, see esp. Chapter 6 of the ABC book), my co-authors and I distinguish the predator from the “accidental fraudster,” calling the former the “malignant bad apple” and the latter, the “benign bad apple.” Predators are highly motivated to commit fraud; “accidentals” not so much.
Recently, during the process of collaborating on research, a reviewer challenged our use of the term “accidental fraudster.” The anonymous reviewer remarked that mens rea (a fragment of the Latin phrase, actus reus non facit reum nisi mens sit rea, which means “the act is not culpable unless the mind is guilty”) or “guilty mind,” is an essential element of fraud. Therefore, by using “accidental fraudster,” for us to even suggest that the fraud was an “accident” was simply wrong-headed. Accordingly, we have since eschewed use of “accidental fraudster,” and replaced it with the term “situational fraudster.”
Which brings me to Tufts University social psychologist, Dr. Sam Sommers, who created quite a stir with his well-received 2011 book, Situations Matter: Understanding How Context Transforms Your World (NY: Riverhead Books). Early on, he declares the foundational premise: “To understand human nature, you need to appreciate the power of situations.” To underscore the powerful influence of context, he writes: “Every day we overlook the enormous power of situations in our lives. We fail to appreciate that life’s basic details—where we are, whom we’re with, and even whether we’re in a hurry—affect how we think and act.” Nationally prominent behavioral economist, Dr. Daniel Ariely of Duke University, gives the book a thumbs up in his review.
Decades ago, management consultant Stan Davis wrote a seminal article suggesting that management decision-making, to be effective, requires a good knowledge of the context of the situation. Essentially (and probably in different wording), Dr. Davis asserted that in just about every situation, the meaning of that situation is pretty well defined by its context. Dr. Sommers appears to endorse this thinking in his reference to the “power of situations (i.e. contexts).”
In a 2012 Psychology Today article, Dr. Sommers applied this kind of thinking to speculate about how context drives unethical behavior, even fraud, and that “bad behavior is about much more than bad people.” Citing a research study by University of Notre Dame researcher, Dr. Ann Tenbrunsel, he points out that being primed to be in an “ethical frame of mind” as opposed to thinking about a business decision context might, by itself, promote ethical behavior. In other words, the framing of the decision context is important; the “salience” of the ethical context even more so. We discuss this aspect in the ABC book using the idea of the “fundamental attribution error” in social psychology, wherein the “actor-observer” bias compels us to attribute the cause of observed behaviors to the person—ostensibly a “good person”—rather than to the context, or situation, that may actually have an outsize and true causal effect. “Or, it isn’t always the person, but the circumstances that may have lead to certain behaviors.”
Next, citing Stanley Milgram’s famous studies of obedience to authority, Sommers notes that “big bursts of bad behavior often start with a slow trickle.” He describes this phenomenon: “The little white lie that snowballs out of control. The ambiguous résumé half-truth that evolves into the outright fabrication perpetuated in public. The fudged expense report that eventually becomes out-and-out embezzlement.” In the ABC book, we similarly describe the slippery slope, and how fraud typically starts out small, then balloons out of control, becoming impossible to hide. Of course, we also pointedly ask our colleague and fellow blogger Dr. Joseph Koletar’s question: “Have you ever heard of a fraud perpetrator who stole a million dollars then worked his way down?”
Perhaps this behavior is best explained by the “boiling frog syndrome:” Initial insensitivity to a worsening situation that gradually increases in severity until it reaches calamitous proportions. The metaphor derives from a 19th century parable about boiling a frog, in which a frog placed in boiling water will immediately try to jump out to save itself, but one placed in cool water that is gradually brought to a boil will ignore the heat until it is veritably boiled to death.
Sommers then proceeds to suggest that “unethical behavior can be contagious.” In fact, he proposes several ways in which “observing the questionable behavior of others affects our own actions….” (the behavior thus becomes the context or situation). His conjectures:
• Perhaps seeing someone else get away with something convinces you that the odds of getting caught are lower than you previously figured.
• Maybe seeing others behave poorly loosens the social conventions that otherwise pressure you into behaving well.
• Or it could be that seeing the transgressions of others simply brings the notion of ethics to the forefront of your mind?
Sommers cites research studies by Francesca Gino, now at Harvard University, who has greatly enhanced our understanding of contextually-driven ethical/unethical behavior (some of her co-authored research studies are referenced below). In this connection, the ABC book offers a simple, but powerful taxonomy: the bad apple, the bad bushel, and the bad crop. We’ve also expanded our thinking in this blogsite by broadening the taxonomy to include “bad farmer’s markets,” wherein regulators, the referees, policy makers, and standard setters may be also compromised through “regulatory capture,” the overseers and governors (e.g., the Board of Directors and auditors) may lack independence and thus be conflicted, the laws themselves may be weak, or the enforcement lax, and the “system of checks and balances” that is assumed to be in operation, is actually compromised and rendered ineffective. This torrid portrait is what we saw happen during the Wall Street financial crisis of 2007-2009 (see for instance, the Report of the Financial Crisis Inquiry Commission, 2011).
Yes, context matters, but only for situational fraudsters. Predators, though, can create the context, and are often more predictable. After all, we don’t ask: “Why do bad people do bad things?”
References:
Bazerman, M. H. & Tenbrunsel, A. E. (2011). Blind Spots: Why We Fail to Do What’s Right and What to Do About It. New Haven, CT: Princeton University Press.
Financial Crisis Inquiry Commission (FCIC) Report (2011). Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. U.S. Government Printing Office, January/February 2011.
Gino, F., Gu, J., & Zhong, C. B. (2009). Contagion or restitution? When bad apples can motivate ethical behavior. Journal of Experimental Social Psychology, 45(6), 1299-1302.
Gino, F., Ayal, S., & Ariely, D. (2009). Contagion and differentiation in unethical behavior: The effect of one bad apple on the barrel. Psychological Science, 20(3), 393-398.
Gino, F., & Pierce, L. (2009). The abundance effect: Unethical behavior in the presence of wealth. Organizational Behavior and Human Decision Processes, 109(2), 142-155.
Sommers, Sam (2011). Situations Matter: Understanding How Context Transforms Your World. New York: Riverhead Books.
Sommers, Sam (2012). When Good People Behave Badly: Exploring the psychology of fraud and unethical behavior. Posted Jun 05, 2012 in Psychology Today, see https://www.psychologytoday.com/blog/science-small-talk/201206/when-good-people-behave-badly

BEHAVIORAL FORENSICS GROUP

The Behavioral Forensics Group 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 Group.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, BFG is a premier, pioneering practice in this field.

We are blogging at: http://www.bringingfreudtofraud.com

Aaron Beam is the former CFO and co-founder of HealthSouth. For his role in participating in the HealthSouth financial statement fraud in 1996 (soon after which he had left the company), he was prosecuted and sentenced in 2003 to 3 months in a minimum-security prison and had his CPA license revoked.
For over 10 years, he has been speaking to several audiences, including more than 50 college and university campuses. Last year, he spoke to Prof. Sri Ramamoorti’s internal audit class at Kennesaw State University. He has also written books such as The Wagon to Disaster (about the HealthSouth fraud), and The Ethics Playbook (guidance on ethics to those pursuing careers in business).
The HealthSouth fraud, with a particular focus on Aaron Beam, is covered in A.B.C.’s of Behavioral Forensics: Applying Psychology to Financial Fraud Prevention and Detection (Ramamoorti, Morrison, Koletar & Pope, 2013).  This is his second guest blog, and Mr. Beam has agreed to write future guest blogs for www.bringingfreudtofraud.com.

(By Aaron Beam) “I don’t think human beings are bad. They’re weak. And that’s what makes them bad.” This was a quote from a “60 Minutes” TV interview with Michael Caine the movie star.
When I heard Michael Caine make this paradoxical observation, it really struck a chord with me. A corollary to his statement is the often quoted phrase “there are not that many evil people in the world but there are many, many people who let others do evil things.” Philosopher Edmund Burke remarked, “The only thing necessary for the triumph of evil is for good men to do nothing.”
For the past 20 years I have been asking myself, why did I take part in the Healthsouth fraud? I always come back to the answer that I was not inherently an evil-doer but I was weak and I lacked the courage to do the right things. I took the path of least resistance—the easy way out.
Fortunately, one of the great things about being human is that we can learn and build courage. An excellent book by Mary C. Gentile titled “Giving Voice to Values” was published in 2010. The book’s main focus is how to develop the “scripts” and implementation plans for responding to the commonly heard reason and rationalization for questionable practices and practicing the delivery of those scripts. The book is about building the skills, the confidence, the moral muscle and the habit of voicing our values.
Looking back at my life, I realize that I would nearly always run away from problems and confrontation. When I faced the pressure of being the CFO of a Fortune 500 company, my approach typically was to take the easy way out. I took the course that caused me the least pain. Many times these choices were borderline–on the edge of ethical.
With the help of Dr. Gentile’s book and other ethics authors and professors, I now realize courage can be learned. As you learn to voice your values, you develop confidence. This in turn helps build even more ethical strength. It is like most things in life: you have to practice to become proficient and strong.
Numerous studies have documented that CFO’s are likely to become involved in material accounting frauds because they succumb to CEO pressure, not because they seek immediate financial benefit (e.g. Feng et al. 2011). During the fraud at Healthsouth, the CEO received $265,000,000 in compensation. I took part in the fraud for less than a year and my last bonus was $300,000. This was in line with bonuses I had received before the fraud began.
In retrospect, I would gladly give up the $300,000 to keep my personal integrity and reputation intact. Of course, that would have required great reservoirs of moral courage that I simply did not seem to have at the time. This is one of the key points made in The Ethics Playbook—hopefully, the younger generation can learn from my experience.
References:
Beam, A. & Womble, G. (2015). The Ethics Playbook: Winning Ethically in Business. www.aaronbeam.net.
Feng, M., Ge, W., Luo, S. & Shevlin, T. (2011). Why do CFOs become involved in material accounting manipulations? Journal of Accounting and Economics, Vol. 51, pp. 21-36.
Gentile, Mary C. (2010). Giving Voice to Values: How to Speak Your Mind When You Know What’s Right. New Haven, CT: Yale University Press.

BEHAVIORAL FORENSICS GROUP

The Behavioral Forensics Group 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 Group.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, BFG is a premier, pioneering practice in this field.

We are blogging at: http://www.bringingfreudtofraud.com

(When Logic Finishes Second)

(By Dr. Joseph W. Koletar) The Wall Street Journal of May 26, 2016 carried the following front-page article:

“Deal With Theranos Haunts Walgreens”

The article recounts the long and somewhat confusing saga of an old drug store chain and a young “up-start” company called Theranos. In the Spring of 2011, the founder of Theranos, Elizabeth Holmes, arrived at John Hopkins University with a machine she claimed could test much smaller amounts of blood than existing procedures and produce data on patients’ medical issues much more cheaply and quickly than before. Walgreens was intrigued. The machine, called Edison, could revolutionize the blood testing arena and could be a huge addition to the company’s many stores.

Scientists at John Hopkins, an old and well-respected academic instruction, asked the obvious question – “Could we have a machine to verify its results?”

To quote the Wall Street Journal article: “It never happened.”

Thus did Walgreens, in its quest to be “first to the market,” proceed to try to strike a deal with Theranos.The article, based on almost twenty interviews of both Walgreens and Theranos officials, describes the once-promising relationship as now being in “tatters.” Issues with the Theranos device were reported by the Wall Street Journal in October 2015, and in January 2016, regulators advised the testing procedures might pose a threat to patients’ health. Logically, Walgreens pushed Theranos for answers and was given promises and partial information. To some degree, Theranos had them over a barrel – if they pushed too hard, Theranos might go elsewhere. In January 2016, Walgreens began to unwind their relationship with Theranos. Much is still uncertain – many details have yet to come out; the Wall Street Journal article has more detail, but one issue stands out:

Why did Walgreens, founded in 1901, with roughly 7,500 drugstores as of 2010, travel so far down a road filled with murky signs? It is an old, respected, and successful company filled with bright, well-paid people. What went wrong? It seems to defy logic. We offer some possible explanations’ from the realm of the mind:

Thrill, excitement – we’ve found the gold mine!

• Ego – we’re better, smarter, and braver than the other guys.

• Ego (part two) – we’re Walgreens – we don’t make mistakes.

• Insecurity – somebody else may steal our cookie.

• Sunk cost (an economic term) – we’ve put so much into this, we have to make it work.

• Narcissism – This is my baby, and if it works I’ll be a star. Besides, I don’t make mistakes. (I haven’t yet.)
Is the Walgreens-Theranos episode a rare example of logic losing to emotion? Perhaps not. Crain’s New York Business, of May 16-22, 2016 carried the following article on page one: “The Little Crane That Should.” Starting on page 13 of that edition, the sub-title is “Cheaper, Faster, Safer.” It recounts the experience of Dan Mooney, himself a former crane operator. Mooney, based on his work in the industry, decided that a smaller, lighter, safer, more nimble, and efficient crane could handle smaller jobs, and even establish the first 20-30 floors of an even taller building. At that point, the tower and crawler cranes could take over. (A tower crane looks like a huge letter “T;” a crawler crane travels on treads, much like a military tank.)

Mooney built what he called a “Skypicker” crane, a machine he designed and built himself. He got a contract from a construction company that was building a 34-story hotel in mid-town Manhattan. The building was completed in a relatively quick six months, and his phone was ringing off the hook with calls from construction companies seeking his services. Sensing opportunity, Mooney built four more cranes. They still sit, unused, in a warehouse in Queens, New York.

Per the article, after initially receiving approval from the NYC Department of Buildings, that approval was quickly reversed due to opposition from the tower crane operators’ union. Why? A tower crane operator, per the article, receives $73.91 per hour, plus $32.50 an hour in benefits, before overtime. In addition there is a $2 per hour surcharge for each hour they are behind the controls, and double wages on weekends when a crane has to be moved. Some crane operators were making close to $500,000 a year. The big cranes (tower and crawler) also required a supporting cast of master mechanics, relief operators and “oilers” whose job it was to start the crane each morning. They saw Mooney’s Skypicker crane as a threat to their livelihoods, as did their Union.

Mooney was counting on logic – Cheaper, Faster, Safer – but he has been sidelined by the big crane operators and their Union, which sees him reducing the amount of work they get. They will always have work, since Mooney’s cranes can only go as high as about 30 stories, and most new buildings in a vertical city like New York are well above that.

The final decision is up to the City of New York and politics and lawsuits will raise their surly heads. This is not to suggest that the big crane operators and their Union are bad people; they are not. They are merely following the basic human instinct to protect what one has.

In the Walgreens matter, logic seems to have failed. The New York City issue remains to be seen, but in both instances human emotion played a significant, if not decisive, role.

Yet we continue to expect corporations and their executives to routinely behave in a logical manner. The realm of the mind is, indeed, powerful.

© 2016  Joseph W. Koletar

BEHAVIORAL FORENSICS GROUP

The Behavioral Forensics Group 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 Group.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, BFG is a premier, pioneering practice in this field.

We are blogging at: http://www.bringingfreudtofraud.com

(By Vic Hartman) Georgia State University Chair of Criminal Justice Richard Wright notes in his recent TEDTalk that there’s a dramatic crime shift from street crime to digital crime. Accordingly, we have a whole new class of victims. In fact, frauds on the Internet are increasing exponentially. In one scam alone, the FBI estimates that victims paying ransoms for their data hijacked via encryption increased from $41 million in last quarter of 2015 to $209 million in first quarter of 2016. This loss is calculated from the victims willing to report to law enforcement; actual losses are likely substantially higher.

In a recent blog, I wrote about the Psychology of the Cyber Hacker Now, let’s consider the psychology of the victim. In particular, the victim of the financial hacker.

Financial crimes on the Internet are quite diverse. Many frauds occur because a victim is deceived into clicking on a link containing malware. The horrors to follow can include their data being hijacked by malware. The malware can also be a man-in-the-middle attack (bad actor is between victim computer and third party) where banking credentials or other sensitive data are captured and resold on the dark web. An attack can also involve stealing intellectual property or personally identifiable information of customers.

Probably the most harmful scam currently propagating around the Internet is the business email compromise (BEC) that the FBI currently estimates exceeds $2 billion in losses. This fraud involves either a spoofed email or a hacked company email account whereby the fraudster advises a financial executive to wire transfer funds unwittingly to an account controlled by the bad actor. This scam is particularly effective if a hacker has penetrated a company’s email system and can insert a bogus email into a conversation between the CEO and controller with fraudulent instructions.

Romantic interest is another avenue to exploiting someone for financial gain. One looking for companionship on the Internet may quickly run into the fraudster proclaiming love for the victim . . . and a need to send money for any number of bogus reasons.

Another common Internet fraud is the decades-old Nigerian 419 scam that has moved from the mailbox to the email inbox. The term 419 comes from the Nigerian Criminal Code that makes this scam illegal. You probably have seen the scam in an email from someone proclaiming to be a Nigerian oil minister that wants your bank account number so he can wire-transfer you $10 million or some other such nonsense. Despite its notoriety and apparent absurdity, victims continue to fall for the scam.

These and other Internet scams all exploit the psychology of the victim. For example, our tendency to trust authority figures may cause us to fall for emails from a boss, doctor, attorney, or the IRS with instructions to forward funds for what appears to be a legitimate purpose. Others may fall prey to the social proof or herd principle. If the victim is led to believe others are doing the same thing, it is much easier to click on the malware link or take other harmful action. Other ploys include time or scarcity issues. You must act now: There is a limited supply. The victim is operating under the FOMO principle – fear of missing out. Lastly, the fraudulent email is even more convincing when the victim’s social media has been mined for intelligence so that the attack email is laced with personal information making it incredibly convincing.

These psychological ploys more easily overcome our human defenses when we are behind a keyboard and in the safety of our offices or homes. Even more pernicious, in the digital world there are fewer social cues – – no sixth sense to tell us that the person we are dealing with has bad intentions.

Interestingly enough, the fraudsters themselves can fall prey to these same psychological pitfalls. There are examples of victims engaging the fraudsters in communications leading them to believe the scheme is working. The victim then encourages the fraudster to travel to a foreign country and open up bank accounts at great expense to the fraudster. Note: While this is a satisfying example of street justice, this should not be tried without the assistance of law enforcement, as these fraudsters can also be very dangerous.

As crime has moved from the street to the Internet, the criminal’s modality has moved from a gunpoint to a mouse click. While all of these frauds are preventable, the solution lies in the HR department, not the IT department. Fraud is a human act, and the victim is unwittingly complicit. This does not have to be the case. Awareness training is effective, cost efficient, and can greatly reduce these cyber frauds.

BEHAVIORAL FORENSICS GROUP

The Behavioral Forensics Group 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 Group.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, BFG is a premier, pioneering practice in this field.

We are blogging at: http://www.bringingfreudtofraud.com

—Bethany McLean

(By Jack Bigelow) Bethany McLean is one of the foremost business journalists of our time. She uncovered the story of Enron, then covered it by writing (with Peter Elkind), The Smartest Guys in the Room. She explores (with Joe Nocera) the greed and sleaze of the financial crisis in All The Devils Are Here, and in her most recent book, On Shaky Ground, she takes us behind the scenes in the sordid story of Fannie Mae and Freddie Mac. Ms. McLean is currently a Contributing Editor to Vanity Fair; earlier she was a Contributing Editor and columnist at Fortune Magazine and a contributor to Slate. Her books are thoroughly researched, giving us engaging detail that verifies the integrity of her account of what happened and when. The Behavioral Forensics Group was privileged to interview her, and will share that interview in this and a subsequent posting.
You’ve said that you find implicit corruption more interesting than explicit. What do you mean by “implicit” and “explicit” and why do you find the implicit corruption more interesting?
Explicit corruption, I think of somebody slipping somebody a bag of cash because the briber wants them to do something. With implicit corruption, I think of people whose self-interest is all bound up in the same thing, and who think the same way without anybody having to bribe anybody else. So one example I might use would be regulation of big banks leading up to the financial crisis. The Federal Reserve and all the regulators thought like the banks—thought that the banks would never do things that were not in the banks’ economic self-interest. They were smart, they were capable, they had good management systems in place. Maybe “corruption” is too strong a word to use in that case, but I think of that as a sort of implicit corruption because it’s not as if the banks were paying off the regulators. Everybody looks at the revolving door and think that’s the problem. But it’s not; the revolving door can actually be quite helpful. It’s just that they all thought the same way.
Would you almost say that it’s subconscious?
Yes, I would also say that it’s subconscious. It’s just everybody’s belief system is the same. Some people might point at the bailout in 2008 as corruption—the group of people who all thought like the banks, the banks had to be saved. I’m not sure I would have it any other way—I’m not sure that was the wrong outcome—but there were people who all thought the same way.
I noticed that in your books, you avoid expressing moral judgments.
I try to lay out the facts and let the people who read them make their own decisions.
At the end of “Smartest Guys,” there was no moral conclusion, but there were certain areas in there where it was clear that you were totally stunned and astonished by what you had unearthed.
Yes. And that’s what I try to do, to lay things out. I like facts, and so I try to lay things out, but any narrative has implicit judgments, right? But I try to lay out facts and let people think for themselves.
The U.S. government is taking the profits of Freddie Mac and Fannie Mae.
Yes.
And it’s not taking the losses.
Yes.
Shares were sold. Isn’t that a type of fraud?
I think it is a fraud. It’s interesting because most people can’t get past the fact that hedge funds and wealthy investors stand to make money on this. So, they automatically side with the government without thinking through the issue. The government structured the bailout in a specific way with specific laws and then when they realized that a certain group of people were going to make money, they said, “Oh, no, no. We’re going to change the rules.” And maybe because they needed the profits from Freddie Mac and Fannie Mae too. But now, their documents have just come out, within the last month or so that show very clearly that the government lied, that they knew full well that these two companies were about to turn immensely profitable. They refer to them as the “Golden Years of GSE (Government Sponsored Enterprises) profitability” that were coming.
It also bothers me quite a bit that the government lied about its reasons for changing the terms of the Fannie and Freddie bailout by saying that they were going into a death spiral, where they weren’t going to be able to pay their dividends, that they had no idea that the two companies were going to be profitable—that is a lie. I think any citizen should be horrified by this. The Government’s feet need to be held to the fire on this and I think it’s an overwhelming hatred and ignorance of Fannie and Freddie that makes people not just up in arms about this. To me, it’s just an enormous scandal. But people don’t care.
Wouldn’t you say the government is actually violating its own SEC rules?
I guess maybe they are in the sense that Fannie and Freddie’s SEC filings never warned that the Government would treat these two companies differently than other companies. That the government might suddenly change the rules on them. I suppose, in a way….
I guess what I’m getting at is they are represented as companies that can make a profit…
That’s true too….they can’t—it’s all being taken away. But if that’s true, there should be a line that says [so].
(We will bring you the remainder of this interview in a subsequent posting.)

BEHAVIORAL FORENSICS GROUP

The Behavioral Forensics Group 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 Group.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, BFG is a premier, pioneering practice in this field.

We are blogging at this blog site: http://www.bringingfreudtofraud.com

Aaron Beam is the former CFO and co-founder of HealthSouth. For his role in participating in the HealthSouth financial statement fraud in 1996 (soon after which he had left the company), he was prosecuted and sentenced in 2003 to 3 months in a minimum-security prison and had his CPA license revoked.
For over 10 years, he has been speaking to several audiences, including more than 50 college and university campuses. Last year, he spoke to Prof. Sri Ramamoorti’s internal audit class at Kennesaw State University. He has also written books such as The Wagon to Disaster (about the HealthSouth fraud), and The Ethics Playbook (guidance on ethics to those pursuing careers in business).
The HealthSouth fraud, with a particular focus on Aaron Beam, is covered in A.B.C.’s of Behavioral Forensics: Applying Psychology to Financial Fraud Prevention and Detection (Ramamoorti, Morrison, Koletar & Pope, 2013). Mr. Beam has agreed to write future guest blogs for www.bringingfreudtofraud.com.

A comment I hear often is that once someone commits a fraudulent act, it is easier to repeat that act. This suggests that fraud becomes easier to commit the more you do it. This comment has always troubled me, and I have not been able to put my finger on why it troubles me.
This morning while mowing my lawn (I do some of my best thinking while cutting my grass), the answer came to me: It is not true. Frauds like Healthsouth do not go on for years because it becomes so easy. In my case, for sure, it was not true. Just the opposite: The initial “cooking of the book” was the easiest compared to subsequent acts.
To understand the point I am trying to make, look at the emotions that were influencing me before and after the initial fraud. Before, I was riding high, I was rich, I was respected, and I wanted this scenario to continue. Plus I did not want to disappoint my boss, stockholders, my family, and Healthsouth employees. In the heat of the battle, I took the “easy” way out and agreed to change some numbers. However, within minutes, my emotional state changed. I was disappointed with myself; I was fearful of being caught and that night I could not sleep. The next day at work I found it hard to look people in the eye. The thought that we might commit the fraud again terrified me.
There are people that do find it easier to commit fraud again and again: Sociopaths. It is easy for them because they are unable to feel real empathy. Their emotions are different from most of us.

BEHAVIORAL FORENSICS GROUP

The Behavioral Forensics Group 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 Group.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, BFG is a premier, pioneering practice in this field.

We are blogging at: http://www.bringingfreudtofraud.com

(By Joseph W. Koletar) The Economist Magazine of March 26, 2016 carried the following article on p. 85: “Clinical Trials: For my next trick…”

It recounts the experience of drug company GlaxoSmithKline (GSK) with a drug called Paxil. Coming to market in 1992, it was presented as a treatment for depression. Some years later it was earning $2B a year, but when British authorities took another look at its effectiveness in 2003 they found Paxil was not only marginal in treating depression, it actually had negative side-effects, to include suicidal ideation. In 2012 American authorities imposed the largest fine ever on a pharmaceutical firm – $3B.

The issue is, in academic terms, called “outcome switching.” In the case of GSK, the article reports the initial trial of the drug was meant to measure eight indications of effectiveness in treating depression. None, per the article, showed it was any better than a placebo (“sugar pill.”) As a result, the researchers came up with nineteen new measures of effectiveness, most of which indicated no significant benefit. Four however did, and these were presented to the medical community and public as if they had been the original focus of the effectiveness study. Thus, did authorities come to levy an unprecedented financial penalty on GSK.

Such issues hardly disappeared with the GKS case. The article notes many promising discoveries in various areas of medicine suffer from what is called “replication crisis.” The concept is simple: If I know how you did what you claim you have done, I should be able to replicate the results. If I cannot, something is amiss.

The article notes the Centre for Evidence-Based Medicine at Oxford University is in the process of doing this, at least for some medical “breakthroughs” with a program named COMPARE. A later study by others indicated that 31% of clinical trials did not adhere to the measurements they initially promised to utilize. Yet another study of 137 medical trials found 18% altered their criteria of success mid-way during the testing period, and 64% had altered their evaluations to emphasize secondary, less impressive, indications of success.

COMPARE, for example, examined 67 clinical trials, which had been reported in well-respected professional journals. Of these, nine were found to be excellent, in that they either achieved their initial goals, or explained why they had altered their initial measurement process. The other 58 seemed to move the goalposts a bit during the measurement process. The studies had 300 outcomes that should have been reported, but were not. At the same time 357 other outcomes were added, although they had not been specified at the beginning of the respective studies.

Such matters were brought to the attention of the journals in question that published the original test results. Seven published COMPARE’s comments; 16 responded to the effect that COMPARE’s observations were trivial or the result of inadvertent error. The other 44 seem to be in a state of suspended animation, even though all the journals involved had previously adopted guidelines to be attentive to “outcome switching.”

For mere mortals, are we left with a situation wherein the hunter can proclaim?

“I missed the deer, but wounded the tree!”

Again, we return to issues of human motivation. These are smart, apparently well-intentioned people. Is it pride of ownership? A sense that great effort deserves at least some recognition/success? Or, is it something else?

In our book, The A.B.C.’s of Behavioral Forensics, we explore the Apple-Bushel-Crop dimensions of organizational misconduct. Is it one person, a group of people, or the entire organization? Is it the CEO forcing subordinates to do improper things? Is it a section of the organization that flies by its own rules? Or has the entire organization gone off course? Is it the familiar defensive refrain of “industry standards” or “accepted/common practice?”

It was once common practice to collude with competitors to fix prices, but that was outlawed; or was it? News reports indicate U.S. federal authorities have recently begun an investigation of airlines that seem to have a pattern of having the same prices to fly from point ”A” to point “B.” In an industry that is supposed to be competitive, is this not odd?

In our book we use “C” to refer to an organization, but is it possible it can also refer to an entire industry segment?

In matters both medical and, increasingly, corporate and financial how are we to know what is authentic? Or, have we slipped into the increasingly-common world of “virtual reality?”

Time, our health, and our finances will tell.

© Joseph W. Koletar, 2016

BEHAVIORAL FORENSICS GROUP

The Behavioral Forensics Group 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 Group.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, BFG is a premier, pioneering practice in this field.

We are blogging at: http://www.bringingfreudtofraud.com

(By Dr. Joseph W. Koletar) While there are hundreds of dishonest ways one person can take money from another person they fall into three basic categories. In reverse order of frequency they are:

• Force, or Threat of Force (We call these Armed Robbery, Extortion, and Kidnapping);

• Stealth (We call these Auto Theft, Burglary, and Shoplifting);

• Trust.

Although there are hundreds of variations, all frauds are a violation of trust. There is a term in our lexicon called “Con Man.” “Con” stands for “Confidence.” If I can gain your trust, you have confidence in me. That is when you become vulnerable.

How do we protect ourselves against such risks?

• With regard to Force, we avoid risky areas and dicey people.

• With regard to Stealth, we lock our doors, use alarms, and keep an eye on shady customers.

• With regard to Trust, we must learn to be discerning, because trust is ubiquitous. We can not function as individuals or societies without relying on a high degree of trust. We must assume teachers have the best interests of our children at heart; we must assume medical personnel are competent; we must assume engineers have designed our homes, cars, bridges, and airplanes correctly; and we must assume our police are honest and our elected officials are prudent.

This is fine, but common sense and experience tell us that such trust is often violated in ways great and small. Some teachers are pedophiles; some medical personnel are incompetent or dishonest; some contractors cut corners and some car maker’s fake emission standards; some police are brutal or corrupt; and some elected officials leave a lot to be desired.

Do we hide under our beds, and trust no one? Impossible. Poor construction could still cause the house to fall in on you.

These are issues both complex and vexing.

Such issues are the reason the Behavioral Forensics Group (BFG) was created. It is a group of five well-educated, experienced professionals who approach such issues from a variety of perspectives. Each perspective is valuable, but combined they bring a more comprehensive approach to complex issues, such as our need and tendency to “trust.” Their expertise ranges from psychiatry to psychology, from law to executive management, to law enforcement, accounting, auditing, and corporate governance.

A compendium of our approach to issues of trust (human behavior) can be found in our book, The A.B.C.’s of Behavioral Forensics (John Wiley & Sons, 2013.) You can learn more about our thoughts on current events involving violations of trust by visiting our blog site, “Bringing Freud to Fraud.”

We are available for consultation on a select basis. Our contact information appears on here on this blog site.

© 2016
Joseph W. Koletar

BEHAVIORAL FORENSICS GROUP

The Behavioral Forensics Group 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 Group.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, BFG is a premier, pioneering practice in this field.

We are blogging at: http://www.bringingfreudtofraud.com

(By Vic Hartman) Two international computer hackers (Aleksandr Andreevich Panin, a/k/a Gribodermon, of Russia, and Hamza Bendelladj, a/k/a Bx1, of Algeria) were recently sentenced in Federal Court in Atlanta to a combined 24 years, six months in prison for their roles in developing and distributing the prolific malware known as SpyEye. The sentences reflect the grave harm these hackers caused worldwide. The SpyEye software infects a computer without the owner knowing. This malware is particularly insidious because it gets into the browser and records the keystrokes of the operator, including banking logon credentials. It is known as a man-in-the-middle attack.
Psychology can certainly play a role in both investigation and prevention of computer intrusions. However, the analysis is quite divergent between the two. For the purpose of this blog posting, let’s focus on the hacker motivations. Put simply, a hacker is a person using a computer to gain unauthorized access to other computers. In a later blog, we’ll focus on the mindset of the victim and how that can play a role in preventing intrusions.
Hackers generally leave digital footprints inside victim organizations. Could there be a relationship between that footprint and the hacker’s motivation?
Let’s first explore six hacker motivations.
• The Financial Hacker presents serious dangers to people and organizations. Defendants Panin and Bendelladj are emblematic of the emerging international organized computer hacking problem, often involving Eastern European criminals in conspiracy with other nationals. The motivation of the Financial Hacker is largely financial. But it can overlap with those of other hacker categories. Panin was the primary developer and distributor of Spy Eye, while Bendelladj sold it. The telltale sign of an attack—its hallmark—is the hacker software and the type of information stolen. Once we identify these characteristics, we know a Financial Hacker is at work and unless caught in time, the victim will suffer financial loss.
• Another dangerous hacker: The Insider or Former Insider. The Insider ‘s motivations can include revenge, anger, lack of recognition, or profiteering. Insider hacker transactions often include misappropriation of intellectual property, including engineering designs, trade secrets, and customer information. If still employed, The Insider may be able to access this information or might be maliciously overriding internal controls. Former Insiders may still be able to access company data unless controls are in place and working.
• Political or social zeal may motivate The Hactivist to do grave harm to organizations, including those of government. A well-known recent example is Edward Snowden’s release of National Security Administration classified information. Another more recent example is the anonymous hacker into the Panamanian law firm, Mossack Fonseca & Co., who exposed off-shore accounts of several world leaders.
• Nation-State Hackers are well-funded and clandestine, operating on behalf of a government. Their motivations vary by national governance. A Communist country like China (running both the national defense AND the economy) views the taking of intellectual property from other countries or private businesses as a vital part of their national security. These government actions are considered locally as strategies and actions for the public good. In contrast, a Nation-State like Iran may commit a distributed denial-of-service (DDoS) attack to harm another country’s economy. Nation-State hacking is sometimes a form of non-combative warfare, an example of which was Stuxnet. Stuxnet perpetrators significantly impaired Iran’s development of nuclear centrifuges. We can get clues to the hacker’s motivation based on the type of attack perpetrated.
• Terrorist Hackers infiltrate computer systems to harm data. They are often motivated by their political, social, or religious beliefs. As with Nation-State Hackers, their weapon of choice is often a DDoS attack: It’s cost-effective and can be launched from anywhere.
• Script Kiddie Hackers are often juveniles using scripts from more sophisticated hackers. They want attention. But don’t consider them to be harmless; they can still cause significant damage to organizations. Script Kiddie Hackers often bemuse the folks in law enforcement because long and complicated investigations often lead to a 15-year-old kid working in the parents’ basement.

Hackers have many tools at their disposal. The types selected and information exploited are often telling clues as to their motivations. In the next posting, we’ll focus on the psychology of the victim to provide insights on deterring cyber intrusions.

BEHAVIORAL FORENSICS GROUP

The Behavioral Forensics Group 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 Group.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, BFG is a premier, pioneering practice in this field.

We are blogging at:  http://www.bringingfreudtofraud.com

(By Dr. Joseph W. Koletar) It is not unusual for financial sector brigands to express some remorse once their misdeeds have come to light. Such actions may be lucrative – paid speaking engagements, advising corporate Boards on why they should be more attentive, etc.

The Wall Street Journal of April 30 – May 1, 2016 explores such issues in a page-one article titled “A Disgraced Trader’s Bid for Redemption.” The article focuses on Alexis Stenfors’ fall from grace after a highly successful and remunerative career as a trader for several big banks. One of his early mentors claimed he was the best young trader he had ever trained.

Mr. Stenfors’ career responded accordingly – he prospered and made millions of dollars for his employers. He married and began a family, enjoying the fruits of his labors, and was given his own trading desk in London. His firm believed a man of his talents should not be included as but one of the herd of also bright and ambitious traders. As a lyric from an old song goes, “That’s when the trouble began.” His friends and co-workers later commented that even when engaged in recreational activities such as squash, he would blurt out an idea for a trading deal or strategy. It was if trading was his essence and all else was peripheral.

The article recounts in 2005 Mr. Stenfors was then employed by Merrill Lynch (ML.) He later claimed he was encouraged to take big risks and aim for huge profits. To add to the earlier song lyric, “That’s when the trouble got “silly-deep.” Mr. Stenfors became involved with other traders in other financial institutions, and their actions began to trouble even him. It looked like they were playing around with LIBORS, a key global interest rate-setting indicator. The article recounts he walked away from at least one potential deal because he found it too “dodgy.”

As wise as that decision may have been, he had plenty of troubles on his own doorstep. Financial markets worldwide were crashing. He was working impossible hours trying to keep the ship afloat and his health was deteriorating rapidly. Even so, he kept trading constantly and later claimed he felt he had a “loyalty” to ML to get it through this crisis in the international financial markets. At one point he is said to have commented that he was “addicted” to trading. Accordingly, there came a day when he made a huge financial bet on the future movement of the market. If it worked, and he guessed correctly, he would be an even-richer star. If it failed, the ship would be in a danger.

His analysis was wrong, and huge financial rocks littered the shore in front of him and ML. It was at this point, the WSJ reports, that he decided to mask the real and potential losses in the hope that the tide would soon turn in his favor. At some point it became obvious his skills and energy could not stem the tide and, per the article, he called his boss with the prophetic words: “I have something I need to tell you.”

As his actions were duly investigated and sanctions rained down upon him, he reassessed his life. He had always wanted to earn a PhD in economics, and did so. He then embarked on a process of educating young students as to perils of the “market,” noting he had “lost it” and come to the point where he thought 100 million dollars was not a lot of money. As apparently sincere as his remorse was for his prior actions, he later made a telling comment to the effect that traders are by nature risk-takers, and the rules of ML operated to deny him his opportunity for “self-actualization.”

Herein lies the rub. “Self-actualization” is an old term in psychology and usually refers to finding the true meaning in your life; of coming to peace with your role in the world, be it great or small; of casting aside the frivolous for the important; of looking back and feeling a degree of contentment that you found yourself, and not the “self” imposed on you by circumstances and traditions.

But the “rules” got in the way?

All organizations have “rules” that are petty, out-dated, or counter-productive. The problem is not so much the rules, as it is the organization. Rules are easy to create, but are rarely reviewed like junk that piles up in the attic or garage. Thus, each employee is left to determine which rules are important and which are not.

That is where Mr. Stenfors appears to have slipped. For most people, on most days, $100M is important, but as he himself noted, he was “addicted.” Just another silly rule.

© 2016
Joseph W. Koletar

The Behavioral Forensics Group 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 Group.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, BFG is a premier, pioneering practice in this field.

We are blogging at: http://www.bringingfreudtofraud.com