Category Archives: Audit

KISS

Audit

 

 

(By Joe Koletar) It is an old saying in every branch of the military. It stands for “Keep It Simple, Stupid!”

It reflects the reality that we often tend to over-plan and over-prepare, to limit risk and increase our chances of success. While a fair degree of planning and preparation is necessary, too much of it can limit success. Another old axiom in the military is that the best battle plan goes to hell the minute the first shot is fired. Battle is messy, dangerous and fluid. The ability to adapt on the fly is crucial. Loss and experience tells us that orders given to front line troops should be precise and concise. Let them go forward with clear, simple guidance, and adapt as need be.

What does military experience tell us about regulation and prosecution in matters of organizational misconduct? A recent article in the Wall Street Journal is instructive:

“Jurors: Dewey Trial Proved Too Confusing.”
(October 21, 1015, page B-1)

The matter in question was the trial of former executives of a failing law firm, Dewey & LeBoeuf LLP. The allegations were they had engaged in “creative accounting” to prop up the firm’s financial standing with banks. The former executives were charged with in excess of 150 counts of violating complex accounting rules in the process of trying to save their firm.

Prosecutors from the Manhattan District Attorney’s Office spent days and weeks and months trying to educate jurors on financial matters that would be confusing to a college accounting student. After days and weeks of deliberation and several instructions from the presiding Judge to “Try again,” they remained deadlocked and a mistrial was called. The prosecution advised it may try again in yet another trial, but their initial strategy obviously failed – too many counts, three people being tried at once, too much complicated data to interpret.

Per the article, several jurors threw up their hands early on and decided guilt or innocence. They refused to look at evidence again or engage in discussion with other jurors. They had simply hit their frustration limit.

In an age of increasing complexity, from dishwashers to Wall Street, how do we as a society try to better cope with the crucial task of pursuing justice? Jurors are picked at random under the assumption that people of reasonable intelligence, with normal life experience, will have the good will and moral fiber to make appropriate decisions. This is fine in cases of robbery, assault and murder, but it seems to begin to break down in the increasingly-common instances of complexity. Both the prosecution and defense may call highly-educated expert witnesses who will likely disagree on matters obscure to the average person.

How do we judge? How do we decide? How do we go forward in a productive manner?

It is a matter of great import to be addressed.

Perhaps we can build a machine to make these decisions for us. We built the machines to begin with; we created the complexity. We have machines to tell us the quickest way to drive from point “A” to point “B.” We have machines to predict the weather. We have machines to move aircraft through the sky without running into each other. We have machines to diagnosis our bodies.

As a character in the old comic strip “Pogo” once said:

“We have met the enemy and he is us.”

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of A.B.C.s 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.

Sniffing out the Bad Apples, Rotten Bushels and Sour Crops

Accounting, Audit, Behavioral Forensics

 The“A.B.C.s”:

How can we distinguish them?

Sniffing out the Bad Apples, Bushels and Crops

From the first conversations of a team dedicated to understanding the human side of fraud  we collectively came to realize that there were multiple problems in the conceptualization of fraud that needed to be tackled. This team was first assembled at the Institute of Fraud Prevention of West Virginia by Dr. Sridhar Ramamoorti. Nearly simultaneously, Daven Morrison assembled his colleague Sridhar and the Group for the Advancement of Psychiatry (GAP): a group of top organizational and occupational psychiatrists. In addition to welcoming Dr. Ramamoorti’s ideas for exploration, Bethany McLean (most interesting to us as the author of “Is Enron Overpriced?”  – an article that brought down two well known organizations) was invited as well. It was with this group of psychiatrists, a business journalist, and a Governance Partner of an Accounting firm in White Plaines where we recognized how “deaf” the ears of senior leaders are to considering fraud – despite the odds that it could happen again.

One of the most pernicious aspects of fraud is how it can creep up on people. They buy into a corporate culture, and stop asking the bigger questions of right and wrong.

Bethany McLean

Author of: Shaky Ground,The Devils are all Here Now, and The Smartest Guys in the Room

 

Of the factors leading to missing larger organizational dynamics that reinforce fraud, perhaps most alarmingly is the actual legal definition of fraud that limits it to “one person”[1]. The law profession itself thus limits how fraud is framed. Clearly the Enron case included multiple guilty parties, and there are others exposed in the headlines everyday: from Madoff to FIFA, to Volkswagen and salmonella poisoned peanut butter – entire systems of people participate in fraud. It moves from a bad apple to a rotten bushel to a sour crop in our model. In fact, as described by Vic Hartman a new member of our team, when it includes the regulators and the quality inspectors (as it did with the S&P scandal) it becomes a bigger stinky mess: a “Rigged Farmer’s Market”.

 

So, in the media we have fairly clear evidence of a larger systemic problem beyond the “rogue greedy trader” that characterizes many public relations messaging of larger organizations caught up in fraud and the resulting embarrassment, but, is there evidence beyond this? What if the criminals themselves were to talk? Would they provide insight?

 

Pamela Murphy Ph.D. actually did interview criminals and her research does help provide understanding to these larger organizational dynamics.

 

Using lessons learned from sociology and criminology integrated with the fact that many major frauds are too complex to be executed by a single person, Dr. Murphy’s hypothesis is recruiting to a larger group must be occurring. In addition she wanted to test and see if the organizational culture would reflect how this happens. She found three types of interpersonal bonds (in decreasing order of incidence):

  1. Self-serving bonds – “we will do this for our own needs”
  2. Organizational-Serving bonds – “we will do this to make organizational goals”
  3. Relationship first bonds – “we will do this because we care more about each other than the rules or the organizational needs = Do this because you love me”.

 

In parallel to this work, the prisoners were surveyed with an instrument designed to assess the ethical focus of the culture. Designed to tease out whether the culture was ethical or “instrumental” (complete the task by any means possible, disregarding ethics) her team found 39% noted an instrument culture. It may be that this number is actually higher assuming the criminals may already have a distorted view of what is ethical.

The notion of the lone gunman is safer for organizations.

Pamela Murphy, PhD; CPA CFE

 

What are the implications?

The research of Dr. Murphy and her team provides a light into mechanisms for the larger group dynamics that the actual fraud cases implicate are occurring.  We think that the prisoners’ motivations fit into the eight motivations we describe in our book,  A.B.C.s of Behavioral Forensics . In the research on motivations around these reversals, there is always one superior motivation. So we suspect the interviews are exposing what are the primary motivations. These basic motivations constantly reverse through out our lives between eight options. These options are each at the end of one binary choice. Specifically, Apter’s theory simplifies human motivation to four axes:

1)   Importance of Rules: do the rules matter enough to follow, or do I rebel?

2)   Others’ Fit/Purpose: Is this for my mastery or do I accept help from others

3)   What Outcomes: Is this about the journey (and play) or are we getting a task done?

4)   Who Benefits: Will this benefit me or others?

 

In work with fraud investigators (in internal risk departments of organizations as well as law enforcement) these factors of motivation are well received. The investigators have to interview people and these interviews can be awkward, lacking a place to start.  Thus, the interviewers appreciate the four axes as a way to organize motivations and get into the mind of the fraudster.  Bottom line: the model provides new trails to follow to help understand motivations beyond “greed” of the person who commits fraud.

 

And to the research of Dr. Murphy and her team, it is clear it also helps us understand those who commit fraud as part of a colluding group.

 

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of A.B.C.s 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.

 

 


[1] Black’s Law dictionary;

CORPORATE EXECUTIVE COMPLIANCE

Audit

(A NEW VIEW)

(By Joe Koletar) We frequently have a tendency to gloss over Letters to The Editor, since they are usually over-heated opinion pieces. Some of them, however, are worth our attention.

In the October 10, 2015 edition of The Economist magazine there is such a letter on page 18, titled “What VW Knew.” It was written by Andrew Morriss, Dean, Texas A&M School of Law. Dean Morriss brings a new slant to the issue of corporate and executive compliance; a view little discussed to date.

The good Dean notes that while VW has suffered the consequences of its actions with regard to emissions controls, the regulators are “…still at their desks.” Like any good attorney he sets forth the basis for his argument.

In 1998 the Environmental Protection Agency (EPA) reached a $1 billion settlement with diesel engine manufacturers over their use of technology to mask emissions performance. In essence, the same actions VW was caught using over fifteen years later. These misdeeds, he notes, were widely reported and discussed in the popular and trade media, so they were hardly a state secret. He further notes that as far back as 1994 an EPA representative was present at a meeting and described in detail how emissions readings could be “controlled.” This took place fully twenty years before the VW issue “broke.” The Dean opines that is “impossible” for any competent regulator to have been unaware of such industry practices long before the VW incident.

This raises the logical issue of why they apparently did not act. Complacency? Diverting attention to other matters of the moment? Resignation that this was just business as usual? Lack of resources? Fear of up-setting the apple cart? Who knows, but the evidence Dean Morriss presents seems clear: regulators were forewarned, but apparently did not take action of any significant magnitude for twenty years.

The Dean also asks a logical and fair question. In a period when many call for corporate
executives caught in misdeeds to face jail, should not regulators be held to at least some standards of vigilance and conduct?

It is a sad state of affairs. Where were the media; where were the legislators; where were the citizen watchdog groups; where is Ralph Nader when you need him?

All fair questions which raise the key issue: Why did it take a Law School Dean to do the job so many others could and should have done?

Thank you, Dean Morriss.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of A.B.C.s 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 BEAT GOES ON

Audit

(By Joe Koletar) It is the title of an old rock‘n roll song by Sonny and Cher. It also seems to capture today’s tone with regard to organizational misconduct. In the last six months we have seen FIFA (the international soccer federation,) VW (the car manufacturer which seems to have fiddled with emissions controls,) and now the U.N.. Yes, the United Nations, that bastion of peace, justice, and concern for the downtrodden.

The Wall Street Journal of October 7, 2015 carried the following article on page A-3:

“Bribery Case Hits the U.N.: Former General Assembly president among six people charged by U.S.”

Preet Bharara, the United States Attorney in Manhattan held a news conference to announce charges brought against John Ashe, the former leader of the General Assembly in 2013. Mr. Ashe is charged with accepting over $1 million in bribes to facilitate business relationships between Chinese businessmen and other countries. The charges announced Mr. Ashe’s activities took place from 2011 through 2014, involved others who were also charged, and also pertained to the payment of sub-bribes to others to advance the scheme. Mr. Bharara advised the investigation continues and the amount of money involved may rise.

Mr. Bharara reported details that seem to be the same old song once again – lavish lifestyle, expensive toys such as cars and jewelry, vacations….the usual stuff.

What are we to make of this? Is corruption a fact of life, which seems to grow almost weekly, or are we just more attentive to it? Have our detection strategies improved? Do we now have less tolerance for “…just the way the things are…?”

U.N. officials reacted to the announcement by Mr. Bharara by noting U. N. officials and attorneys were unaware of the investigation, adding that corruption is not “…business as usual…” within that organization.

One may well ask if the U.N. is capable of investigating itself, and it turns out it is, but to a limited extent. The U.N. group charged with such matters is limited to only looking at paid administrative and support staff, not the top level diplomats.

The Beat Goes On was a good song in its day and is still played from time to time, but it is a dismal state of affairs with regard to public and private organizational conduct. Take your favorite song of all time and play it continuously for twenty-four hours. It gets boring, doesn’t it? It becomes irritating, eh?

Anyone out there getting tired of hearing the same old song in organizational affairs?

But there is more to this sad saga; like FIFA and VW, the U.N. issues were transnational, involving a number of countries. As we have noted with regard to FIFA and VW, the United States is once again acting as the world’s watchdog. Talk about the same old song?

Here we go again.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of A.B.C.s 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.

SOCCER BALLS AND VW’S

Audit

(IS THE U.S. THE WORLD’S WATCHDOG?)

(By Joe Koletar) At first glance, soccer balls and Volkswagen (VW) automobiles do not seem to have much in common, but let us look at the two situations a bit more closely.

On September 24, 2015 the Wall Street Journal carried the following article on page A-1:

“VW CEO OUT AMID TESTING SCANDAL”

The article recounts that VW seems to have installed some software on 11.5 million diesel vehicles to make them appear to perform better on emissions tests than was the actual case. This apparently had been going on some years. The article also indicates that VW has taken an aggressive stance on addressing this issue, and has set aside a $7.2 billion “charge to earnings” to cover the anticipated cost of remediation. The company’s market value dropped 29 percent in a matter of days, per the article. This may be but part of the final cost, since the company will almost surely face on-going challenges to restore consumer confidence.

Now let us switch to soccer balls. FIFA is the ruling body of professional soccer, the most popular sport on the face of the Earth. The story of its scandal seemed to begin to break around May 2015. Top officials were under investigation for money-laundering, bribery, and various forms of corruption. Press releases were put forth, accusations and denials traded, and promises of further action began to bloom from many quarters. By this point in time, the consequences have become more apparent – charges filed, resignations tendered, “reforms” announced – all the usual stuff.

What do FIFA and VW have in common? Both were world-wide organizations. Their actions affected scores of countries. Their actions had gone on for years, with apparent immunity or, worse yet, apathy from those who should have been attentive and concerned.

Where does the United States come into in these issues? In the case of FIFA, several countries had raised questions about FIFA’s methods of operation, but relatively little came of it.

In the case of VW, their vehicles were sold in scores of countries but the faulty emission readings were either missed or not acted upon.

The common link? The United States. U.S. law enforcement and regulatory bodies saw a series of unusual financial transactions flowing through U.S. financial institutions and began to ask questions and launch investigations. So much for FIFA.

With regard to VW, the U.S. Environmental Protection Agency began to become curious about the seemingly excellent emissions performance of VW vehicles, in light of consumer complaints.

Were it not for U.S. involvement and follow-up would these misdeeds have continued into the future? Fair question, but both situations seem to have a lot in common.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of A.B.C.s 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.

You vs Bad Guys on the Web: Daven’s Seven

Accounting, Audit, Behavioral Forensics

Daven’s 7 Internet Safety Rules

7 Rules to stay safe from predatory tactics and fraud on the internet

 

As a father of social media savvy children and an author on the behavioral forensics of fraud, considering how people harm each other on the internet has been top of mind for me for several years.  From recent insights following presentations to the FBI as well as spooky hacks that have included major corporations such as SONY, people’s capacity to harm via the internet is as incredible as its ability to do good.

Perhaps the most terrifying for everyday people was the recent hacking of a Jeep while driving on the highway. Even though the hack was done with the driver’s knowledge, it came within moments of killing the driver and other drivers on the road as he was driving down the St. Louis interstate.

As Leonardo DaVinci observed: “simplicity is the ultimate sophistication”. So, in a humble attempt to make the complex simple, without oversimplifying, here are “Daven’s 7 Rules” to keep in mind relative to the dangers of the internet and those who want to harm – share with your friends and loved ones! Keep Daven’s 7 in mind as you actively and passively become more immersed into the web.

Daven’s 7 Rules for Internet Safety

An Organizational Psychiatrist’s cautions for being vigilant on the Web

  1. Tell your kids: If you can see the internet, then the internet can see you.
  2. The internet of things is good, powerful and dangerous: Beware taking the internet into the world: If things can see you and the internet sees things: the internet can see you.
  3. You in hi-res = high risk. The increasingly complex, high resolution picture of you on the net means there are more details about on you. This has implicit dangers:  The more things see you, the more complex a picture can be made of you.
  4. The more things see you the more they know what you think is important: you are what you value, and the internet knows it. These “things” can be quite personal: news sites, Google questions, your location, your calls, your texts, what you purchase: they are a laundry list of what you value. And, as many data points are also self-broadcast, they provide points and methods to access what is most personally valuable to you. Facebook knows this and sells your information to marketers. These details about you, arranged in the form of a profile, is available to not only those who want to persuade you (to sell you things or get you to join some cause) but they can also be used to play on your emotional triggers.   These are opportunities to seduce you or to extort from you. Be careful what is exposed on the web as beyond guileless marketers there are those who want to malignantly deceive. As a reminder, and as google directions say: “Take a u-turn when legal”.
  5. Remember your elders. Overtime, a human brain ages and decelerates. Simultaneously, the  internet follows Moore’s law and accelerates: this is a bad combination for all of us especially our parents and grandparents. As our brains age (and in the minds of predators, as we acquire wealth) they are less efficient at distinguishing camouflaged threats. Meanwhile technology’s capacity to mimic reality grows. The internet will grow stronger at deception while each of our skills at detecting grows weaker.
  6. Beware an emotional Siren song on the net.  The lurkers want you to get excited about easy money or getting something valuable for cheap. “Are you excited?” Excitement is a basic emotion, or affect, and this emotion is consistently refined to find easy targets and manipulate them over the internet. “Gullibility=Manipulability.”
  7. Legend of the internet trolls. Trolls are unhappy people and likely are hurting.  They are unable to see the pain in others and if they did they would likely stop – we are hard-wired to stop hurting when we see pain. Yet, so much fraud and other mischief is done without seeing the other person. These are victimless crimes in the mind of the perpetrator but not painless crimes for the victim.  In the end, there is great promise on the web, but  also, the internet bodes long term danger for human kind. In the lack of human contact people can’t see hurt, and so their brains sense no hurt, and  so there is the potential to hurt more than they may intend. And psychopaths hurt despite seeing pain in others.

 

How the values rot in a “Bad Apple”

Accounting, Audit, Behavioral Forensics

When Values Rot in the Bad Apple:

Understanding the changing of the fraudster’s mind from sweet to sour

(by Daven Morrison, with Ken Cramer*) One of the most perplexing questions in fraud prevention is how to halt the theft before it starts.   In parallel to the challenge of helping individuals and organizations not fall victim to a fraudster, another equally perplexing challenge is how to stop a nearly invisible fraudster who steals inside an organization:  silently and secretly—without detection.

For the typical fraudster who steals enough money to be financially material and is subsequently both discovered and prosecuted, a Certified Fraud Examiner is often involved. The Association of Certified Fraud Examiners (ACFE) compiles the work of the examiners and these case compilations begin to provide illumination into the trends of fraudsters.  What the ACFE study (among others) demonstrates is the average fraudster is not a “professional” criminal.  They have not committed other felonies and are not living a life of crime.  They are average people succinctly summarized as “soccer moms” and “hockey dads” by fellow blogger, Joe Koletar.  How does one stop them?  Understanding the components of one’s decision to commit fraud lies at the heart of the problem.

In our book, The ABC’s of Behavioral Forensics, we propose that these average people are reversing or switching between their motivations.  They are not ill (mentally or physically), because they commit only fraud, and do so while keeping “everything together.”  The point at which the fraudster crosses the line is as unique to them as his/her fingerprint — it’s part of the individual fraudster’s life story — but it would be instructive if one had a theory or model of how the mind switches from obeying the law to breaking it.  Fortunately there is one:  the empirically studied Theory of Reversals.

This theory begins with a foundation that a person’s mind is always in some motivational state, but that the motivation moves back and forth between four sets of opposing continuums.  Obeying rules vs. defying (or rebelling against) them is one such continuum.  Here is an example, in the form of a joke, of switching between disobeying rules and conforming:

            A visitor to Harvard is lost. He finds himself in the middle of the campus and is disoriented as to where he needs to be. He is anxious to get to his appointment on time. He sees a student and decides to ask for help . . .

Visitor: “Can you tell me where this path leads to?”

The student is silent. She stops but doesn’t look up. Visitor (louder): “Ahem, Can you tell me where this path leads to?”

 The silence persists. The visitor is becoming angry and he clears his throat again, only louder.

“CAN YOU TELL ME WH_”

“Please do not raise your voice at me. I can hear you fine.” The student replies. Then she continues: “The issue at hand is, we are educated here at Harvard to not respond to a comment that ends in a preposition. (She pauses) I am waiting for you to finish.”

“Ok, I will.” Says the visitor.

He then calmly continues: “Can you tell me where this path leads to jerkface!”.

There are times when the rules of grammar are essential and there are times when they are not. Being able to switch back and forth appropriately is an important social skill.

This summer in their biennial International Conference, the Reversal Theorists from around the world met, and I had the honor to present our ideas on Fraud and Reversal Theory. The conference was fascinating. Invited in as a colleague, I was part of discussions of presentations with topics ranging from violent felonious assault in sports to poor health compliance to college pre-party drinking as well as the factors of unprotected sex.  Many of the topics included the same perplexing problem of individuals breaking rules despite awareness of high risk to themselves.

In investigating fraud, greed is assumed to be the motivation. Reversal theory offers a refined method to consider human motivations. As we turn our attention formally to the behavioral forensics of fraud, it is clear that the motivations are more complex than “greed”. In fact, the all too common explanation of greed obstructs our understanding of the fraudster’s motivations. Perpetrators do not see themselves as greedy when they act, and thus the concept of greed as a motivation doesn’t provide any advantage towards understanding how they see themselves.

What the Reversal Theory researchers have defined is when rules are ignored, the motivation of the person is what is described as “negativistic”: a term to describe the opposite pole for conforming. Negativistic individuals are motivated to go against rules: to rebel. Rebelling can come from fairly simple dynamics of managing a life. For example, a person may rebel after fatigue of obeying rules. In Canada, this was reported in a presentation when individuals were non-compliant with good health habits. In other words, people get tired of following rules related to health.  
There are other motivations along independent lines that may nudge the fraudster or provide the impetus to end up on “the wrong side of the line”.  They may do so for a variety of other motivations: mastery among violent athletes, to be liked by others. In Reversal Theory’s model this is a switching between self and mastery motivations where being driven by sympathy is the opposite of the athlete wanting to win. In the case of fraud it could be seeking sympathy for the self or auto-sympathy, simplified as “autic-sympathy”. This was reported in the conference in situations such as a willingness to have unprotected sex. All of these studies imply places to start with fraud. 
In other words, “I committed fraud …
·      Autic-sympathy: to not incur the wrath of the senior leader
·      Fatigue: because I got tired of following the rules
·      Mastery:  to win the game (at any cost!)

So what was the feedback on fraud? Generally the response was very positive with encouragement to develop a method to formally assess the actual motivations of fraudsters using the model of Reversal Theory. This goal lies between now and the 18th Reversal Theory conference in London 2017.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of A.B.C.s 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.

Kenneth M. Cramer, Ph.D. is  a 3M National Teaching Fellow, Teaching Leadership Chair and a Professor, Dept. of Psychology at the University of Windsor, of Windsor Ontario. He coordinated, led and presented at the International Biennial Reversal Theory Conference at Niagara on the Lake this July.

“Rain-man” and the LIBOR Fraud

Accounting, Audit, Behavioral Forensics

Financial War Profiteering

Why you should care when “Rain Man” takes the fall for the Multi-billion dollar LIBOR fraud

We live in a society in which the elites have maybe more power than they’ve ever had and a greater share of the wealth than they ever had in a very long time, but its not clear they have much in a sense of an obligation to society.

Michael Lewis  – Author: Liar’s Poker

Brief But Spectacular – the PBS Newshour

(by Daven Morrison) This week a financial insider involved in the LIBOR case was sentenced to 14 years in prison for illegal manipulation of the financial markets. For those who are not familiar with this case of fraud – you are not alone, of all the frauds I mention in lectures, LIBOR is the least well-known and the most confusing.

LIBOR is an acronym for London InterBank Offered Rate, which for non-interest rate wonks (which is likely close to 99% of the world) is the heart of interest rates around the world. This set number determines interest rates that tie to mortgages, commercial loans, inter-bank loans and loans between nations.  It is a number that is expected to be as trustworthy as the standard length of a meter, the temperature gauge of a thermometer or the weight of a kilogram. In other words if LIBOR is inaccurate than everything else that depends on LIBOR  is off – in other words the entire financial marketplace.

The amounts are stunning. By manipulating the rate, select banks were able to conceal their relative ill-health, as well as make unnatural profits to their advantage. This has ties to the average American. One estimate has noted roughly $6 billion in added interest rate payments US counties and municipalities (government) have had to pay, This is an additional 150% more than the $4 billion already paid[1]. Other estimates have put the cost of LIBOR in excess of $100 trillion. This problem is not new to myself and my coauthors. We were writing about this over two years ago in advance of the publication of A.B.C.s of Behavioral Forensics. In our text, LIBOR plays an important role in illustrating the problem of not only Bad Apples (individuals) but also Bad Crops (Industries). Our current thinking, since publishing “A.B.C.s,” is that LIBOR is an example of a Crazy Farmers’ Market (the whole system is rotten).

“This dwarfs by orders of magnitude any financial scam in the history of markets.[2]

Andrew Lo, MIT Professor of Finance

The individuals tied to LIBOR are elite. One does not graduate from a community college in the Midwest and then decide to get a job reporting and defining LIBOR. Therefore, to make an impact on the market, as was done around the crisis, and to move such large amounts of money is trusted to a select few. These are an informed and well-connected group of elite money managers in an insular profession. Therefore, to make these changes in a manner that is manipulative and intended for financial advantage likely requires some well coordinated tasks among special individuals.

(Because of my work experience as a Wall Street advisor) I know how much b-s  there is and I know how often people even in the financial world act like they know what is going on when they don’t’.

Michael Lewis  – Liar’s Poker

Brief But Spectacular – the PBS Newshour

 

Thomas Alexander William Hayes was one. Who was he? A recent article about his sentence was published this month in the Wall Street Journal

“Mr. Hayes, a mildly autistic mathematician whose quirky personality earned him the nickname “Rain Man” among colleagues…”[3]

As in the movie, Rain Man, it is likely that he did not work alone. He would be relatively shy, likely mathematically brilliant and also relatively easy to manipulate. Individuals on the autistic spectrum are at a particular risk of bullying. Biologically wired to not be comfortable with affect (emotion), it would be straightforward to stare down someone with autistic traits, and quite difficult for that person to stand up to someone who takes an aggressive stance with him or her.  But that does not mean an autistic man would not understand what was going on.

“I was very, very, very open, very transparent” about his tactics as a trader, Mr. Hayes said on July 10, his voice quavering. “All my managers knew. I had no reason to think that it was wrong.”[4]

This case is particularly revealing about how justice is dealt in the modern era. It has overtones of a fraternity that cheats at all opportunities and at all costs while presenting a face of angelic “best and brightest”. But when caught, the fraternity turns on its weakest member to take the fall. As Tom Cruise’s character did in the original move, the “Rain man” is merely a tool to be manipulated for easy money.

“Everyone’s talking about honesty and dishonesty and what did you think and what was your state of mind, but you know what? At the time I didn’t think about any of it. I didn’t think about whether this was right or wrong. And people go to work every day on the train or on their bike or however they get there, and they go to work and they do a job. And they don’t sit and think, ‘Is doing my job honest or dishonest?’ They do their job.”[5]

This breaks the mold of the common thinking about fraud. Legal definitions of fraud define it as one person[6] when we know that is not always the case. In the case of LIBOR it is very likely not true that it is one “bad apple”. We think it is very likely a bad crop (the entire industry), and potentially even a bad Farmer’s Market. If Mr. Hayes is the only one who goes to prison, this would be a miscarriage of justice.

According to the Senior Editor of A.B.C.s of Behavioral Forensics, Sridhar Ramamoorti, there is evidence of serious problems in this case. According to Dr. Ramamoorti: “Obviously, it appears there is no ‘ethical sensitivity’ at all, and in a highly competitive environment, and a ‘whatever it takes’ mentality, ethics must be sacrificed in order to succeed and win.  After all, by definition, ‘a hyperactive trader’, if he is a predatory fraudster, it is his job to commit fraud not to think like a philosopher and ponder over whether his actions are ‘right or wrong!’ “

Given the fact that LIBOR is the universal metric used to set standards for interest rates around the globe, and given the fact that it more than doubled the cost to the local and national government of the U.S. to service loans illegally rigged, LIBOR is not a fraudulent scam to forgive and forget. It is a sign that yet again the scale of fraud can scale to incredulous sums. Truly mind-boggling.

And, the ABC model bears critical relevance as it exposes that we are all in trouble when it is not one predatory fraudster but an entire industry (banking) that turns predatory with sinister dispassion.

“Burn baby, burn!

Enron Energy traders upon learning that wildfires would raise the cost of electricity to impoverishing rates to Californians and lead Enron to daily profits in the millions

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of A.B.C.s 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.

[1] Darrell Preston (10 October 2012) “Rigged Libor costs states, localities $6 billion” Bloomberg

[2] The LIBOR Scandal Explained”. Accounting Degree. Retrieved 17 July 2012.

[3] The Wall Street Journal; Aug 3, 2015; “Former Trader Tom Hayes Sentenced to 14 Years for Libor Rigging”; Enrich, David

[4] Ibid

[5] Ibid

[6] Black’s Law Dictionary

WHISTLEBLOWERS – FACT AND FICTION

Audit

(By Joe Koletar) Whistleblowers have, to many, achieved an aura of James Bondesque mystic. The lone wolf, privy to sensitive information, who shrugs off risk. The lone voice in the wilderness, borne on the wings of truth and justice, who navigates the reefs and shoals put up by the opposition, to arrive at the shores of recognition and reward. (OK, no lethal gadgets or beautiful assassins now in thrall of the fearless hero, but the basic idea is the same,)

Were that always true. Numerous studies have shown over the years the typical fate of most whistleblowers is termination, joblessness, social isolation, alcohol and drug use, divorce, and sometimes suicide. A recent column in The CPA Journal, June 2015, page 5 may help illustrate this point.

Tony Menendez was a CPA employed by Haliburton, a major oil field services company. In the course of his duties Memendez discovered that revenue recognition practices were contrary to accepted accounting practices. He spent months trying to bring this to the attention of his superiors. Eventually even senior executives accepted his position, but the accounting practices which enhanced the company’s balance sheet, continued. This was in 2005, often referred to as the “Enron” era. Frustrated by corporate inaction, Menendez filed a confidential report with the SEC that same year.

The company immediately struck back (it appears it learned of the SEC contact,) and identified him to many of his co-workers. Per the CPA Journal article, this was in conflict with not only the provisions of the Sarbanes-Oxley Act of 2002, but also contrary to Haliburton’s own policies.

Let us return to Mr., Bond. Did Menendez receive praise, perhaps a note from the Queen, and the pleasure of the beautiful assassins for years to come?

Not quite. After nearly a decade of legal battles Menendez was awarded $30,000 by the courts. That works out to roughly $3,300 a year, or about $.1.65 an hour, based on a 2000-hour work year.

Should his experience be seen as a warning to keep your mouth shut? Hopefully, no. Consistent statistics compiled by the Association of Fraud Examiners indicate that tips, usually anonymous, are the single most effective means of discovering organizational fraud.

Is there a moral to the story? Yes, do it because it the right thing to do, especially if you have a professional obligation to do so. If you want to go for the money, that is fine, but prepared to wait.

Copyright 2015
Joseph W. Koletar

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of A.B.C.s 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.

CORRUPTION: BRAZIL 10, U.S. 2?

Audit

(By Joe Koletar) Or, to paraphrase an old TV host, “Now, for a really BIG show…”

Is this an example of a really big, and corrupt, Farmer’s Market?

The Wall Street Journal of April 7, 2015 carried the following Page One article:

“Brazil Cracks Open Vast Bribery Scandal,” by Will Connors and Luciana Magalhaes.

The article indicates that a man named Paulo Roberto Costa, a former oil executive, had a problem, but had been able to successfully stall and evade it for a significant period… until prosecutors began to go after his family for potential evidence tampering. Then the game changed. Facing six stern prosecutors in a small office, he began to talk, and talk he did. He talked of money generated through inflated invoices, of money-laundering to hide that money, and of bribes paid to politicians and regulators. All told, hundreds of millions of dollars.

Mr. Costa not only gave evidence to Brazilian prosecutors, but also to Brazil’s Congress. A public uproar resulted, much like what in the U.S. we could call “Costagate.” Others may well come forward, to help themselves by belatedly confessing their sins, and seeking refuge among the company of angels. It happens all the time, in the U.S. and abroad.

One hopes the prosecutors are young, since they have a long road ahead of them, particularly when high-priced lawyers become involved, as they always do. Negotiations will take place, deals will be made, and the dance will continue. But this begs the essential issue – why did the hundreds who had to know what was going on not come forward? Perhaps a few did, and were ignored or silenced. (Costa only came forward when he thought his family was in danger.)

More recently, the Speaker of Brazil’s House announced he is splitting with President Dilma Rousseff’s government for dragging him into the corruption probe at Petrobras, Brazil’s state-controlled petroleum company. This speaks to a poisonous political and business environment in that nation.

We seem to never learn the lessons of the past. In my generation we sought to free the people of South Vietnam (SVN) from a corrupt government and an external threat. Actually, the two were closely intertwined. We won the war militarily, but could not teach, or force, the people of SVN to be free, although we did try to win their “hearts and minds.” We have been doing it now for over a decade in the Middle East, and one dictator seems to replace the previous dictator.

How do we succeed? Armed revolution is not the answer, but neither is passive acceptance. History teaches us that the only thing that seems to work – to stoke the desire of the people to be free – is the non-violent tactics of Gandhi and Martin Luther King. Those worked.

“Our lives begin to end the day we become silent about things that matter.”—Martin Luther King, Jr.

Comments are welcome.

Copyright 2015

Joseph W. Koletar

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of A.B.C.s 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.