(By Jack Bigelow) 60 years ago, our nation was stunned by Sputnik. The Soviet Union caught the United States by surprise when it launched the first human-made satellite. Sputnik became the trigger-title for starting an intense period of national introspection, concluding that U.S. attention to Science, Technology, Engineering, and Mathematics (now known in academic circles as STEM) was in dangerous decline. The need to beef up our STEM became a matter of national security and, we began an intense campaign to upgrade STEM programs and participation.
I’d like to suggest that we live in a parallel crisis these days—a crisis signaled by the volume of fraud cases but extending to many other modern trends as well. This time, the issue is not a deficiency in math and science; it’s a decline in our capacity and willingness to engage in critical thinking.
My definition of critical thinking is that it’s the ability and motivation to test a piece of information against reality, logic, conflicting possibilities, credibility of source, consequential risks, and integrity of process to award or deny that information its acceptance as probable fact. A technical term for it is cognitive reflection. And auditors call it “healthy skepticism.” An example: There’s an old story about two men on a train. One of them, seeing some naked-looking sheep in a field, said, “Those sheep have been sheared.” The other looked a moment longer, and then said, “They seem to be—on this side.”
—John Holt, How Children Learn
Can you think of any case of fraud where some deficiency in critical thinking was not involved? Just examine the spectrum of posts on this blog site. In some, fraudsters admit to failure to see that the expedient choice of the moment carried grave risks for them, their organizations, and their families. In others, we see where the victims of fraudsters choose to accept empty assurances and distorted promises to feed their irrational urges for money, for power, for status, and other immediate gratification. In her recent interview with The Behavioral Forensics GroupTM, best-selling researcher and author Bethany McLean notes, “The press did call the housing market, over and over again. They said that this is a bubble, this is a problem, but nobody wanted to hear it. It was the same thing with Enron, with Valeant….They didn’t want to hear it. And so I guess I would say that if you don’t want to accept blame after the fact, engage in critical thinking. There are things that are too good to be true.” Ms. McLean’s books about Enron, the near-collapse of our financial system, and Freddie Mac and Fannie Mae abound with examples of failure in critical thinking.
What this suggests is that deficiencies in critical thinking represent peril well beyond this blog site’s focus on fraud:
• Mass mood swings in our populations come from blind acceptance of demagogic blaming, empty promises, distorted assertions, and outright untruths. Those mood swings influence political and policy decisions.
• We have a growing epidemic of false news items being distributed, and they are being accepted as fact!
• The scientific community reaches for the outcomes of studies conducted with flawed protocols.
• While we are on science, a classic case of the point being made here was failure to postpone the launch of Challenger in the face of engineering advice that the temperature was too low.
• Educators are seduced by trendy patterns of educational strategy without thinking through the long-term consequences (an example: Expecting computers to teach what they cannot teach, such as critical thinking!). (Many teachers want to develop critical thinking among their students but are constrained by systemic limitations that result from deficiencies in critical thinking.)
• On Wall Street and therefore in business, long-term survival is trumped by short-term results as business performance is assessed. Think of how this affects executive decisions.
• In local governments, pension obligations bow to funding daily operations and become victimized by “loans” that are impossible to repay under current taxing structures.
• And the federal government becomes dysfunctional as “winning the battle” supercedes doing the public’s business.
Can you see where public weakness in cognitive reflection is now so widespread that its manifestations are everywhere?
But back to fraud. Our bloggers at this site point over and over again to motivators far deeper than greed at work in these many cases. There are technical terms, but my interpretation goes something like this: We allow our emotional receptors to overwhelm any questioning logic with the seductive appeal of easy answers to very complex issues. We believe an item of information—whether it be zero risk, inflated earnings, distorted value, or any other state—because we want to believe it. Not because we have subjected this information to rigorous testing of logic, experience, challenges, long-term consequential projection, “common sense,” and other forms of evaluation. Healthy skepticism begone! And then we act on our perceptions because we want to believe them and because it may be easier. Often, that action is to our detriment.
I don’t believe such behavior to indicate “stupidity.” Brilliant people can have tragically limited capacity for critical thinking. One of our bloggers here, Daven Morrison, MD, has been researching leadership qualities than can be collectively described as “judgment.” In fact, he and others have developed an instrument to measure an individual’s judgment capacity. I suspect that a major component of judgment, whether in business leadership or in public policy areas, is being able to assess information received via communication and personal perception with a critical thinking process that is executed with integrity. Can a person be brilliant and still be handicapped in judgment? I believe so. How many brilliant CEOs gave themselves permission to encourage or tolerate fraudulent activity?
What situations can you identify where critical thinking was impaired? The key is to look for bad choices leading to terrible results.
What can we do about this crisis?

BEHAVIORAL FORENSICS GROUP^TM LLC

The Behavioral Forensics Group^TM LLC is a team of professionals with vast experience in detecting fraud, understanding why it occurs, and in recommending steps to mitigate fraud incidence within the corporate workplace, particularly within higher-level (and therefore more costly to the enterprise) executives.  The fields of investigation, organizational psychiatry, accounting and behavioral forensics, and law enforcement are represented within the Behavioral Forensics Group^TM LLC.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, B4G^TM is a premier, pioneering practice in this field.

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

Behavioral & Computer Forensics: A New Interpretation of Human-Computer Interactions
(Blog Posting Part II)

(By Sri Ramamoorti and David Sems) In an earlier post at this blogsite, we noted that computers and software are, in themselves, tools of massive utility for communication and productivity. We also observed that they are empty of value and and neutrally benign when isolated from human manipulation. But technology can be a great enabler to perpetrate fraud. The recent, egregious case of Wells Fargo is instructive: employees and managers at Wells Fargo systematically created fake PIN numbers to accompany the counterfeit e-mails to push the cross-selling of multiple products to its customers. Bank employees took measures to the extreme and a consulting firm hired by Wells Fargo found that almost 1.5 million unauthorized deposit accounts were opened and unauthorized applications submitted for 565,443 credit card accounts. Beyond covering customer restitution charges, Wells Fargo Bank will pay $185 million in fines and penalties to settle what the Consumer Financial Protection Bureau calls “the widespread illegal practice of secretly opening unauthorized deposit and credit card accounts.” (CFPB Consent Order, 2016). It is quite remarkable that neither external nor internal auditors seemed to have caught whiff of this widespread scheme within the bank that led to the dismissal of 5,300 employees.
Internal controls are typically viewed as “systems and processes” devoid of the human element. We need to put the “people back into internal controls” so that we can have superior assessments of behavior/integrity risks, conflicts of interest, ethical lapses, etc. Technology is unlikely to catch fraud predicated on these types of “integrity failures.” We need a deeper understanding of “soft measures” and associated “soft controls.”
It is important for the computer forensic examiner to be both knowledgeable about technical operations of a computer, but also human behavior. Today’s “personal” devices, such as smartphones, play a significant role in connecting people’s digital lives. The exponential growth of mobile devices with incredible power at one’s finger tips makes these devices extremely connected to the human using them. People manage their entire lives based on what is on these devices. The amount of personal information stored on these devices is massive and unfathomable. From having reviewed many such devices the second author can guarantee that anyone, even if prepared for the worst, would be shocked at much of the content.
Recently, the second author was assisting law enforcement in a case where four individuals had smashed a stolen pickup truck into a gas station to “steal the ATM.” After a car chase, the police apprehended the suspects. What is interesting is that a subsequent forensic analysis of one of the apprehended suspects revealed his motivations—through his Google searches from the night before – “How much does a bank robber make?” Well, at least it appears he was doing career research to make sure it was the right choice for his future!
If one analyzes a computer just purely on looking for artifacts without the input of human behavioral considerations it could result in misinterpreted results. Computer forensic tools allow the investigator to rebuild or reconstruct what the end user was doing on the computer. The more difficult thing to do is determine “why” the user behaved in the manner demonstrated by the timeline. For instance, if the investigator sees a spike in files accessed in a folder – there are a few explanations. It could be that an anti-virus program has been executed and “touched” all the files –or it could be that the end user copied all the corporate secret files to take to their next employer. The rise in “ransomware” incidents at hospitals is a disturbing confluence of dark human behavior and the unavoidable dependence on technology.
Traditionally, computer experts and technology specialists have had a tendency to treat behavioral approaches as “fluff stuff,” and have ignored available insights—to their detriment. They have perhaps reaped the adverse effects from the “sins of quantification”—after all, everything is not simply mathematical, and subject to mathematical analysis—there are different levels of explanation, some far more cogent and helpful. As Einstein put it rather pithily, “Not everything that counts can be counted; and not everything that can be counted, counts.” We pay a heavy price for not bringing insights from the behavioral sciences to understand, and respond effectively to the fraud problem when cybercriminals’ are motivated to use technology in the planning, execution, and concealment of white collar crime. Technology may be the toolkit, but motivated people can use these tools for crime as well as productivity.
© Sri Ramamoorti & David Sems. All rights reserved.

BEHAVIORAL FORENSICS GROUP^TM LLC

The Behavioral Forensics Group^TM LLC is a team of professionals with vast experience in detecting fraud, understanding why it occurs, and in recommending steps to mitigate fraud incidence within the corporate workplace, particularly within higher-level (and therefore more costly to the enterprise) executives.  The fields of investigation, organizational psychiatry, accounting and behavioral forensics, and law enforcement are represented within the Behavioral Forensics Group^TM LLC.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, B4G^TM is a premier, pioneering practice in this field.

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

(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^TM was privileged to interview her, and has been posting the interview in installments (See Interview Part I, Interview Part II, Interview Part III). In this, the final installment, Ms. McLean comments on the role of critical thinking, how Arthur Andersen, the Enron auditor, could have missed the mischief there, and the unknowing complicity of fraud victims.
I’d like to talk about critical thinking, because I think critical thinking is somehow involved in this. I’m not exactly sure how, but if you were to measure the amount of critical thinking that occurs today versus in the 1980s, how do you think the comparison would turn out?
I have no way of measuring that, I don’t know. I do think that there is too much emphasis in today’s world on creativity and not enough emphasis on critical thinking. It’s funny—I came from a meeting this morning, totally different context, but they were talking about all the importance of creativity and all the tools to help people bring out their creativity. What I was actually thinking was, “We don’t need more creativity. What we need in writing is not creativity, it is clarity.” I think there is less value in our society on clarity, but I’m not sure. Some of that may be changing today as respect for the sciences grows again. But we definitely went through a phase when I was in college, when you didn’t have to have any classes in hard science to graduate. I’m a math major, and there is something about math and science that teaches you a very precise way of thinking and I think it’s important. And it applies to writing too. I get annoyed when things don’t hang together. It offends me.
I often think that the amount of critical thinking in this country could be a matter of national security. It could apply to the election, but I’m thinking it could also apply to Enron, to the financial crisis, how much critical thinking was involved?
Not very much. But there was very much a belief in the efficiency of the market. And that was simply Alan Greenspan’s view—that lenders wouldn’t make, and banks would not buy, securities made up of loans that people couldn’t pay back—the system just wouldn’t permit that. It was almost a religious belief in the efficiency of the market that prevented people from seeing what was actually happening on the ground, which was that people were getting loans that they couldn’t pay back. I think that’s another very interesting tension in life—between ideology, which is what you believe, and a willingness to see the facts that don’t respond to your ideology. It’s funny how people get blinded by ideology and can’t see the facts staring them in the face.
From your perspective, what do you think happened at Andersen in the Enron thing?
I think that it was micro versus macro rationalization. What I mean by that is with every transaction, people could convince themselves that they met the letter of the law, they weren’t violating the accounting standards. And so, in a very micro way, they could rationalize that they were meeting the needs of the clients and doing an OK thing. But if anybody could have stepped back and realized that they were doing thousands of these transactions a year, with all of them adding up, the financial statements are not representative of reality. And is this going to be a problem for us some day? Everybody would have sat up and said, “Oh, we can’t do this.” Does that make sense? I think it’s very easy to rationalize the micro and then not see the big picture. I think that’s a large part of what it was. And then, once you realize that growing the revenue and keeping the business is so important, you are going to do what you can to keep the business.
The rationalization I heard [at Andersen] was, if we don’t grow the business, we can’t attract the people to meet the institutional needs of the investing public.
You see, that’s very powerful, right? There’s some truth to it. There’s always some truth to the rationalizations that people use. That’s what makes them so hard. Sometimes I think that everything has these catches. I sometimes think that everything has these tensions. You want to believe that you are making the right decisions and everything all lines up perfectly, then you will feel tension-free. But if you are making decisions that limit the growth of your business, even if those decisions are right, well, there’s a cost to that, particularly in the short term.
Regarding the efficiency of the market, could we not say that there is tension between the long-term efficiency of the market and the short-term efficiency of the market? Maybe what people lost sight of was the long term efficiency of the market?
Yes, that’s probably fair. It’s funny, because most of the people who say they live by the efficiency of the market don’t actually believe in the efficiency of the market. That’s one of the things that I’m actually struck by—in every case, whether it was the executives at Enron or the people in charge of our nation’s big financial institutions, they were huge believers in the market, but as soon as the market turned against them and said, “You’re going out of business,” they said “the market’s wrong,” that the market is making a mistake. “They don’t understand our business.” I think it’s so funny, the hypocrisy. Lloyd Blankfein, at Goldman, you know, was a big proponent of the efficiency of the market, but when his firm was about to go under, did he say, “The market is speaking?” No, he did not!
One last question: What have I not asked that would be well worth thinking about?
I think that almost every story about a business gone wrong is about the complicity of the victims. The least of those who are ultimately going to pay the price. And what separates them from the perpetrators in the modern world is that they really do end up paying the price. Along the way, they don’t want to listen. They want the party to continue too. And, I think that if you were to ask one thing of people, it would be, —and this gets back to your point about critical thinking—it is to engage with things that you don’t want to hear because they aren’t in the interest of your pocket book and so you’re shutting them out. So, if you were warning out the housing market, during the bubble years, you were just assaulted by people saying, “You horrible journalists, you terrible person.” And then afterwards, people were saying, “Why didn’t you tell us?” Well, you know what, the press didn’t call it a crisis, nobody saw how these cascades of financial securities would cause the failure of the financial firms, but the press did call the housing market, over and over again. They said that this is a bubble, this is a problem, but nobody wanted to hear it. It was the same thing with Enron, with Valeant. People were doing critical pieces about Valeant, and they were just shot down, and called hacks, and people were just up in arms. They didn’t want to hear it. And so I guess I would say that if you don’t want to accept blame after the fact, engage in critical thinking. There are things that are too good to be true.

BEHAVIORAL FORENSICS GROUP^TM LLC

The Behavioral Forensics Group^TM LLC is a team of professionals with vast experience in detecting fraud, understanding why it occurs, and in recommending steps to mitigate fraud incidence within the corporate workplace, particularly within higher-level (and therefore more costly to the enterprise) executives.  The fields of investigation, organizational psychiatry, accounting and behavioral forensics, and law enforcement are represented within the Behavioral Forensics Group^TM LLC.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, B4G^TM is a premier, pioneering practice in this field.

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

(Blog Posting I)
The world isn’t run by weapons anymore, or energy, or money. It’s run by ones and zeros—little bits of data—it’s all electrons…There’s a war out there, a world war. It’s not about who has the most bullets. It’s about who controls the information—what we see and hear, how we work, what we think. It’s all about information.
–Sneakers, MCA/Universal Pictures, 1992
As surely as the future will bring new forms of technology, it will bring new forms of crime.
–Cynthia Manson & Charles Ardai (eds.) Future Crime: An Anthology of the Shape of Crime to Come
(New York: Donald I. Fine, 1992, p. ix)
(By Sri Ramamoorti and David Sems) Founded in 1993 at Carnegie-Mellon University, the Human-Computer Interaction Institute is a laboratory set up to investigate the relationship between computer technology, human activity and society. That was over 20 years ago, when computer forensics was in its infancy; e-mail messaging was fairly uncommon. As technology fueled global communications advances, and cyber-fraud became a reality, computer forensics took off. It was not until 2013, the year of publication of A.B.C.’s of Behavioral Forensics, a book so frequently mentioned in this blogsite, that the behavioral sciences, especially psychology and psychiatry, were seriously explored to understand why people commit fraud. In this and a subsequent blogpost, we will draw attention to the need for fusing the behavioral forensics and computer forensics approaches—how they feed into each other, how they can inform each other, and understand the synergistic power of an integrated perspective.
Dorrell & Gadawski (2012) define forensic accounting as “the art and science of investigating people and money.” “Computer forensics” is the use in fraud investigations of advanced technology capabilities such as key word searches, computer and data imaging, electronic evidence, link and network analysis, data mining and predictive analytics, etc. to identify incidents of fraud. Behavioral forensics parallels computer forensics by leveraging insights from the behavioral sciences to understand primarily the fraudster’s motivations, but also looks at the psychology of the victims, as well as the fraud investigators themselves. To the extent that fraud involves intent to deceive, the ecology of fraud necessarily is infused with behavioral implications throughout. However, to truly understand these behavioral elements, an important aspect of the contemporary investigative approach also involves electronic evidence gathering, for most complex white collar crimes involve technology.
In a prophetic speech by former British Prime Minister, Gordon Brown, then UK chancellor of the exchequer, on “meeting the terrorist challenge,” given to Chatham House, October 10, 2006, he asserted, “What the use of fingerprints was to the 19th century, and DNA analysis was to the 20th century, so financial information and forensic accounting has come to be one of today’s most powerful investigative and intelligence tools available in the fight against crime and terrorism.” Clearly, forensic investigations in the 21st century find computer forensics to be indispensable. Nevertheless, we must understand that computers and technology, by themselves are mere instruments. They are inert and insentient. They require human beings to use them as powerful weapons and tools to aid in the perpetration of fraud. Of course, the better the technology capabilities of a fraudster, the better use s/he can make use of it for not only committing fraud, but also concealing it. For instance, consider the recent heist of $81 million from the Central Bank of Bangladesh that involved a potential compromise of SWIFT credentials. Such sophisticated hacking of banks will likely continue in the future. After all, cybercriminals are human beings first, so the general principles of psychology must apply to them.
Fraud is very much a “human endeavor” (Ramamoorti & Olsen, 2007; Ramamoorti, 2008). Much of human behavior is influenced by emotions. Hence looking at “manipulation of emotions” is key to understanding fraudsters’ methods and tricks in deceiving victims. There is a rapidly developing literature around the science of persuasion: “that magical power to capture your audience, sway undecideds, convert opponents” (Cialdini, 2007). Even the IT field acknowledges the importance of understanding “social engineering” to get at the human element surrounding technology. And human beings have found technology to be a very helpful tool in white collar crime. More on just how that can happen in our next and final posting on this subject.
References
Dorrell, D.D. & Gadawski, G. A. (2012). Financial Forensics: Body of Knowledge. Hoboken, NJ: Wiley.
Gordon Brown’s speech on terrorism (2006). Full text can be found at http://www.theguardian.com/politics/2006/oct/10/immigrationpolicy.speeches
Ramamoorti, S, & Olsen, W (2007). Fraud: The Human Factor. Financial Executive, July/August, pp. 53-55, the professional journal of Financial Executives International (FEI).
Cialdini, Robert B. (2007). Harnessing the Science of Persuasion. In Bloomberg, December 4, 2007. http://www.bloomberg.com/news/articles/2007-12-04/harnessing-the-science-of-persuasionbusinessweek-business-news-stock-market-and-financial-advice

BEHAVIORAL FORENSICS GROUP^TM LLC

The Behavioral Forensics Group^TM LLC is a team of professionals with vast experience in detecting fraud, understanding why it occurs, and in recommending steps to mitigate fraud incidence within the corporate workplace, particularly within higher-level (and therefore more costly to the enterprise) executives.  The fields of investigation, organizational psychiatry, accounting and behavioral forensics, and law enforcement are represented within the Behavioral Forensics Group^TM LLC.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, B4G^TM is a premier, pioneering practice in this field.

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

(By Daven Morrison, MD) Everyone wants to be young rich and a Silicon Valley success.
Well, at least it seems like it. In fact, every time I turn around I see stories in the papers, on LinkedIn or on Twitter about how the Silicon Valley (or just “The Valley”) is the cool place to be. The stories are straightforward: this person’s business is founded, becomes a success and the rest of us need to sit back and bask in their brilliance. Many of the recommended readings for business are grounded simply and almost solipsistic in the argument: because they are successful, they are the gurus business leaders must follow.

The conclusions of these books seem to run a common course, and have been at times overly simplistic and repetitive in their “research”. Successful businesses, according to the generic thinking, are run by people who are:
• Tough
• Single-minded
• Inspired
• Energized
• Energizing
• Passionate
• Hard Workers
Such is the list for the typical profile of successful executives. In fact, if you dig deep enough you find they can be cool as well. In one story, they swear and hang out with cool rappers like Ben Horowitz of “The Hard Thing About Hard Things”. Celebrity, in entertainment, or sport, also glamorizes success as the ultimate panacea, and again, because they are successful they know Truth.
As you might infer, the ideas move annoyingly from solipsism to sophistry.
So if there are so many winners where are the losers? The winners of the Valley must be beating someone else to be a winner, correct? Losers, or in other terms, “venture failures” can be found, too.

One clear place for failure is Chicago. Unfortunately this is my hometown. The overall wealth, commerce, logistics (O’Hare is not just a center for human transport, but material as well) and population suggests it ought to be a cradle for new business. Yet, year after year it consistently underperforms not only New York and The Valley, but also the ventures of Pittsburgh, San Antonio, and elsewhere. And, yet the bloom may be coming off the rose of the Valley.

(Who) expects fraud in Silicon Valley?” Penny Kim, Head of Marketing, WrkRiot

A Silicon Valley Dream Collapses in Allegations of Fraud

Katie Benner New York Times, August 31, 2016

Recently, the pressure, or perhaps level of competition, reached a point where the Valley spilt out into outright fraud. Similar to the overheated engine of the CDO (Collateralized Debt Obligation) swapping of 2006-07, the new ventures’ of the Valley expectations of wealth and success have perhaps gone too far when WrkRiot was exposed as a failed business. Prior to the collapse, the firm fraudulently attempted to forge wire transfers to cover payroll and other expenses. But perhaps of more concern, as noted in the article exposing possible fraud, are the fraudulent claims the founder Isaac Choi made related to who he was and where he worked. This is an alarming red-flag of character.

They have what everyone wants, the cool new hot venture from the valley, and yet it isn’t measuring up and they take the step to committing fraud to keep the dream alive. Why? We think there are a variety of motives, and specifically more than just greed. In this case, it may be about mastery, the game, or even to do good for others – though probably not the last one in this case. They are literally on the edge of having it all, but feel empty when it remains out of reach.

Do we really know whether the losers are not doing all the same things? In my opinion they are doing the same things; and often the only differentiator is good luck. Not the self-aggrandizing narratives the “winners” create. Being able to be a person of character and the courage to do the right thing when luck turns into a headwind and not a pleasant surprise is at the heart of these stories. For understanding why the “Egos” get out of control, see our Chapter 7 (in The A.B.C’.s of Behavioral Forensics, Wiley, 2013) where we discuss charismatic leaders and their followers. In fact, the maturity of losing and missing the goal is where some think the entrepreneurs really come into their own. For the others who must have it all despite not being dealt cards for success and despite all they already have, they will move to fraud. And given the high visibility and the high threshold for what is a success— a really successful new business or launch is called a “Unicorn” because of its rarity— there are likely to be more.

BEHAVIORAL FORENSICS GROUP LLC

The Behavioral Forensics Group LLC is a team of professionals with vast experience in detecting fraud, understanding why it occurs, and in recommending steps to mitigate fraud incidence within the corporate workplace, particularly within higher-level (and therefore more costly to the enterprise) executives.  The fields of investigation, organizational psychiatry, accounting and behavioral forensics, and law enforcement are represented within the Behavioral Forensics Group LLC.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, B4G is a premier, pioneering practice in this field.

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

(By Daven Morrison, M.D.) As Joe Koletar noted in a recent blog, there is a group dynamic that has been at the heart of our “bad bushel” model since our first explorations of A.B.C. in a paper entitled: “Bringing Freud to Fraud”. The push to be always keeping up with the Jones is often more obvious to those driving through the physical neighborhood than to those that live there. As Koletar notes, this neighborhood has many forms. Some examples include the suburban country club, the private school for “perfecting children” which can be found in the suburbs or the city, or the urban “not-for profit” (quotes intended) boards. All of these are coveted and drive those of wealth and power. Perhaps, the most coveted of all is, as Steve Jobs famously joined when Apple stock skyrocketed, the “B club*”.
So hyper-competitiveness is out there, but for many, like Koletar, the question is “why”?
One of the common challenges we find in executives is being hypercompetitive. As noted in our consultations to senior executives, it is a mindset. The hypercompetitive individual is dominated by a fear of losing and energized by the desire to win, and in particular to beat down an opponent: “show no mercy”. And with this view of the world comes obvious advantages. Those who are in the way of winning are tactically approached and subordinated. Still others are forced or coerced into calculated battles where the targeted victims will lose. Yet clearly there are also disadvantages.
As noted in our book, The A.B.C.s of Behavioral Forensics, we recognize that this hyper-competitiveness likely plays a role in motivation for fraud. GAAP will not get in the way of someone determined to win at all costs. And it can feel good in the moment. But as noted in a previous post, when also fueled by greed, the “winning” is not only never questioned, but it is also never fulfilling. In fact, when driving hard the desire to not be beaten can cause the hypercompetitive person to literally snatch defeat out of the angry jaws of victory. At its core are unresolved factors in the personality that derive from a young age and once served as a healthy defense but are ineffective as adults. They relate to competition for attention and affection and an inability to resolve feelings of ambivalence.
In our experience, being hypercompetitive appears to increase in frequency in the higher organizational levels, although we have not done a study to prove this. This seems intuitive, but it’s important to remember when a person is hypercompetitive, this aspect of their personality can undermine one’s own success as well as the success of others.
*Billionaire”

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, B4G is a premier, pioneering practice in this field.

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

(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 we have posted two installments earlier at this blog site (See Installment I by clicking here; See Installment II by clicking here). In this, the third installment, Ms. McLean talks about the difference between ethical and criminal wrongdoing, how to remain ethical when surrounded by unethical influences, and the risks of rationalizing to justify choices.
When you speak before groups, what is the question that you are most frequently asked?
I would say the human nature questions, the motivators. In the wake of the financial crisis, the question that is asked in almost every event is, “Why did no one ever go to jail?”
And your answer?
My answer is that it is complicated. My answer is that there is a difference between ethical wrongdoing, something we can all look at and say, “That’s wrong,” and criminal wrongdoing. And there’s a reason for that. Our laws don’t work to throw people in prison for what we perceive as being wrong, our laws are written that there has to be criminal intent, there has to be actual rules broken. It is really difficult to prosecute people and the system we have in corporate America—I’m not sure there are better ways to set it up, but it is really screwed up.
The people at the top of a company can insulate themselves with accountants, lawyers, and chains of command, such that they can plausibly claim they don’t actually know what the people in the trenches are doing, even if their paycheck is being boosted by what those people are doing. Like Angelo Mozilo at Countrywide wasn’t prosecuted, he ended up settling with the SEC for a paltry sum. I don’t think there was any lack of desire to prosecute him; the case just wasn’t there. And yet, he was benefitting, directly, from Countrywide’s stretch for market share with all the shoddy loans he was making. You can’t have a CEO be directly responsible for the acts of all their underlings, right? That’s not a workable system. And yet the system we have—there’s something perverse. I think that’s an interesting issue. And it goes back to that question of self-delusion. If someone did what they did out of self-delusion and incompetence, that’s not necessarily criminal intent.
I do think there is a glaring—another factor in the financial crisis—there’s a glaring difference between the outcome of Enron and the outcome of the financial crisis in that in the Enron case, they did go to jail. Skilling went to jail for a long time. And to me, what happened at Enron and what happened with the financial crisis, they are not so different. It’s not like one is horrible behavior and the other is fine. They are both somewhere in the grey to black area, and yet people weren’t prosecuted in the wake of the financial crisis. For me, unfortunately, the Enron guys weren’t in the halls of power, they were these cowboys down in Texas and so the mentality was, “Get them at all costs.” And I think that in the wake of the financial crisis, the bankers were the power elite, and so they were seen as, “Well, they made mistakes, this was the perfect storm, and they were all the power structure, and so there was not the same “Go get them” mentality, as there was with the outsiders.
They “didn’t know what was going on.”
No, everybody did it, this was the thousand-year flood, you know, and that was what you heard, frequently, and so I think that’s the excuse. The bankers aren’t to blame! They were just caught up in events. You can hear the hypocrisy at work when you compare the treatment of the GSEs (Government Supported Enterprises) with that of the banks. I hear officials in the Treasury and the government say over and over again, “Well, we have to get rid of Fannie Mae and Freddie Mac because the crisis proved their business model doesn’t work.” What about the big banks? Doesn’t the crisis prove their business model doesn’t work too? How can you use that argument for one and then not use it for the other? But they don’t —because the banks are of the power structure, and Freddie and Fannie weren’t, at the end of the day. Fannie and Freddie had enough enemies that they could be thrown under the bus, whereas the banks are different.
Is the lawsuit over Fannie and Freddie over now?
No, the lawsuit, things are heating up. It’s very ugly. One of the lawsuits led to the government finally unsealing all these documents that reveal that they thought Fannie and Freddie were about to become very profitable when they changed the terms of their bailout. The lawsuits are very interesting and there are a lot of them.
You’ve become a scholar of how people dig themselves into troublesome trenches from which there are no good escapes. You document very well the influence of “the times,” “the era” or the wild and crazy environment of various excesses. Do you see an antidote for the influence of the environment?
I think there are two answers. I sometimes wonder what if, after leaving Goldman Sachs where I had been working since after college, I had been recruited by Enron, down in Houston. Would I have become a whistle-blower? Or would I have been a part of the setup? I probably would have been part of the setup. I think about it. I don’t know. So I say these things without putting myself on a moral pedestal. But I do think one thing that saves you is just if there is an inherent sense of right and wrong. During the financial crisis, there was this guy named Dave Zitting, who was a small residential mortgage lender—ran a good sized company in Arizona. He started making sub-prime loans, and he was selling them to bigger institutions like small lenders did, and the bigger institutions were saying, “Make more of these loans, come on, keep ‘em coming.” And Dave would reply, “I can’t underwrite them and make sure people can pay them back. And if people can’t pay them back, I’m not giving them the loan.” And the bigger institutions kept saying, “What’s the matter? They’re off your books, just keep them coming.” And Dave thought about it and said, “You know what? That’s wrong.” And so, in 2005, he shut down his company and stopped doing business at a huge cost to his firm, and watched as the market went crazy for the next a year and a half, but they all got caught when they all had these loans that they couldn’t sell, while he runs a successful company today. And I think that when you hear about the moral decisions that people make, there is often this moment of clarity of, “Well, that’s wrong.”
I think Valeant was another great example. All these investors ended up losing fortunes and destroying their own reputations and to me there’s a simple right and wrong about it, because this was a company that was making existing drugs that people needed to stay alive and jacking the price up and not recycling the proceeds to make the drugs better. You can justify that in all sorts of ways, you can say, “well, the insurance pays,” or “that is the value of the drug, because it saves lives,” or you can just look at it and say, “You know what? That’s wrong. I’m not going there.” I often think that these things can be very simple, and I’m not putting myself on a moral pedestal and say that I wouldn’t find a rationalization, but smart people find rationalizations and I think rationalizations can be very, very dangerous.
I think the other thing that saves people is long-term thinking. That’s such a cliché, but it’s so true. I spent an 11-hour day with Warren Buffett, for a rare positive story, and he said that the most important part of his legacy would be to have Berkshire Hathaway around in a hundred years, and so his whole orientation is to have a company that lasts. And I do think that if people thought, “How do I build this institution to be around in 50 years, or 100 years,” rather than, ”How can I make as much profit as I can today?” People would make different decisions. If people saw their legacy as one part preservation as well as one part success, I think they would make different decisions.

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, B4G is a premier, pioneering practice in this field.

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

(By Dr. Joseph W. Koletar) In matters of fraud we tend to think most often of the motives of the perpetrator. Thanks to the work of our colleague, Dr. Daven Morrison, we now also begin to explore the psychology of the victim(s.) But, one key player in the “script” of a fraud has been little addressed:

The psychology of the witness.

Few frauds are so clever that they go unnoticed, especially by those closest to them, such as subordinates. But few speak out for fear of retribution, (loss of position, scorn from friends and colleagues, real or potential profit, etc.) Indeed, early studies have shown the “whistle-blowers” often suffer greatly for their actions (substance abuse, divorce, even suicide.) Blowing the whistle is, indeed, a dark and lonely job. Yet, it seems to be the single most effective mechanism to discover fraud in its earlier stages (Reports To The Nations, Association of Certified Fraud Examiners, Austin, Texas, various years.) In fact, the sooner it’s discovered, the less the fraud costs the organization, by geometric factors.

Recent press reports indicate those few who “blew the whistle” on the Madoff matter may share in a $100 M. bounty. Such “reward” systems are not new: they date back to the False Claims Act of the Civil War Era. (Lincoln had enough assaults on the organization he was running, so he made changes with the law.) The IRS has had such a program for decades.

We usually try to address such issues by calls to the higher instincts of others – principle, responsibility, ethics, etc. But great sermons most often come from the safety of the pulpit. How many of us in our business or professional lives have sat silent when we believed we had evidence of misdeeds by those in power? (The author includes himself.)

What, then, are we to do?

Will the base element of profit encourage more effective disclosure? It is a complex and vexing question. The intelligence service (Stasi) of the East German Democratic Republic (a farcical use of words) is now believed to have used paid informants to such a degree that perhaps 20 percent of the population was informing on the other 80 percent (children included.)

Do we wish to become a nation of paid moral prostitutes? Virtue, in theory, is supposed to exist solely for its own sake (batteries not included.) Do we now buy “virtue”, allowing third parties to passively manage this precious resource?”.  Is this a reasonable, necessary, and effective, “deal with the devil?”  This was discussed in a club event for students at University of Chicago’s Booth School of Business. The topic was ethics.

In the end, what the witness fears is exclusion from the herd. The quiet book keeper fears where the organization might turn on her; to be shamed and shunned by people in power and those who don’t believe her. But the long term shame is being a silent witness to an injustice. Such as remaining silent with other injustices such as sexism, cruelty to children (as in public spankings), racism, or unfair advantages granted in the workplace or playground. Those informed by their values will regret their silence more than their complicity in the moment. It is the shame of Nazi Germany and Jim Crow Southern U.S.. The power of knowing it is wrong is strong and actually hard to ignore. In our book, A.B.C.s of Behavioral Forensics (Wiley, 2013), we highlight that thought with research in primates (see this link). So, for the witnesses, they are likely to experience truly ambivalent feelings: Strong desires to act in opposite ways: “ambi,” “valent.”

The material above is not an injunctive, a call for action, or a “sermon from the safety of the pulpit.”

It is a suggestion for thought and contemplation on an old and vexing problem.

We welcome your comments.

© 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) It is perhaps the oldest question in the world: A child asking a parent, “Why is the sky blue?”

As adults, in the world of governmental and corporate affairs, we ask our own version of that simple question: “Why did they do it?” Think of Madoff, Skilling, and so many others – rich, powerful, praised and recognized, but resorting to deceit. Why?

The question bedevils us. It makes no sense. It defies logic, but we make a mistake. We try to apply logic to human affairs. That, largely, is folly. There is, to be sure, logic there, but is not readily apparent unless we study the human mind.

To rise to a position of power you are, by definition, a competitive person. Others want what you want. Once in the position of power, the point of reference becomes horizontal rather than vertical. “How do I stack up against the competition?”

The noted psychiatrist Donald L. Nathanson (Shame and Pride) writes extensively about shame, perhaps the most powerful of human emotions (we usually think of love or hate.) Silvan S. Tomkins points out that humiliation is shame to the extreme. We almost always feel shame in a direct and personal sense: we have hurt someone close to us, intentionally or inadvertently. But is the equation different in the horizontal world of CEO’s and CFO’s? Do they feel shame because they hurt another, or do they feel shame because they may lose their prominence and fall to the dreaded “Number 2, or Number 3?” (Or, perhaps, in such cases, could it be humiliation?) To the victor go the spoils. The list of accolades for the losing team in the Super Bowl is markedly small.

Thus, does an imputed and self-perceived, fear of shame or humiliation drive “C” suite executives to take “extreme measures,” such as cheating? Do they cover their tracks with “save the company” rationalizations, but line their pockets in the process? Is ego the base motivation? There is “logic” to all of this, but it is grounded in the base mental motivation, with rationalization merely an instrumentality toward an end. Being “Number 1” is the goal, and being on the cover of financial magazines is the first of many trophies (plus the money.) Bethany McLean, in an interview covered elsewhere on this blogsite, gives us a good example in talking about Jeff Skilling: “…He had to engage in some of the structures that he did because he had to keep the stock price up. It would be bad for his investors to have the stock decline. It’s that rationalization that you’re doing something in service to something larger than yourself, but it is actually very self-serving because it’s your ego that can’t stand defeat.” What is more damaging to ego than the experience of shame?

If we try to understand executive misdeeds only from the perspective of investigations, lawsuits, regulatory actions, and the like, we miss the essential point; the eternal point.

Why?

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 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 posted the first part of her interview earlier. In this part, Ms. McLean discusses the role of ego and self-delusion, blended with incompetence, in fraud situations, and the “slippery slope” character of fraud she found in her research.

You’ve written about Enron, you’ve written about the Financial Crisis, and you’ve written about Freddie Mac and Fannie Mae. What have you learned about fraud and corruption in your research and thinking about these situations?
I would say that from where I started, it has been very shocking. When I first started writing about Enron, I thought it was about bad people doing bad things. You had to be a bad person to do bad things. It was people knowingly doing bad things. And I think the most amazing and interesting discovery for me is the amount of self-delusion that is involved. And often the amount of just pure incompetence that’s involved too. You hear these stories of business gone wrong, but they are often covering up the incompetence of having failed to make their businesses produce profits. And so they’ve had to engage in the shenanigans that they did. So I always think that these stories involve an odd mixture of self-delusion, rationalization, and incompetence and maybe a little bit of willful deception, but a lot less willful deception than self-delusion.
There was a lot of delusion portrayed in “The Smartest Guys….”so I heard that the uncovering of Enron started with you meeting with Skilling and asking him, “How does this company make money?”
Yeah, so I did a piece in Fortune, and I wouldn’t say it really started the unravelling. I did the piece in Fortune in early 2001, when Enron was still at the height of its power, and the title of the article was, “Is Enron Overpriced?” That’s probably the meekest title in business history and the piece got more credit than it was due. It was more a piece of financial analysis than a work of investigative reporting. I didn’t have sources inside the company—it was more a piece of financial analysis and I didn’t get at the heart of what was wrong—I guess I did get at some of the heart of what was wrong, but I would have never guessed that that the company would be bankrupt in nine months. I think we were in a naïve period in American business where the dot-coms were cracking, but the carnage wasn’t obvious yet. And the idea that a major American company could be a fraud was just—would never have occurred to me. Never would have occurred to me. More than that, the idea that the auditors and lawyers and accountants signed off on so much of what Enron did, I thought that I must be the one who is crazy to think that there’s something wrong here because the accountants and the lawyers signed off on it. And I think that the way in which the accountants and lawyers can follow the rules and say the company is following the rules, while totally violating the spirit of the rules—that would not have occurred to me. I coined the term, “legal fraud,” which is following all the rules, but violating the spirit of the laws, so the picture you create of your company’s earnings is entirely false. It is very hard to say whether you have broken the law.
The term I often use which seems to cover this is, “intellectual dishonesty.”
Yeah, that’s the same sort of thing.
In the slippery slope that descends from what appears to be minor violations of rules and standards to outright criminal behavior,—based on what you’ve seen and heard— when do innocent little white lies turn to something darker?
I think it is really hard to live this way, but I think that’s why those innocent white lies aren’t so innocent. And why rationalizations are dangerous. Because what happens is that people will cheat a little bit using the rationalization that they are doing the right thing. So, for example, when Angelo Mozilo steered Countrywide to making riskier loans, he thought, well, he had to do this, because if he didn’t, his profits would fall and his market share would fall, and the stock price would go down and his investors would be unhappy.
He did it for “the good of the cause.”
He did it for the good of the cause. And Jeff Skilling had exactly the same argument with he had to engage in some of the structures that he did because he had to keep the stock price up. It would be bad for his investors to have the stock decline. It’s that rationalization that you’re doing something in service to something larger than yourself, but it is actually very self-serving because it’s your ego that can’t stand defeat. It’s something that’s very, very, dangerous and I think a really good life lesson is that whenever you think you are doing something in service to a cause, you have to really think, “Am I? What’s in it for me?” The problem is that once you do the small transgression, then the small thing becomes something you need to cover up, and so it snowballs from there. It really can. And so, I’m not sure that there is any such thing as an innocent little white lie. That said, well, what is it if you tell your daughters not to tell their friends if their dresses look ugly! Obviously, some white lies help us all get along, but I do think in general these little transgressions are dangerous. More dangerous than you think they are at the time.
Based on your research, what do you think makes people take the risks that result in criminal or unethical behavior or behavior that is intellectually dishonest?
That’s interesting, because I think most people think it’s greed, pure and simple. And I don’t think it is greed. I think it’s ego. I think greed is a part of ego, and greed and egos are a part of our modern world, and so men, and mostly men, who measure their accomplishments and their sense of self-worth not just by whether they can put food on the table for their family, but whether the other guy is worth more than they are. And it becomes a real yardstick of self-worth and I think it’s ego, it’s not greed, it’s not that they need money to go and buy a private island, it’s the ego, it’s the way to keep score. I think that is what it is.
I just finished writing a piece about this company called, Valeant, for Vanity Fair. I don’t think Mike Pearson, the former CEO, was driven by greed; I think he was driven by his deep insecurities that made him need to be the best in the eyes of his investors. He wanted to keep achieving for them. But you can say, “Isn’t that wonderful. He wanted to achieve for his investors.” Well, no, because his sense of self was fed by that, right? It was ultimately narcissistic.
(A third and final installment of our interview with Ms. McLean will be 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: http://www.bringingfreudtofraud.com