Tag Archives: red flags

Something’s Not Right

306H

When I was just heading into my teenage years, something was not right. Not with me, but with my mother. It was unsettling for me and then miserable. It was difficult enough to be heading into my teenage years but my mother was not helping by being off.

First of all, she began to act out of character. She would come home from work and ask for a glass of water with lots of ice in it. You may not see anything wrong with that, on the face of it, but it was plenty odd because my mother never drank glasses of water with lots of ice in them. And now she wanted a glass every night. To make things even more stressful for us, each glass was closely examined and if it was not perfect – not enough ice, water somehow looked cloudy, the glass was not perfectly polished – one of us kids would have to get a new glass and make sure that it was perfect this time.

Then there was the language. My mom started using new slang. For all I know now, she may have started hanging out with a new lunch buddy and picked up some phrases from this new friend. But, along with the water, this new language mom was freaking me out. It was truly odd. But the breaking point came, for me, one Saturday morning. I was following my mother around the house and she watered and spoke to her many, many plants. This was totally in character so that gave me some comfort and was likely the reason why I was hanging about with her that morning. Then I noticed that her dress didn’t quite fit. It was tight on my mom and that was, once again, out of character for her. What was going on?

That thought was still with me as I spent time alone that afternoon. What was going on? Well, after an afternoon of pondering, I had narrowed it down to two options. Either my mother was having an affair or she had been abducted by aliens and they had left an imposter alien in her place. My two options seemed to be the only options that made sense to me at the time – I had friends at school whose parents were going through divorce. Something about our conversations made me think that divorcing parents did not act like themselves. But, if it wasn’t divorce, it could only be aliens. I blame Star Trek for getting me to believe that my mother could be abducted and a poor replica, that wasn’t quite the same size and betrayed itself with its weird speech patterns and love of ice, be left in her place. Both options were devastating for me; either way I was losing my mother and that filled me with despair. I even cried a little that afternoon.

Fortunately for my state of mind, just that week, as though she knew what was going on with me, my mother broke the news. She was pregnant (some may say I was sort of right about the alien in her body). What a relief!

It turns out that, despite all the clues that I noticed, I came to a completely wrong conclusion about what was causing the changes in my mother. Fortunately all my wrong conclusions led to was an afternoon of sadness and tears. In the work place, the consequences of taking data, red flags and other clues to incorrect conclusions can be far more costly. A classic example is that of Rita Crundwell, who defrauded the city of Dixon of over $53 million. The people who worked with her saw that she had a growing stable of quarter horses and was often traveling far and wide with these horses. They assumed that the horses paid for themselves and more and this was how she could afford to keep them. People in the horse world, who knew that horses cost more than they made, thought that she had some kind of trust fund that paid for her extravagant lifestyle. When Rita would not let anyone do her work, or even collect her mail, they thought she was being a great treasurer who diligently controlled her city’s budget. No one saw all the clues and thought she was embezzling money.

If someone was paying attention to the clues and knew how to analyze all the red flags that Rita Crundwell left in her wake, her fraud would never have lasted for the two decades that it did. If, for instance, the city had taken on the services of a forensic CPA to analyze, design and implement control systems and to help them with fraud prevention and deterrence, they may not have lost over $53 million to Crundwell.

This is an excellent reminder of how important it is to have a CPA, with experience and qualifications in financial forensics, to analyze and assess your business’s operations and finances to see what clues are there and what those clues really mean. You may notice that things are amiss, but how willing are you to accept how expensive coming to the wrong conclusion can be for you?

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Way Outside The Box

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Shock Absorber

I studied economics in college and in class we learned a lot of theories about things like supply & demand, consumption, and maximizing utility. Those lessons came with graphs and diagrams that were all very logical and pretty to look at. To know that there was an explanation for everything was both exciting and comforting. Learning that a change in the money supply would result in a provable response from the market was a powerful lesson. Everything worked just so, and followed the lines of the diagrams. The power of economics was amazing – all very logical, like a math problem (I also studied math and statistics, so I enjoyed how everything fell in place). It all made sense!

After college, I spent a few years in Zimbabwe and, during that time, I did a stint at an investment bank. I had studied various aspects of economics including micro- and macroeconomics, econometrics and neoclassical theory and so I was ready to step into my analyst position where I took market information and used it to explain and predict market activity. What I found, however, was that sometimes things worked according to the models that I created and the other times the market went rogue. When that happened I was stumped. What was wrong with the people? Why didn’t they act according to the graphs and predictions? Why weren’t they behaving in a logical manner? I wasn’t sure at times, whether to be upset with the people or with the economic theory that didn’t sufficiently warn me about the propensity of people to do what they are not supposed to do.

I left the bank to work in audit, at Deloitte. Just before I started there, an incident had occurred. A client, who was committing fraud, offered the audit manager a bribe to ignore the fraud and issue a clean audit report. When the manager refused to accept the bribe, the client tried to kill the manager. At work, my fellow employees were puzzled by this behavior – for one thing, it would have made more sense to try to bribe the audit partner, as that was who would sign off on the audit report. Was this client’s plan to kill every manager who took over the audit until he found one who was willing to not only take the bribe but also convince the audit partner that the books were fairly stated? It didn’t make sense.

I have found over the years that, unlike most of my mathematics problems, there are many incidents where human behavior does not make sense. A recent example is Scott London, a former senior KPMG partner who, although he earned a seven-figure salary, gave away insider information to his golfing buddy in exchange for a watch and jewelry that he could have bought himself and for about $50,000, cash that was small change in comparison to what he earned. He risked his career, reputation and, possibly, freedom for no good reason.

Why would he do that? It is a question that comes up just about every time a fraud is exposed. We are shocked by the lengths that people go to in order to defraud businesses and what they are willing to risk in their schemes and it is very likely that the fraudsters bank on our unwillingness to believe that anyone could do what they are doing. Often a fraud goes on for a long time because even when someone suspects that something is amiss, they cannot get their minds to go to the place the fraudster occupies. We have preconceived ideas of what a criminal is and so there are many that we don’t suspect:

  • We can’t believe that someone who has been a longtime, respected member of our community could steal from us.
  • We are stunned to discover that a friendly and fun coworker is defrauding the company.
  • In cases such as that of Rita Crundwell, the fraudster is the kind person who helps out when we are in trouble. How could that person be embezzling money?
  • The person fleecing the company could be the person who wins employee of the year awards because they put in long hours, never take vacation time and are always doing more than is expected of them.

At times, in order to see fraudulent behavior, we have to first shrug off our preconceived notions of what kind of person will commit these actions. In this way, we won’t shrug off any red flags or odd moments. Many times after a fraud is uncovered we hear people say things like:

  • He would say things sometimes and I would think maybe I heard him incorrectly;
  • I just assumed she had inherited money from a relative who had passed away;
  • When he started explaining things, he made it sound so complicated that I decided maybe I thought something was wrong because it was too difficult for me to understand.

Humans are odd creatures. We have the power of choice and sometimes that means that a person will make a choice that is absolutely illogical to you. For instance women will wear shoes that break their bones and disfigure their feet and, not only will they wear these shoes, but they will also play hundreds of dollars, sometimes thousands, for these foot-deforming shoes. For many, there is no good reason to destroy your feet in the name of cute shoes but for many others it makes enough sense for them to do it. I know this as a runner who has seen how wrecked we look at the end of a race – bleeding body parts, hobbling, missing toenails – and yet how absolutely triumphant we are. We often don’t make sense.

At times when things pop up that we don’t make sense, we need to be able to keep from thinking that the error is with us. Instead of creating explanations that make sense to us, at times it is important to step outside our boxes and open our minds to the possibility of the unimaginable. If it appears off, it may well actually be off and not be your imagination. It turns out that no one is too smart, too rich or too nice to commit fraud.

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