Monthly Archives: April 2018

Fraud Friday: Schrödinger’s Fraud, or How They Rationalize Cleaning Out Your Bank Account

Schrodinger's Cat Graphic

The psychology of morality – that’s a deep trench to dive into. Everyone from Tolstoy to Jay-Z has asked, in one form or another, “What does it mean to be ‘moral’?

Is morality a human behavioral trait selected by nature over thousands of generations that allows us to live in high-density social settings? Are we the only living beings that are able to identify such an abstract concept? Interestingly, it would appear not:

Do Animals Know Right From Wrong? New Clues Point to ‘yes’

I knew there was a reason I generally trust animals more than humans!

But I digress…More relevant to our discussion is the psychological landscape of white-collar criminals. By now, many, if not most people in the accounting/audit/fraud investigation are well aware of Donald Cressey’s famous and venerable Fraud Triangle:

Fraud_Triangle

Credit: Wikimedia Commons

Pressure – Opportunity – Rationalization: The three ingredients for baking a big ol’ fraud cake. This framework is now standard in most academic courses that are even tangentially fraud-related – everything from accounting and finance, to human resources and financial institution employee training. It’s common sense: give certain individuals a reason to steal, a chance to steal, and something to convince themselves that it’s okay, and you are going to be missing some assets of some sort.

Recently, however, the Cressey model is being supplanted by the Fraud Diamond concept, which adds capability as a fourth fraud dimension:

Fraud Diamond

Makes sense: In order to commit fraud, you have to be able to, you know, commit fraud.

The problem is that these models bring us no closer to answering the existential question: WHY?

In my approximately fifteen years conducting investigations, I’ve yet to come across the hypothetical Parent-Stealing-Money-To-Pay-For-Their-Child’s-Chemotherapy fraudster that we read about in the ACFE’s Fraud Examiner’s manual. But I’ve certainly come across plenty of Trusted-Employee-Cleans-Out-The-Company-Cash-Account-To-Go-To-The-Casino fraudsters. This one happened right in here in my local area:

Laura Dejong admitted that she embezzled $2,679,227 from her employer, Kansas City Screw Products Inc., from January 2003 to November 2011. Kansas City Screw Products is a family-owned and -operated metal fabrication business in Kansas City. Laura Dejong, who was employed as a secretary and bookkeeper for approximately 23 years, forged checks drawn on two company bank accounts.

According to court documents, significant gambling activity was identified for the Dejongs, totaling approximately $4.5 million from January 2002 to December 2011. The majority of the Dejongs’ gambling was at slot machines.

Records indicate that the Dejongs took at least eight cruises and spent more than $100,000 on payments for cruises, vacations, and airfare between 2005 and 2011. During the time of the embezzlement scheme, according to court documents, the Dejongs used the stolen money to purchase a 2007 Chevrolet Tahoe, a 2009 Honda Accord, a 1997 Crownline boat (20-foot fiberglass runabout), a 1997 Prestige boat trailer, a 1985 Chevrolet RV/motor-home (now a KC Chiefs party bus), a 2008 Jayco travel trailer, four Ameriprise Brokerage accounts, four Kansas Speedway season tickets (for passholder seats, parking passes, and track passes), four Kansas City Chiefs Club Level season tickets and parking passes, membership to the Chiefs Wolfpack Club (an exclusive members-only facility), and their residence.” fbi.gov

Wouldn’t we all like to have our own KC Chiefs party bus, metaphorically if not actually?

Anyhow, nobody needs all that crap. Why do we do it? And frankly, I don’t generally subscribe to the “there’s two kinds of people” worldview that so many fraud professionals have. It’s just not that simple. I’ve met enough convicted felons to realize that they’re not all evil people who only care about bringing chaos and darkness to the world through criminal activity, etc. That’s certainly NOT to say that there aren’t a small percentage of people who comprise an extremely malevolent group of sociopaths that will steal anything that’s not nailed down.

The unsatisfying answer is that just about any of us could be a victim or a perpetrator. Some people start small and find themselves getting in deeper and deeper to a fraud scheme that began as a very small “F You” to their employer, or to borrow money to pay the rent. You would be surprised how many white-collar criminals commit embezzlement in order to please their spouse/partner/boyfriend/girlfriend. It’s among the saddest things I’ve ever seen to listen to a woman in her mid-30’s talk about how her husband served her with divorce papers and took custody of her children the day before she went to federal prison after embezzling hundreds of thousands of dollars that she spent mostly on trying to keep him happy.

NPR has an excellent piece on the psychology of fraud, I recommend listening:

https://www.npr.org/2012/05/01/151764534/psychology-of-fraud-why-good-people-do-bad-things
“In general, when we think about bad behavior, we think about it being tied to character: Bad people do bad things. But that model, researchers say, is profoundly inadequate…

…Here is, she says, a common misperception that at moments like this, when people face an ethical decision, they clearly understand the choice that they are making.

“We assume that they can see the ethics and are consciously choosing not to behave ethically,” Tenbrunsel says.

This, generally speaking, is the basis of our disapproval: They knew. They chose to do wrong.

But Tenbrunsel says that we are frequently blind to the ethics of a situation.

Over the past couple of decades, psychologists have documented many different ways that our minds fail to see what is directly in front of us. They’ve come up with a concept called “bounded ethicality”: That’s the notion that cognitively, our ability to behave ethically is seriously limited, because we don’t always see the ethical big picture.

One small example: the way a decision is framed. “The way that a decision is presented to me,” says Tenbrunsel, “very much changes the way in which I view that decision, and then eventually, the decision it is that I reach.”

Essentially, Tenbrunsel argues, certain cognitive frames make us blind to the fact that we are confronting an ethical problem at all.

Tenbrunsel told us about a recent experiment that illustrates the problem. She got together two groups of people and told one to think about a business decision. The other group was instructed to think about an ethical decision. Those asked to consider a business decision generated one mental checklist; those asked to think of an ethical decision generated a different mental checklist.

Tenbrunsel next had her subjects do an unrelated task to distract them. Then she presented them with an opportunity to cheat.

Those cognitively primed to think about business behaved radically different from those who were not — no matter who they were, or what their moral upbringing had been.

“If you’re thinking about a business decision, you are significantly more likely to lie than if you were thinking from an ethical frame,” Tenbrunsel says.

According to Tenbrunsel, the business frame cognitively activates one set of goals — to be competent, to be successful; the ethics frame triggers other goals. And once you’re in, say, a business frame, you become really focused on meeting those goals, and other goals can completely fade from view.”

I too disagree with many of the outdated beliefs of the ACFE’s founders in relation to the red flags of fraud – it’s just overly simplistic to assume that every accounts payable clerk who buys a new car is embezzling. I find there to be a lot of implied sociological bias in those assumptions, some of which border on racism and misogyny.

Good people do indeed do bad things. Kind of like how Schrödinger’s mythical quantum cat can be both alive and dead at the same time.

So what can we do as preventive and detective controls to minimize the risk of fraud? We’ll address that in our next installment…


Music Recommendation: Keith Urban’s new album, Graffiti U. One of the best in the business, KU releases another well-crafted, soulful album of country-flavored music that continues to push the boundaries of the genre.


Food Recommendation: Hummus. So many ways to use chickpeas to make tasty stuff. If you haven’t tried it, you’ll like it. Recipe: https://www.bonappetit.com/test-kitchen/cooking-tips/article/best-hummus-ever

 

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Fraud Friday: Crime Pays, or Talking Animals Discuss the Finer Points of Escrow

On a tight deadline this week for a project, so no lengthy analytical post today. Rumors of impending treasonweasel activity are rampant, so I suspect the news cycle is about to heat up and bury this blog anyway. In that spirit, I’ll leave you with a classic:
Dilbert

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Fraud Friday: When Auditors Attack, or Fear & Loathing in Clay County, MO

State auditors tend to embody the excellent advice of President Teddy Roosevelt: They speak softly and carry a big stick. Most state audit shops work under a broad legislative mandate – this includes the ability to examine any and all records of state and local agencies, and this includes subpoena power, when necessary.

In practice, state audit shops rarely threaten to flex their legal muscles, and this is mostly because their legislative mandate and mission are widely understood by public policy makers and managers. When the State Auditor calls, you pick up the phone and give them what they need, so to speak. Now, there are definitely instances where an agency will dig in and try to refuse a specific records request, etc., but that almost invariably ends poorly for that agency. It’s even rarer for an agency to not only refuse to cooperate, but to also engage legal counsel to threaten legal action against the state auditor for even insinuating their intention to audit an agency. And yet, here we are…

For those unfamiliar with the greater Kansas City metropolitan area, Clay County occupies roughly the northeast quadrant of the KC metro. The county’s population is about 250,000 and growing, and it’s a fairly large county geographically, so while Clay County residents are part of a relatively bustling urban midwestern city, the county retains a rural, provincial character. This is attractive for many residents who move there seeking reasonably-priced land, good schools, an increasing number of amenities and retail options, and a sane commuting distance to almost any part of the Kansas City area.

Unfortunately, small-town living also tends to include small-town politics, and things have been getting a bit…testy…up in Clay County recently.

KC television station WDAF “Fox 4 KC” has been conducting an extensive, in-depth journalistic investigation of Clay county commissioners and numerous reports of government waste, fraud, and abuse associated with the county government. In my experience, it is unusual for a local TV news department to devote such a significant amount of resources to a local public policy matter, and I’d like to recognize the excellent reporting of Megan Dillard and the entire Problem Solvers team at Fox 4.

Last year, reports of wasteful spending and poor oversight began surfacing in Clay County. $600 coffee makers. Unexplained $5,000 cash transfers to Paypal.  The hiring of ELEVEN legal firms to conduct legal work on behalf of the county and the commissioners. Procurement card abuse by county management. Failure to follow the approval process for significant expenditures. Managers signing their own expense reimbursements. In other words, the familiar tale that we public-sector auditors too often end up investigating as fraud and turning over to law enforcement for prosecution. WDAF aired their first story about this mess on Feb. 28, 2018, and it’s a doozy:

Missouri Auditor Weighs in on Clay County’s Alleged Misuse of Taxpayer’s Money

This Northland county is facing growing public outrage after slashed budgets, salary increases for elected officials and possible misuse of taxpayer money.

Stop wasteful spending. It`s a message, a mantra, that Clay County citizens have made their battle cry. They’re frustrated by what they see as a misuse of taxpayer money, overspending, lack of internal controls and budget cuts to much-needed county departments.

‘I was just embarrassed by how our county was being run. Enough was enough,’ said Clay County resident Jason Withington. He started the petition drive along with former Clay County employee Sherry Duffett.

We’ve got everything in this story: Arrogant public employees, both elected and appointed, who resent open records requests and do everything they can to avoid accountability? Check!

Ridiculous-seeming expenses, that even if justified, still look terrible on an investigative report on television? Check!

A whistleblower putting their livelihood on the line for coming forward to resist and/or expose the avarice and greed of the villainous county employees? Check!

Clay County residents have noticed all of this alleged malfeasance and are understandably pissed off. Part of their collective response has been to start a petition drive to implore Missouri State Auditor Nicole Galloway’s office to conduct a thorough, comprehensive, non-partisan/non-political audit and investigation of the alleged waste, fraud, and abuse.

There’s a lot more to this story, and I encourage any of you who are interested in good governance and fraud investigation to view and follow the story. However, recent developments in this story have kind of blown my mind. Essentially, Clay County hired an attorney to send threatening letters to both the County Clerk AND THE STATE AUDITOR. That’s right – these local government “public servants” are insinuating that the State Auditor not only has no jurisdiction to conduct an audit or investigation of the county’s books but that even attempting to do so will result in legal action against the State Auditor herself! In addition to the letter to Galloway, the law firm also served whistleblowing Clay County Clerk Megan Thompson with a similarly-worded threatening letter in late March. Needless to say, Galloway ain’t having any of that nonsense.

Days after voicing concerns about the red flags FOX4’s investigation uncovered, Missouri State Auditor Nicole Galloway also received a threatening letter from Pearson…”It is clear there are questionable activities,” Galloway previously said of Clay County spending.

The eight-page letter she received said Galloway’s comments to FOX4 “reflect an inappropriate prejudging of issues based on far less than all the facts,” and her comments “violate the state law that defines the duties of the auditor. Frankly, the comments make clear that you and your office are now incapable of objectively performing an audit or any other activities regarding clay county,” Pearson said in his letter…

…Pearson says Galloway and her office should recuse themselves from such action, not participate in any activities in Clay County, and refer all Clay County matters to an external accounting firm. ‘”t is unfortunate that such measures are necessary to ensure an independent process that complies with state law,” Pearson wrote, “but given the comments on camera, I see no other alternative.”

Pearson gave Galloway 10 days to heed his request. “If you do not do so, Clay County, on behalf of its taxpayers, reserves all rights to take legal action to enjoin any unlawful actions,” he said.

Galloway’s office sent its own letter in which she repeated, “there are legitimate concerns” in Clay County and “citizens concerns appear to be numerous and widespread.” Galloway’s general counsel also said Pearson “mischaracterized” and took the auditor’s comments “out of context.”

“While we could speculate as to your motivations for doing so, this office takes any concern related to these matters seriously,” general counsel Paul Harper wrote.

He added that Galloway’s comments in FOX4’s story “clearly demonstrate that the auditor remains objective and has neither made any predetermined assessment of the facts nor predetermined any recommendations for a future report.”

The letter concludes, “We stand ready to assist any citizens with their concerns about how public funds are handled.” – Fox4KC

That takes some pretty big brass ones to tell a state auditor’s office that they have 10 days to stand down. Elected officials in Clay County are now backpedaling, stating that the law firm in question did not bring the letter before the County Commission for review and approval before it was sent, blah blah blah.

Plausible deniability – The provenance of weasels worldwide! I suspect there will be much more to this story going forward, and we’ll update as things develop.


Music Recommendation: All Them Witches from Nashville, TN. These guys aren’t breaking any particularly new ground, but they definitely ARE producing some groovy, stoned-out, blues-space-rock jams. I particularly dig https://open.spotify.com/embed/track/2EvUjCWg5zeaeKxGeOaHPh“>When God Comes Back, Heavy/Like A Witch, and Elk.Blood.HeartGo ahead, eat an edible or three, and trip out on these spacey sounds. Tip of the hat to my cousin-in-law (I think), Jack Vogel for turning me on to these dudes!

Food Recommendation: Look, it was just recently Easter, and holidays require, nay, they DEMAND high-quality, high-calorie sugary treats. For my (considerable) money, it’s impossible to beat See’s Candies

If they were good enough for Warren Buffet to buy the entire company after trying them, they’re good enough for your broke ass. My personal favorites in the See’s lineup: Milk/Dark Bordeaux, Toffee-ettes, and Butterscotch Squares. As Amy, my lovely & talented spouse says, “They’re just little drops of Heaven.”

Until next time, keep fighting the good fight!


 

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