Tag Archives: Psychology

Fraud Friday: All The Queen’s Horses

It’s not too often that us auditor/fraud investigator/forensic accountant-types find ourselves in the bright light of mainstream celebrity. In a way, our entire collective professional identity is primarily as anonymous bean-counting corporate drones. We even revel in it, and use it to our advantage when trying keep an ultra-low profile during an investigation.

Really, accountants and auditors tend to only make the news when it’s BAD (here’s looking at you, Arthur Anderson). To be fair, the ACFE and their wonderfully named trade magazine, FRAUD, is full of stories of intrepid, tenacious defenders of truth, justice, and the American Way, but let’s face it: Nobody but us reads those stories.

The closest I’ve seen any frauditor-types come to mainstream celebrity is Harry Markopolous, the kick-ass CFE who unearthed the Bernie Madoff Ponzi scheme, which remains the largest confirmed Ponzi/Pyramid-type fraud scheme in world history, with estimates of up to $100-billion dollars stolen (although Mr. Markopolous insists that at least $35 billion of that figure consists of fictional profits that Madoff reported, but that never really existed). Regardless, I highly recommend Mr. Markopolous’ fantastic book about the Madoff scandal, No One Would Listen.

But now we’ve got a new contender for fraud-world celebrity, such as it is: Kelly Richmond Pope, PhD., CPA:

KRPope
Source: https://www.allthequeenshorsesfilm.com/filmmakers/

Dr. Pope, in addition to being a professor of forensic accounting, ethics and leadership, and managerial accounting at DePaul University, is a self-described “Left-handed CPA who uses filmmaking to teach people about decision-making.” I recently had a chance to attend a private showing, of her latest documentary film, All The Queen’s Horsesand it is remarkable. It may be the single best documentation of the complex psycho-social web that surrounds every fraud scheme.

You may remember the surreal headlines coming out of the sleepy small-town of Dixon, Illinois in 2012:
Crundwell Indictment Press Release
Source: FBI press release, 5/1/12

“Financial controls in Dixon were the ‘perfect storm of embezzlement,’ an expert says”
Chicago Tribune

“Woman accused of bilking $53 million from Reagan’s boyhood hometown”
Reuters

The story seems utterly banal: Small-town has poor-to-non-existent internal controls in its municipal government operations, and a long-time employee sees an opportunity for malfeasance and takes it. But this case is really something else – Rita A. Crundwell, the long-time town controller, stole AT LEAST $53 million over a period of twenty years. This from a small farming community of less than 16,000 people.

Dr. Pope began working on the film shortly after Ms. Crundwell’s arrest in 2012. Recognizing that there was a compelling story beyond just the dollar amount in this case, Pope and her production team took six years to ensure that the entire tale was told – from Rita Crundwell’s humble and quasi-idyllic childhood, all the way through arrest, indictment, and sentencing and the subsequent human, political, and economic aftermath.

I think what I found so compelling about All The Queen’s Horses was how well the film captures the emotional roller-coaster that whistleblowers find themselves on, and the ripples of fallout that affect people far beyond the primary participants in the saga.

Narrated by Dr. Pope in a crisp, entertaining style, the film intersperses dozens of interviews with experts and laypeople, politicians and taxpayers, academics and activists, while also taking an educational approach, with numerous animated info-graphics and concurrent storylines.

A key theme that emerges is that Rita Crundwell could never have pulled off the largest municipal fraud in U.S history without a number of unwitting assistants. It’s a textbook case of failure of multiple lines of defense against fraud: A bank that fails to adhere to anti-money-laundering procedures. A good-ol-boy city council that was asleep at the wheel. Dozens of colleagues, friends, and family members that never seriously questioned Rita’s expertly delivered but suspicious cover stories. And a global audit firm that failed their fiduciary duty to their client (the City of Dixon), that their shame (and liability) should be infinite. It’s all quite a tale, told in a fast-moving and entertaining 1 hour, 10-minute film that is very well-produced.

Most of all, All The Queen’s Horses serves as a vivid reminder that every entity involving humans is susceptible to fraud in all its forms. The thing I keep going back to when thinking about the film is the fundamental decency of virtually everyone in Dixon. Hard-working, honest, charitable, polite folks. The proverbial salt-of-the-earth-midwesterners that I’ve come to know and love after living in Kansas for nearly a decade. These folks trusted Rita Crundwell with their tax dollars. She stole nearly all of it, and roads, sidewalks, buildings, and other public infrastructure in Dixon steadily decayed. Kelly Richmond Pope captures the pain and betrayal that these folks feel, and their confusion and angst at realizing that it was “one of their own” that did it.

All The Queen’s Horses is available on all major streaming platforms, and has been one of the most-watched documentary films of the past two years on Netflix, iTunes, Amazon Prime Video, and Google Play.  I highly recommend taking the time to watch it and research the story and the film!


Music Recommendation: Nathaniel Rateliff & The Night Sweats, Live at Red Rocks A tasty stew of blue-eyed soul, greasy garage-band rock-n-roll, and classic R&B, along with an assist from the amazing Preservation Hall Jazz Band of New Orleans. A new favorite – highly recommended!

Food Recommendation: The short-rib griller sandwich at Q39, Kansas City Pitmaster Rob Magee’s incredible restaurants in Kansas City and Overland Park, Kansas. This thing is worth getting on an airplane for – trust me. Truly sublime. Magee’s Q39 has rapidly ascended the ultra-competitive KC BBQ ladder.

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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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