Guest Post: Fraud Girl “Learning From Frauds, Armstrong’s Denial, & The Body Language of Deceit”

Welcome Back.

In my interview with white-collar criminal Sam Antar, Antar emphasized that distraction was one of the key elements to a criminal’s success. At Crazy Eddie, Antar made sure that the auditors saw only what he wanted them to by amusing them with lunches and small talk.

Auditors and regulators must notice these tactics and act upon the warning signs to assure that they can prevent future crimes.

I found two followup articles regarding fraud prevention that add additional insight…

#1: Financial fraud — accounting for criminals (thanks to Forensic Accounting, Fraud, and Economic Damages Blog)

In this article Antar expands on the distraction tactics he used at Crazy Eddie. He knew that the auditors were young, “fresh meat” and recognized what would distract them. He was able to assure that the auditors only looked at what he wanted them to see. It’s about twenty years later and the same issues are still arising. This raises a huge concern: accounting firms continue to utilize ineffective methods and expect to see different results.

Audits at the “Big Four” and other firms are conducted by young adults just out of college that have little to no experience. Mix a lack of experience with distractions like “cute hot females” or discussions on last night’s baseball game and you have a criminal’s paradise. As Antar noted in the interview, auditors must ask the right questions to catch criminals. This becomes increasingly difficult, however, when the auditors are young and inexperienced in the industry.

Another convicted felon, Mark Morze was also featured in the article. As the former CFO of ZZZZ Best, Morze (along with CEO Barry Minkow) was charged with committing one of the largest frauds in the 1980s. Morze claims that he was able to fool three accounting firms into believing that ZZZZ Best was profitable using “an Apple computer, a bottle of whiteout, and a desktop copier”.

Morze states that there is a “big difference between truth and accuracy”. For example, Morze’s auditors once requested to see 400 invoices from ZZZZ Best of which they would pick 20 to examine. Instead of providing them with 400 invoices (which didn’t exist anyway), Morze fabricated 20 invoices and handed them to the auditors. When the auditors pushed to see the 400 invoices they originally requested, he objected and the auditors simply complied. The 20 invoices may have been accurate with what was provided on the company’s ledger but it didn’t denote that they were automatically truthful.

With tactics similar to these, Morze and Minkow were able to con investors, auditors, and regulators into believing the company had over $50 Million in revenues when in reality $43 Million of them were bogus.

The conviction of Bernie Madoff has proven that auditors and regulators have not yet learned from past mistakes. Madoff, like Morze, created phony statements and deceived auditors while making millions in the process.

It might be time for a change in the way accounting firms do business…

#2: Signs of deception in Lance Armstrong’s denials (via FraudBytes)

Aside from observing criminal’s attempts to distract their victims, auditors and regulators can also look for verbal cues to recognize if someone is lying or being deceitful. This article tries to show how Lance Armstrong deceived the media into believing that he has never taken performance-enhancing drugs by analyzing the way he defended himself.

Paying attention to weak and strong denials, as mentioned in the article, could help auditors and regulators test the legitimacy of their client’s statements. Government agencies and other regulatory bodies are being trained to find verbal and non-verbal cues in criminal investigations.

If you’re interested in learning more about verbal and non-verbal cues, I would suggest looking into Paul Ekman’s work (mentioned much on SimoleonSense). Also, Ekman’s website has tools that will help analyze “mini facial expressions [which] occur when people are deliberately trying to eliminate any sign of how they are feeling”.

See you next week…

-Fraud Girl