Why You cannot Trust and then Verify
White Collar Fraud: White Collar Crime: How Criminals Exploit your Humanity is an interesting blog by Sam E. Antar "the former CFO of Crazy Eddie (and now a convicted felon) who helped mastermind one of the largest securities frauds uncovered in the 1980's."
"As a criminal, I considered your humanity as a weakness to be exploited in the commission of my crimes. I have often said that white collar crime is a crime of deceit and white collar criminals are artful liars.
A great President Ronald Regan once said "Trust, but verify" when dealing with Russia during the cold war. However, as a criminal I took advantage of your initial inclination to trust me. I did anything in my power from charming you to pointing out the good deeds I had done in an effort to corrode your objectivity, professional skepticism, and cynicism."
Can you "Trust, but Verify"? The problem is neatly dissected by Antar.
"As a criminal I followed Michael Corleone's philosophy all too well. We corrupted our auditor's professional skepticism by giving them extraordinarily rich consulting work in addition to their audit engagements. Today, at least under Sarbanes-Oxley accounting firms cannot engage in consulting work for the clients they audit.Our auditors felt too comfortable with us as "good, respectable human beings with high integrity." We would socialize with our auditors by having so-called "three martini lunches" and we would invite them to attend Antar family functions. They believed we were pillars in our community as we gave large amounts of money to charity and were involved in a number of good community causes."
The basic human emotion to bond can be used by a sophisticated criminal like a hammer, knife or gun - a weapon that you never see coming until the damage is done.
Consider this bit of psychological trickery, from Antar.
"When the auditors finally came to our offices to conduct field work we were all too accommodating of their desires. We knew that most of them were relatively young kids who thought their field work was boring. We engaged in a campaign of "obstruction by distraction."I instructed Crazy Eddie staff involved in the fraud to do anything to keep audit staff members from focusing on their work. They would talk about baseball, sex, or anything else in an effort to stop them from focusing on the work.
For example, if the auditors had ten weeks to complete an audit, they would be expected to complete about 10% of their field work each week. However, as a result of our "obstruction by distraction" campaign, for example, by the 8th of 10 weeks instead of having 80% of their field work completed they would have only about 25% of it done.
When people have to rush they make mistakes. They skimp over important issues such as red flags and they omit key important work in an effort to make up for lost time and complete their work. The auditors could not blame us for their lack of time. After all we were all too "accommodating" with them.
For the fiscal years 1986 and 1987 the auditors never completed key field work. For example, regarding fiscal year 1986 they failed to conduct proper sales cut-off testing and did not thoroughly review our cash balances."
Would you think that the staff at Crazy Eddie's were terrific people, or skillful obstructionists preventing an audit from taking place?
