It’s the Most Wonderful Time of the Year… For Scammers Too

During the holiday season, many people choose to give and help others around them, but sometimes due to the spirit of giving that abounds, we tend to let our guard down. The Pittsburgh Post-Gazette recently published an article which outlines five popular scams to be sure to avoid this holiday season.

Fighting Fraud with Mathematical Weapons

According to a Wall Street Journal article, forensic accountants recently uncovered a several hundred thousand dollar fraud committed by employees at a national call center simply by “wielding mathematical weapons.” Using data analysis, they were able to identify a number of fraudulent refunds that call center employees were issuing. The find was critical to the company as it helped them discover where they were losing a lot of money.

Benford's Law

The forensic accountants who detected the fraud at the call center used a mathematical test known as Benford’s Law. Contrary to popular belief that there should be an even distribution in the starting digits of numbers, Benford’s Law says that “more numbers start with one than any other digit, followed by those that begin with two, then three, and so on,” and that “ones should account for 30% of leading digits, and each successive number should represent a progressively smaller proportion, with nines coming last, at under 5%.” In the case of the call center, the forensic team noticed an exceptionally large percentage of refund amounts where the starting digit was a four. It also happened to be that employees could issue refunds to customers up to $50 without needing additional supervision. By using Benford’s Law and investigating the transactions where the leading digit was a four, forensic accountants discovered a small number of operators at the call center “who had issued fraudulent refunds to themselves, friends and family totaling several hundred thousand dollars.”

Individuals Causing the 2008 Housing Crisis Receive No More Than a Slap on the Wrist

Following the 2008 housing crisis, several of the banks involved paid large settlement fines. JPMorgan Chase was one of those banks. The Justice Department used evidence from an anonymous whistleblower in the prosecution, but until recently the whistleblower remained anonymous. Matt Taibbi recently released an article in Rolling Stone describing why the whistleblower, Alayne Fleischmann, has gone public with what she knows. Ironically, the Justice Department wasn’t committed to bringing “justice” to those individuals who contributed to the fall of the economy through fraudulent activities. In fact, Attorney General Eric Holder said the following:

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy, and I think that is a function of the fact that some of these institutions have become too large.”

What is the Justice Department doing if they aren’t bringing justice to those responsible for major crimes? When Fleischmann realized that much of what she reported to the SEC and the Justice Department was not being fully pursued, she decided she had to go public with what she knew.

Research Study Suggests That the Culture in the Banking Industry Leads to Dishonesty

Financial Times recently printed an article about a study done by researchers at the University of Zurich which suggested that bankers have a tendency to lie for financial gain. The study used a control group and treatment group of bankers. The bankers in the control group were asked questions about their everyday life (for example, “How many hours of television do you watch per week?”). The bankers in the treatment group were asked questions relating to what they did at work as a banker. They then gave each group a coin, had them toss it ten times, and then had them self-report their results. The participants were told beforehand whether heads or tails would count as a success. If no cheating took place, the average amount of heads compared to tails should have been very close to 50/50 for each group. In the control group this was the case, but the group who had been primed with thinking about their profession as bankers reported 58.2% winning tosses. From these results, the researchers estimate that 26% of the bankers in the treatment group cheated.

Would You Break the Law for $1 Million?

A survey was recently conducted in Korea where participants were asked if they would break the law in order to gain the equivalent of $955,000 (USD). Surprisingly, nearly one in four responded that they would. The study showed that people in their twenties were even more likely to break the law for $1 million (nearly one in three respondents in their twenties said they would). If this holds true throughout the world, we could potentially see more frauds committed as the younger workforce reaches stages in their careers where they have the pressure and opportunity to commit fraud.

Check out the article in the Wall Street Journal and ask yourself the same question – would you break the law for $1 million? Hopefully the number of people who answer yes to this question gets smaller and smaller over time.

The Latest in Detecting Deception

I spend about two and a half weeks in my Fraud Examination class studying how we can detect when someone is being deceptive. I think it's a fascinating area that holds a lot of promise as one of the best things auditors could learn to utilize to detect fraud. If I was king of independent auditing for a day, I would change auditors' requirements to interview for fraud but that is the subject of a future post...

When I teach about detecting deception, I emphasize to my students that non-verbal cues are much less reliable than verbal cues. Some recent research shows that text analysis in verbal cues reveals four patterns in people who are lying. Check out the short, but informative, video below to learn more.

Lie Detector Could Help Stop Doping in Sports

They say a picture is worth a thousand words—and researchers have found a video can be worth even more. A recent article talks about research that was conducted using videos of Lance Armstrong where he denied doping, as well as the video where he finally confessed, taken from the Oprah Winfrey interview (see confession clip below). Researchers put the videos through a lie detector program to see the results.

The videos passed through the lie detector computer program and “revealed consistent patterns of behavior.” When Armstrong lied and denied allegations of doping, the computer detected patterns and revealed that Armstrong was lying. “Among the few, subtle patterns that Armstrong unwittingly repeated when lying were shaking his head, blinking and pressing his lips together.” When Armstrong confessed, the computer did not detect these same patterns.

Competitive Sports Leads to Academic Fraud at UNC

A report was recently released with findings of an investigation on academic fraud at the University of North Carolina. The report states that an office administrator, Deborah Crowder, established fake classes where students weren’t expected to do anything except submit a paper. The classes became known as “paper classes.” The investigative report revealed that “when Crowder graded the papers, she did so generously – typically with A’s or high B’s – and largely without regard to the quality of the papers.” A majority of the students enrolled in the “class” were student athletes (mainly football and basketball players) who needed a good grade to remain eligible to compete in their respective sport. Just like the frauds we have seen in cycling, competitive sports seems to have yet again created the perfect environment for fraud to occur, and it wasn’t just one person who knew about it.

Insider Trading: Employing Mob-like Tactics to Realize Tremendous Profits

An article from earlier this year on fortune.com said that “more than half of the best-known white-collar inmates… are in prison because of insider trading.” What causes people to risk being one of the next infamous white-collar inmates by committing insider trading? For most people it’s because of the unbelievably high profits. But just how profitable can insider trading be, and how do people get away with it?

Uncovering Pharmaceutical Fraud

In a previous post, I mentioned a research paper that was published in The Lancet that made claims that a certain vaccine caused autism. The idea went viral, and the amount of vaccinations decreased, which resulted in many children suffering needlessly with the measles and other preventable diseases. Claims in the paper were eventually proven false, and The Lancet retracted the paper. However, although there may not be a causal link between vaccines and autism, there does appear to be alleged fraudulent activity occurring on the side of the pharmaceutical companies to cover up and enhance the results of their vaccines.

A recent Huffington Post article discusses three court cases filed by whistleblowers against Merck, a pharmaceutical company, saying that they “fraudulently misled the government and omitted, concealed, and adulterated material information regarding the efficacy of its mumps vaccine in violation of the FCA [False Claims Act].” One of the court cases describes Merck’s misconduct as follows:

Doping in Sports and Financial Statement Fraud

I just read an interesting article titled: "Instead of punishing dirty cyclists, should we reward the clean?" The idea is to certify pro cyclists who are willing to be thoroughly tested for doping. The tests would go beyond what is currently used to look for drugs and involve many mechanisms to detect doping.

Connections Between the Big Banks and Holder's Justice Department: No Wonder There Aren't Criminal Cases

Eric Holder (from The Guardian)

A story in The Guardian discusses connections that Eric Holder and Lanny Breuer have with a law firm, Covington & Burling, that represents several big banks. The Guardian article gets key information from an NPR story including this connection between Holder and Breuer and the big banks:

How the Atlanta Teaching Scandal was Uncovered

A recent article in Business Insider shed some light on how a teaching scandal in Atlanta was uncovered. The scandal involved teachers who were changing their student’s answers on a standardized test so that their students could score higher and the school district and teacher could get better funding and bonuses. (See more about the scandal at these previous posts: Teaching by Example: Fraud in Public Schools and More on the Cheating Scandals in Public Schools.)

Don’t Get Scammed: Tips on Avoiding IRS Scam

I recently saw an email from someone who received a phone call from a woman claiming to be from the IRS. The woman claimed that she was calling because he (the person who received the call) was the target of a criminal investigation. She went on to say that he needed to give her the name of a lawyer that he wanted to represent him and that she could put him in touch with one if needed. Luckily, in large part because the woman on the phone didn’t speak very coherent English, he knew it was a scam. However, some people aren’t so lucky.