Identifying, Understanding and Fighting Fraud

Silicon Valley Bank. His point, long term client relationships are known are a known risk to audit quality, and that KPMG's your thirty year run at SVB demands a fresh look at the issue fraud accounting misses nothing new and writing about all of this with a timely book is

Kelly Richmond Pope. She's professor in the School of Accountancy at A Paul University, a forensic accountant expert to her new book is Fully One Scam Stories and Secrets from the trillion dollar fraud Industry, and she joins justin me via zoom in Chicago. Kelly, good to have you here on Bloomberg Radio. You have made a study out of fraud.

Why is that? I think when I was as early as I can remember, in high school, I was fascinated by why people still And there was a neighbor of mine that was a bank executive that went to federal prison, and I thought, why would someone risk at all to

do this? So my interest in it really started at a very very early age, and I went on to graduate school and when I was working on my PhD, my research area was around ethics, but I was interested in fraud because I believe that that's the absence of ethics. So I say all that to say, I'm probably just a little bit nosy, and I just turned it all into something. It's like journalist, I get it, so get it, so okay, So fraud. I mean, I think about the

year that was. We've talked a lot about the thorough nos fraud, the alleged fraud at FTX by Sam Bankman Freed. We're looking at three bank failures where accountants and sometimes risk officers are supposed to be watching things. I'm not saying there was fraud, but nonetheless fraud hoppens over and over again. Why well, behind every good fraud As a person, and I think people are the worst computers, so they fulfilled with errors, and so I think that we find

ourselves sometimes in difficult situations. And one of the arguments that I was wanting to make in the book is that everyone doesn't steal because of greed. And I really want to be specific about saying that they are different types of perpetrators. There's different types of prey, and they're different types of whistleblowers. And so a lot of times we think that people just are greedy and they just take, take, take,

and that's something that I call an intentional perpetrator. But there's this other category, these two other categories, and they are accidental perpetrators and righteous perpetrators. And they don't always engage in fraud because they just want just because they're greedy. Sometimes they just are following the boss's orders and they make a transaction or turn a blind eye to something that they know is wrong, and they're trying to help

the team. That's the acci dental perpetrator. The righteous perpetrator, on the other hand, may just want to help a friend and has the power and the privilege in an organization to do that. So the argument that I make and is everyone is not your bernar madeoffs and even homes Elizabeth Holmes, I would put her and my righteous

perpetrator category. Yeah, she's a perpetrator, but the reason how she started was really because she wanted to do good for the world, and so I want people to understand that there's different categories and we need to think about everyone doesn't steal because of greed. We sometimes create environments where people find themselves in very difficult situations and that

can lead to fraud too. And Kelly, when you were talking about these righteous purps and you were talking about thorough Nos specifically, but you also wrote about how there's this robin Hood effect. So I'm trying to kind of wrap my mind around that how she was helping others and so can you break down how do people cheat and then start to actually rationalize that because it is hard to think about how that works. Especially if you talk to Theroodos investors, they're gonna they might be able

to hold on. Okay. So one of the stories in the book is about a woman that I met doing the research. Her name is Kayla Ravello, and she was a very successful partner in the own Wall Street Wall Street, big big law firms there and what she wanted to do, or what she ended up doing, was awarding her husband or her ex husband, a contract to really help him help promote a business that he needed to start. He couldn't find a job. So she was an equity partner

in the law firm. She was a well compensated person. She didn't need the money. She was trying to help her husband. So really, what I'm talking about is the initial rationalization as to how someone commits fraud. Think about Elizabeth Holmes at the very beginning. Now she evolved into something a little bit more, but at the very beginning, her intentions were really to people hate getting their blood drawn.

What if I could create something that just allows for just a drop of blood to run all the tests that you possibly could use or we possibly need. That's would be a really great thing if it worked. Correct or we in agreement there, right, totally? Okay, So we're talking about the initial intentions and so thinking about specifically Kayla and other people that I've interviewed over the years. Everyone is not doing this for their own personal gain.

Some people are doing this to help others. That first fraud story that I was thinking about when we first started talking, that neighbor that I was telling you about when you read the case documents about what his fraud was about, his rationalization was I wanted to help a friend whose struggle, whose business was struggling, he had a great job, he didn't need to do this, He didn't receive any personal gain. He was just trying to help a friend. And there's there's their startup. So that's the

part that I'm talking about. Some people just are trying to help and they so are you saying, though, though, then we should excuse I didn't say that. Okay, okay, I didn't say we shouldn't excuse you. But what you'll notice is variability in sentencing. So if you notice, everyone that engages in fraud gets different types of sentences. Now, that depends on the judge, it depends on the jurisdiction.

But what I'm thinking is a lot of it depends on their rationalization, their original intention, And so that that's what I'm pushing people to think about. So I'm not saying that we should not they should not serve time, not saying that at all, But I'm just really thinking

about how it happens. How do you think about companies who may be aware of a flaw and a product and believe because they're making so much money over it, that better to deal with the litigation later, or their lawsuits later if something goes wrong because they're going to make so much more money on the front side or the initially that it doesn't really matter what they pay out later. How do you how do you think about that kind of I don't know fraud is the right word.

So this is the interesting thing. What you're what you're talking about now is the prey category, the innocent bystanders that are impacted by that corporate decision. So we know that there's a company pharmaceutical companies exactly. I could go on, yeah, right, And so what's scary about us as consumers is we don't always know when those conversations are happening. And that's why you need a whistleblower in the room, somebody that will alert us when those kinds of decisions are being made.

So when you think about the fraud cycle, you need everybody. You need well, you don't really need perpetrators, but you definitely need you definitely need whistleblowers because there will always be perpetrators in the mix, and there's always going to be victims, and you need the voices of whistleblowers. And even like I talk about there's different types of perpetrators,

there's also different types of whistle blowers. Three types that I talk about, an accidental whistle blower, a noble whistle blower, and a vigilante whistle blower. Now, vigilante whistle blower is the category that I believe where snitch, rat, cross, tattletale, those kinds of terms come from. Because vigilante whistle blowers they don't they tell, whether it has anything to do with them or not, they are telling, and so they don't mind becoming a whistle blower. I mean, they are

ready for the fight. They're almost like, bring it on, I'm ready for you. The other two categories are people that don't necessarily identify as being a whistle blower, and they're just doing their job. They stumble upon something or they turn a blind die, they step out, they don't try to blind excuse me, they don't try to blind die, and they step outside of the group and tell. And so those accidental whistle blowers and noble whistle blowers tend to tend to have a fair amount of backlash when

they do what they do. What I'm arguing is you need all of them in an organization because when these companies are making decisions to say, well, what's the cost of a life if we if we change this safety protocol, it's going to cost us one hundred million dollars and the probability of something happening is one percent. Let's roll the dice and see what happens. You probably want to whistle blower in the room that's gonna let us know

that's happening. Yeah, whether it's like the ultimate checks and balance system. I have to say, Kelly, on a podcast you talked about accounting is the backbone of everything. There's always a money story, and I feel that way when we talk about business stories or just anything in the world. There's always a business aspect, of market aspect of money aspect. So as fraud always about money. Oh that's a good question.

I think all roads lead back to money. So if I had to say yes or no, I'm gonna say yes. Broad is about money? Okay? Ninety nine point nine percent of the time. Is it always? Though? You know you talk about the importance of accounting, and is it always if we just look at the books of something and the financials we're going to find potentially that's where we

can find something wrong. Well, yes, and so one you're understanding your basic financial statements, income statement, balance sheet, statement, retainer, and a statement to cash flows. Understanding how they work together is very important. But also reading the notes to the financial statements, which many people might think are the most boring aspects of the financial statements, really tells you

the story behind the numbers. So you have to think about those numbers are just one like the end of a set of behaviors. So if you read the notes, it sort of helps put those those numbers in contexts. So understanding accounting I think helps you ask really important questions.

And you don't have to be a CPA. I think like an introductory accounting class can just give you some basic knowledge of understanding why would an executive want to overstate revenues and a certain period, why would an executive want to understate expenses and a certain quarter? Like why

why do those behaviors happen? And if you understand like the accounting equation and you and you understand revenue minus expenses equals netting income and it makes sense if you understand the difference between our cruel accounting versus cash basis accounting, there's so much that makes sense and I think it helps, I mean, I think it helps um right, I mean, listen, you're not thinking you're not going to get an argument from us because we're so into data and understanding balance sheets.

You know, in the previous segment, I kicked it off talking about a Bloomberg opinion column where our columnist Chris Hughes talks about KA KPMG, well known auditor and accounting firm, you know, auditing Silicon Valley Banks books for thirty years, and talked about long term client relationships are a known risk to audit quality. And there is something about when you've got an auditor who's been with you for a long time, right, it's in their best interests to make

sure that they kind of maintain that relationship. And you do wonder if things get too friendly and cozy, is there something ripe to go wrong? Do you agree with something like that in that relationship. So I think we have to break it down a little bit further because we're talking about a firm auditing a client. But what we're what we're not realizing is there's lots of turnover in those teams, and you're you're not talking about the exact same person or the same team doing the same

thing for thirty twenty years. That's not really what we're saying. Now. Is it good practice best practice to have three to five year rotation? Sure, is it less risky to have more rotation. You have new eyes sometimes bring better due diligence to the table. But I think that we are forgetting the fact that these are teams that are rotating out. You have new people that are coming in on these

teams all the time. So I think we have to remember that aspect of the operational aspects of an audit team. All right, to be fair, I'm not saying anything went wrong or there was anything amiss. Oh sure, Oh no, no, no, no, no no, it was just an opinion calumnist ahead, Jess, come on back, and Kelly, you made a point in the last segment when you were talking about the role

of whistle blowers. What specific advice do you have for somebody who could potentially fall into that category in the future, because it does seem like an extremely tough position to be in as far as risking your employment and what that could potentially mean for your future. I think a couple things come to mind. I think, first, do you have to think about your role in whatever the transaction or the scenario that you are reporting about, what was your role in it? What is what is your plan B?

So can you exit this company? Can you? Can you find another job easily? What kind of evidence do you have to support whatever claim? And what kind of internal support do you have to support whatever claim you are about to make? But I think assessing your role in the transaction is very important because your credibility is going to be questioned. I think understanding your tenure in that

whatever that organization is very important. And realize that you probably won't have a lot of supporters, but it's going to be a tough road. But a lot of people have fought the good fight and won, but it will be a tough road. An operative word being fight. I'm using that on purpose. I wanted to switch gears and point to something that you had in your book talking

about your red flag list. So you talk about how never trusting anyone who doesn't like dogs, or talking about anybody who doesn't agree with Whitney Houston is the greatest singer of all time. No, she I definitely agree. Tell us why you made this list and basically just the whole point of that as far as the motivation behind it, you know, as silly as it may sound, they are red flags that really alert you to something, and that alerting you to something is what makes you dig a

little deep. For example, if you have been working professionally for twenty years and you don't have a LinkedIn profile or a picture on LinkedIn, it's suspicious. I'm not saying it's fraudulent, but it's suspicious. If you still have mail directed to your parents' house and you are a working professional, it's suspicious. Again, not saying that it's fraudulent, but suspicious.

If you cannot say thank you or please, it's suspicious, right, you know, thinking about if you still and some people this may be a little bit more controversy, but if you still have a Hotmail account as a little suspicious, right, Like I mean, who doesn't have a Gmail account these days? So it makes you think about cyber fraud. I mean, they're things that you just shouldn't just rush under the

table or under the rug. But it's suspicious. It's just those things that we all make us, you know, and again it makes us feel uncomfortable that we've got to kind of keep o Kelly, we've got to run. But really appreciate checking in with you. Kelly Richmond Pope at DePaul University. Her book It is out today, fully one Scam, Stories and Secrets from the trillion dollars fraud industry