Speaker 1: This is Bloomberg Business Week with Carol Masser and Bloomberg
Speaker 1: Quick Takes Tim Stenovich on Bloomberg Radio, a Bloomberg opinion
Speaker 1: column caught my attention, and in it, our columnist Chris
Speaker 1: Hughes asked, after thirty years, why was KPMG still auditing
Speaker 1: Silicon Valley Bank. His point, long term client relationships are
Speaker 1: known are a known risk to audit quality, and that
Speaker 1: KPMG's your thirty year run at SVB demands a fresh
Speaker 1: look at the issue fraud accounting misses nothing new and
Speaker 1: writing about all of this with a timely book is
Speaker 1: Kelly Richmond Pope. She's professor in the School of Accountancy
Speaker 1: at A Paul University, a forensic accountant expert to her
Speaker 1: new book is Fully One Scam Stories and Secrets from
Speaker 1: the trillion dollar fraud Industry, and she joins justin me
Speaker 1: via zoom in Chicago. Kelly, good to have you here
Speaker 1: on Bloomberg Radio. You have made a study out of fraud.
Speaker 1: Why is that? I think when I was as early
Speaker 1: as I can remember, in high school, I was fascinated
Speaker 1: by why people still And there was a neighbor of
Speaker 1: mine that was a bank executive that went to federal prison,
Speaker 1: and I thought, why would someone risk at all to
Speaker 1: do this? So my interest in it really started at
Speaker 1: a very very early age, and I went on to
Speaker 1: graduate school and when I was working on my PhD,
Speaker 1: my research area was around ethics, but I was interested
Speaker 1: in fraud because I believe that that's the absence of ethics.
Speaker 1: So I say all that to say, I'm probably just
Speaker 1: a little bit nosy, and I just turned it all
Speaker 1: into something. It's like journalist, I get it, so get it,
Speaker 1: so okay, So fraud. I mean, I think about the
Speaker 1: year that was. We've talked a lot about the thorough
Speaker 1: nos fraud, the alleged fraud at FTX by Sam Bankman Freed.
Speaker 1: We're looking at three bank failures where accountants and sometimes
Speaker 1: risk officers are supposed to be watching things. I'm not
Speaker 1: saying there was fraud, but nonetheless fraud hoppens over and
Speaker 1: over again. Why well, behind every good fraud As a person,
Speaker 1: and I think people are the worst computers, so they
Speaker 1: fulfilled with errors, and so I think that we find
Speaker 1: ourselves sometimes in difficult situations. And one of the arguments
Speaker 1: that I was wanting to make in the book is
Speaker 1: that everyone doesn't steal because of greed. And I really
Speaker 1: want to be specific about saying that they are different
Speaker 1: types of perpetrators. There's different types of prey, and they're
Speaker 1: different types of whistleblowers. And so a lot of times
Speaker 1: we think that people just are greedy and they just take, take, take,
Speaker 1: and that's something that I call an intentional perpetrator. But
Speaker 1: there's this other category, these two other categories, and they
Speaker 1: are accidental perpetrators and righteous perpetrators. And they don't always
Speaker 1: engage in fraud because they just want just because they're greedy.
Speaker 1: Sometimes they just are following the boss's orders and they
Speaker 1: make a transaction or turn a blind eye to something
Speaker 1: that they know is wrong, and they're trying to help
Speaker 1: the team. That's the acci dental perpetrator. The righteous perpetrator,
Speaker 1: on the other hand, may just want to help a
Speaker 1: friend and has the power and the privilege in an
Speaker 1: organization to do that. So the argument that I make
Speaker 1: and is everyone is not your bernar madeoffs and even
Speaker 1: homes Elizabeth Holmes, I would put her and my righteous
Speaker 1: perpetrator category. Yeah, she's a perpetrator, but the reason how
Speaker 1: she started was really because she wanted to do good
Speaker 1: for the world, and so I want people to understand
Speaker 1: that there's different categories and we need to think about
Speaker 1: everyone doesn't steal because of greed. We sometimes create environments
Speaker 1: where people find themselves in very difficult situations and that
Speaker 1: can lead to fraud too. And Kelly, when you were
Speaker 1: talking about these righteous purps and you were talking about
Speaker 1: thorough Nos specifically, but you also wrote about how there's
Speaker 1: this robin Hood effect. So I'm trying to kind of
Speaker 1: wrap my mind around that how she was helping others
Speaker 1: and so can you break down how do people cheat
Speaker 1: and then start to actually rationalize that because it is
Speaker 1: hard to think about how that works. Especially if you
Speaker 1: talk to Theroodos investors, they're gonna they might be able
Speaker 1: to hold on. Okay. So one of the stories in
Speaker 1: the book is about a woman that I met doing
Speaker 1: the research. Her name is Kayla Ravello, and she was
Speaker 1: a very successful partner in the own Wall Street Wall Street,
Speaker 1: big big law firms there and what she wanted to do,
Speaker 1: or what she ended up doing, was awarding her husband
Speaker 1: or her ex husband, a contract to really help him
Speaker 1: help promote a business that he needed to start. He
Speaker 1: couldn't find a job. So she was an equity partner
Speaker 1: in the law firm. She was a well compensated person.
Speaker 1: She didn't need the money. She was trying to help
Speaker 1: her husband. So really, what I'm talking about is the
Speaker 1: initial rationalization as to how someone commits fraud. Think about
Speaker 1: Elizabeth Holmes at the very beginning. Now she evolved into
Speaker 1: something a little bit more, but at the very beginning,
Speaker 1: her intentions were really to people hate getting their blood drawn.
Speaker 1: What if I could create something that just allows for
Speaker 1: just a drop of blood to run all the tests
Speaker 1: that you possibly could use or we possibly need. That's
Speaker 1: would be a really great thing if it worked. Correct
Speaker 1: or we in agreement there, right, totally? Okay, So we're
Speaker 1: talking about the initial intentions and so thinking about specifically
Speaker 1: Kayla and other people that I've interviewed over the years.
Speaker 1: Everyone is not doing this for their own personal gain.
Speaker 1: Some people are doing this to help others. That first
Speaker 1: fraud story that I was thinking about when we first
Speaker 1: started talking, that neighbor that I was telling you about
Speaker 1: when you read the case documents about what his fraud
Speaker 1: was about, his rationalization was I wanted to help a
Speaker 1: friend whose struggle, whose business was struggling, he had a
Speaker 1: great job, he didn't need to do this, He didn't
Speaker 1: receive any personal gain. He was just trying to help
Speaker 1: a friend. And there's there's their startup. So that's the
Speaker 1: part that I'm talking about. Some people just are trying
Speaker 1: to help and they so are you saying, though, though,
Speaker 1: then we should excuse I didn't say that. Okay, okay,
Speaker 1: I didn't say we shouldn't excuse you. But what you'll
Speaker 1: notice is variability in sentencing. So if you notice, everyone
Speaker 1: that engages in fraud gets different types of sentences. Now,
Speaker 1: that depends on the judge, it depends on the jurisdiction.
Speaker 1: But what I'm thinking is a lot of it depends
Speaker 1: on their rationalization, their original intention, And so that that's
Speaker 1: what I'm pushing people to think about. So I'm not
Speaker 1: saying that we should not they should not serve time,
Speaker 1: not saying that at all, But I'm just really thinking
Speaker 1: about how it happens. How do you think about companies
Speaker 1: who may be aware of a flaw and a product
Speaker 1: and believe because they're making so much money over it,
Speaker 1: that better to deal with the litigation later, or their
Speaker 1: lawsuits later if something goes wrong because they're going to
Speaker 1: make so much more money on the front side or
Speaker 1: the initially that it doesn't really matter what they pay
Speaker 1: out later. How do you how do you think about
Speaker 1: that kind of I don't know fraud is the right word.
Speaker 1: So this is the interesting thing. What you're what you're
Speaker 1: talking about now is the prey category, the innocent bystanders
Speaker 1: that are impacted by that corporate decision. So we know
Speaker 1: that there's a company pharmaceutical companies exactly. I could go on, yeah, right,
Speaker 1: And so what's scary about us as consumers is we
Speaker 1: don't always know when those conversations are happening. And that's
Speaker 1: why you need a whistleblower in the room, somebody that
Speaker 1: will alert us when those kinds of decisions are being made.
Speaker 1: So when you think about the fraud cycle, you need everybody.
Speaker 1: You need well, you don't really need perpetrators, but you
Speaker 1: definitely need you definitely need whistleblowers because there will always
Speaker 1: be perpetrators in the mix, and there's always going to
Speaker 1: be victims, and you need the voices of whistleblowers. And
Speaker 1: even like I talk about there's different types of perpetrators,
Speaker 1: there's also different types of whistle blowers. Three types that
Speaker 1: I talk about, an accidental whistle blower, a noble whistle blower,
Speaker 1: and a vigilante whistle blower. Now, vigilante whistle blower is
Speaker 1: the category that I believe where snitch, rat, cross, tattletale,
Speaker 1: those kinds of terms come from. Because vigilante whistle blowers
Speaker 1: they don't they tell, whether it has anything to do
Speaker 1: with them or not, they are telling, and so they
Speaker 1: don't mind becoming a whistle blower. I mean, they are
Speaker 1: ready for the fight. They're almost like, bring it on,
Speaker 1: I'm ready for you. The other two categories are people
Speaker 1: that don't necessarily identify as being a whistle blower, and
Speaker 1: they're just doing their job. They stumble upon something or
Speaker 1: they turn a blind die, they step out, they don't
Speaker 1: try to blind excuse me, they don't try to blind die,
Speaker 1: and they step outside of the group and tell. And
Speaker 1: so those accidental whistle blowers and noble whistle blowers tend
Speaker 1: to tend to have a fair amount of backlash when
Speaker 1: they do what they do. What I'm arguing is you
Speaker 1: need all of them in an organization because when these
Speaker 1: companies are making decisions to say, well, what's the cost
Speaker 1: of a life if we if we change this safety protocol,
Speaker 1: it's going to cost us one hundred million dollars and
Speaker 1: the probability of something happening is one percent. Let's roll
Speaker 1: the dice and see what happens. You probably want to
Speaker 1: whistle blower in the room that's gonna let us know
Speaker 1: that's happening. Yeah, whether it's like the ultimate checks and
Speaker 1: balance system. I have to say, Kelly, on a podcast
Speaker 1: you talked about accounting is the backbone of everything. There's
Speaker 1: always a money story, and I feel that way when
Speaker 1: we talk about business stories or just anything in the world.
Speaker 1: There's always a business aspect, of market aspect of money aspect.
Speaker 1: So as fraud always about money. Oh that's a good question.
Speaker 1: I think all roads lead back to money. So if
Speaker 1: I had to say yes or no, I'm gonna say yes.
Speaker 1: Broad is about money? Okay? Ninety nine point nine percent
Speaker 1: of the time. Is it always? Though? You know you
Speaker 1: talk about the importance of accounting, and is it always
Speaker 1: if we just look at the books of something and
Speaker 1: the financials we're going to find potentially that's where we
Speaker 1: can find something wrong. Well, yes, and so one you're
Speaker 1: understanding your basic financial statements, income statement, balance sheet, statement, retainer,
Speaker 1: and a statement to cash flows. Understanding how they work
Speaker 1: together is very important. But also reading the notes to
Speaker 1: the financial statements, which many people might think are the
Speaker 1: most boring aspects of the financial statements, really tells you
Speaker 1: the story behind the numbers. So you have to think
Speaker 1: about those numbers are just one like the end of
Speaker 1: a set of behaviors. So if you read the notes,
Speaker 1: it sort of helps put those those numbers in contexts.
Speaker 1: So understanding accounting I think helps you ask really important questions.
Speaker 1: And you don't have to be a CPA. I think
Speaker 1: like an introductory accounting class can just give you some
Speaker 1: basic knowledge of understanding why would an executive want to
Speaker 1: overstate revenues and a certain period, why would an executive
Speaker 1: want to understate expenses and a certain quarter? Like why
Speaker 1: why do those behaviors happen? And if you understand like
Speaker 1: the accounting equation and you and you understand revenue minus
Speaker 1: expenses equals netting income and it makes sense if you
Speaker 1: understand the difference between our cruel accounting versus cash basis accounting,
Speaker 1: there's so much that makes sense and I think it helps,
Speaker 1: I mean, I think it helps um right, I mean, listen,
Speaker 1: you're not thinking you're not going to get an argument
Speaker 1: from us because we're so into data and understanding balance sheets.
Speaker 1: You know, in the previous segment, I kicked it off
Speaker 1: talking about a Bloomberg opinion column where our columnist Chris
Speaker 1: Hughes talks about KA KPMG, well known auditor and accounting firm,
Speaker 1: you know, auditing Silicon Valley Banks books for thirty years,
Speaker 1: and talked about long term client relationships are a known
Speaker 1: risk to audit quality. And there is something about when
Speaker 1: you've got an auditor who's been with you for a
Speaker 1: long time, right, it's in their best interests to make
Speaker 1: sure that they kind of maintain that relationship. And you
Speaker 1: do wonder if things get too friendly and cozy, is
Speaker 1: there something ripe to go wrong? Do you agree with
Speaker 1: something like that in that relationship. So I think we
Speaker 1: have to break it down a little bit further because
Speaker 1: we're talking about a firm auditing a client. But what
Speaker 1: we're what we're not realizing is there's lots of turnover
Speaker 1: in those teams, and you're you're not talking about the
Speaker 1: exact same person or the same team doing the same
Speaker 1: thing for thirty twenty years. That's not really what we're saying. Now.
Speaker 1: Is it good practice best practice to have three to
Speaker 1: five year rotation? Sure, is it less risky to have
Speaker 1: more rotation. You have new eyes sometimes bring better due
Speaker 1: diligence to the table. But I think that we are
Speaker 1: forgetting the fact that these are teams that are rotating out.
Speaker 1: You have new people that are coming in on these
Speaker 1: teams all the time. So I think we have to
Speaker 1: remember that aspect of the operational aspects of an audit team.
Speaker 1: All right, to be fair, I'm not saying anything went
Speaker 1: wrong or there was anything amiss. Oh sure, Oh no, no, no, no,
Speaker 1: no no, it was just an opinion calumnist ahead, Jess,
Speaker 1: come on back, and Kelly, you made a point in
Speaker 1: the last segment when you were talking about the role
Speaker 1: of whistle blowers. What specific advice do you have for
Speaker 1: somebody who could potentially fall into that category in the future,
Speaker 1: because it does seem like an extremely tough position to
Speaker 1: be in as far as risking your employment and what
Speaker 1: that could potentially mean for your future. I think a
Speaker 1: couple things come to mind. I think, first, do you
Speaker 1: have to think about your role in whatever the transaction
Speaker 1: or the scenario that you are reporting about, what was
Speaker 1: your role in it? What is what is your plan B?
Speaker 1: So can you exit this company? Can you? Can you
Speaker 1: find another job easily? What kind of evidence do you
Speaker 1: have to support whatever claim? And what kind of internal
Speaker 1: support do you have to support whatever claim you are
Speaker 1: about to make? But I think assessing your role in
Speaker 1: the transaction is very important because your credibility is going
Speaker 1: to be questioned. I think understanding your tenure in that
Speaker 1: whatever that organization is very important. And realize that you
Speaker 1: probably won't have a lot of supporters, but it's going
Speaker 1: to be a tough road. But a lot of people
Speaker 1: have fought the good fight and won, but it will
Speaker 1: be a tough road. An operative word being fight. I'm
Speaker 1: using that on purpose. I wanted to switch gears and
Speaker 1: point to something that you had in your book talking
Speaker 1: about your red flag list. So you talk about how
Speaker 1: never trusting anyone who doesn't like dogs, or talking about
Speaker 1: anybody who doesn't agree with Whitney Houston is the greatest
Speaker 1: singer of all time. No, she I definitely agree. Tell
Speaker 1: us why you made this list and basically just the
Speaker 1: whole point of that as far as the motivation behind it,
Speaker 1: you know, as silly as it may sound, they are
Speaker 1: red flags that really alert you to something, and that
Speaker 1: alerting you to something is what makes you dig a
Speaker 1: little deep. For example, if you have been working professionally
Speaker 1: for twenty years and you don't have a LinkedIn profile
Speaker 1: or a picture on LinkedIn, it's suspicious. I'm not saying
Speaker 1: it's fraudulent, but it's suspicious. If you still have mail
Speaker 1: directed to your parents' house and you are a working professional,
Speaker 1: it's suspicious. Again, not saying that it's fraudulent, but suspicious.
Speaker 1: If you cannot say thank you or please, it's suspicious, right,
Speaker 1: you know, thinking about if you still and some people
Speaker 1: this may be a little bit more controversy, but if
Speaker 1: you still have a Hotmail account as a little suspicious, right,
Speaker 1: Like I mean, who doesn't have a Gmail account these days?
Speaker 1: So it makes you think about cyber fraud. I mean,
Speaker 1: they're things that you just shouldn't just rush under the
Speaker 1: table or under the rug. But it's suspicious. It's just
Speaker 1: those things that we all make us, you know, and
Speaker 1: again it makes us feel uncomfortable that we've got to
Speaker 1: kind of keep o Kelly, we've got to run. But
Speaker 1: really appreciate checking in with you. Kelly Richmond Pope at
Speaker 1: DePaul University. Her book It is out today, fully one Scam,
Speaker 1: Stories and Secrets from the trillion dollars fraud industry