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PsychologyofFraud Toby Groves. 4:09:55 p.m. Thompson: Center, Alaska two-sixty-one. We are, uh, in a dive here, and I've lost control, vertical pitch.

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Presentation on theme: "PsychologyofFraud Toby Groves. 4:09:55 p.m. Thompson: Center, Alaska two-sixty-one. We are, uh, in a dive here, and I've lost control, vertical pitch."— Presentation transcript:

1 PsychologyofFraud Toby Groves

2 4:09:55 p.m. Thompson: Center, Alaska two-sixty-one. We are, uh, in a dive here, and I've lost control, vertical pitch. 4:10:33 Thompson: Yea, we got it back under control here. 4:11:43 Tansky: Whatever we did is no good. Don't do that again... 4:11:44 Thompson: Yea, no, it went down. It went full nose down. 4:11:48 Tansky: Uh, it's a lot worse than it was? 4:11:50 Thompson: Yea. Yea. We're in much worse shape now. 4:14:12 Public address: Folks, we have had a flight-control problem up front here, we're working on it.

3 4:15:19 Flight 261 to LAX-CTR: L.A., Alaska two-sixty-one. We're with you, we're at twenty-two-five [22,500 feet]. We have a jammed stabilizer and we're maintaining altitude with difficulty... 4:15:36 LAX-CTR: Alaska two-sixty-one, L.A center. Roger, um, you're cleared to Los Angeles Airport via present position... 4:17:09 Flight attendant: Okay, we had like a big bang back there. 4:17:15 Thompson: I think the [stabilizer] trim is broke. 4:19:36 Extremely loud noise 4:19:43 Tansky: Mayday 4:19:54 Thompson: Okay, we are inverted, and now we gotta get it. 4:20:04 Thompson: Push, push, push...push the blue side

4 4:20:14 Tansky: I'm pushing. 4:20:16 Thompson: Okay, now let's kick rudder. Left rudder, left rudder. 4:20:18 Tansky: I can't reach it. 4:20:20 Thompson: Okay. Right rudder, right rudder. 4:20:25 Thompson: Are we flying? We're flying, we're flying. Tell 'em what we're doing. 4:20:33 Tansky: Oh, yeah. Let me get... 4:20:38 Thompson: Gotta get it over again. At least upside down we're flying. 4:20:54 Thompson: Speedbrakes 4:20:55 Tansky: Got it. 4:20:56 Thompson: Ah, here we go. 4:20:57 End of recording


6 Neurocriminology The Biological Link to Crime Twin and adoption studies-General support for hereditary basis for crime Landmark Study-Mednick (1984) 14,427 Non-familial adoptions analyzed Results: Biological and adoptive parents with no convictions= 13.5% of children had convictions Adoptive have convictions/Biological do not=14.7% of children had convictions Biological have convictions/Adoptive do not=20% of children had convictions Both Biological and Adoptive have convictions=24.5% of children had convictions Less than 5% of individuals were chronic offenders Indicates stronger biological influence, but that environment is factor as well. Mednick, S. (1984), Raine, A. (2013)

7 Neurocriminology The Biological Link to Crime Lower Function in Prefrontal Cortex for Murderers Limited FunctionNormal Function Raine, A. (2013)

8 Neurocriminology The Biological Link to Crime Significant findings Amygdala 18% smaller in group considered psychopaths Believed to be genetic susceptibility coupled with environmental triggers Monoamine Oxidase A (Enzyme) combined with early child abuse associated with smaller amygdala volume (emotional center of brain) Brain plasticity Early development can have profound influences on brain activity Moral decision making elicits different neural responses in psychopathic individuals Caspi, A. & Moffitt, T. (2002); Yang, Y., Schug, R. & Raine, A. (2009)

9 Psychopathy Not a diagnosable mental disorder per the American Psychiatric Association Psychopathology-Science of disease of the human mind A Psychopathic Personality is known by the following traits: Amoral and anti-social behavior Inability to develop meaningful/lasting relationships Extreme egocentricity Absence of empathy Known to be “Emotionally Deaf” Most accepted test for Psychopathy is the Psychopathy Checklist (Dr. Robert Hare)

10 Psychopathy test- Score 0 if it does not apply to you, score 1 if it somewhat applies, score 2 if it fully applies to you. Please total your score at the end of the test. 1. Glibness and superficial charm – smooth-talking, engaging and slick. 2. Grandiose self-worth – greatly inflated idea of one’s abilities and self-esteem, arrogance and a sense of superiority. 3. Pathological lying – shrewd, crafty, sly and clever when moderate; deceptive, deceitful, underhanded and unscrupulous when high. 4. Cunning/manipulative – uses deceit and deception to cheat others for personal gain.

11 5. Lack of remorse or guilt no feelings or concern for losses, pain and suffering of others, coldhearted and unempathic. 6. Shallow affect / emotional poverty – limited range or depth of feelings; interpersonal coldness. 7. Callous/lack of empathy – a lack of feelings toward others; cold, contemptuous and inconsiderate. 8. Fails to accept responsibility for own actions – denial of responsibility and an attempt to manipulate others through this.

12 9. Needs stimulation/prone to boredom – an excessive need for new, exciting stimulation and risk-taking. 10. Parasitic lifestyle – Intentional, manipulative, selfish and exploitative financial dependence on others. 11. Poor behavioral controls – expressions of negative feelings, verbal abuse and inappropriate expressions of anger. 12. No realistic long-term goals – inability or constant failure to develop and accomplish long-term plans.

13 13. Impulsiveness – behaviors lacking reflection or planning and done without considering consequences. 14. Irresponsible – repeated failure to fulfill or honor commitments and obligations. 15. Juvenile delinquency – criminal behavioral problems between the ages of Early behavior problems – a variety of dysfunctional and unacceptable behaviors before age thirteen.

14 17. Revocation of Conditional Release – Violating probation or other conditional release because of technicalities. 18. Promiscuity – brief, superficial relations, numerous affairs and an indiscriminate choice of sexual partners. 19. Many short-term relationships – lack of commitment to a long-term relationship. 20. Criminal versatility – diversity of criminal offenses, whether or not the individual has been arrested or convicted.

15 Common Steps of a Psychopath in an Organization Organizational Entry (Charming the interviewer) Assessment (Gauging utility of organizational members, establishing a network, charm people in power Manipulation (Spread disinformation to disparage others and enhance own image) Confrontation (Abandon pawns that are no longer useful) Ascension (Reach upper echelon at company and abandon those who facilitated his rise to power (Ramamoorti, 2008)

16 Behavioral Profiling FBI Behavioral Analysis Unit (BAU)/ White Collar Crime Focus on: Developing behavioral profiles based by comparing details of the crime with behavioral details of the offender “investigation phase” –after a crime has occurred Recognition of people likely to cooperate/act as informants Conflicting assessments as to effectiveness

17 Behavioral Profiling Why not use profiling before a crime occurs? FBI uses known data from a crime to draw correlations with past events and infer characteristics This is much different than inferring data for a crime that hasn’t occurred and for which details are unavailable Even for experts, predicting behavior is statistically little better than chance

18 (Dan Ariely, Duke University) We subconsciously assign tremendous weight to our assumed outcomes and automatic character assessments This assessment causes profound biases our perceptions Colors our judgment Results in automatic assumptions and predictions Causes susceptibility to seek incorrect subliminal information Why does this matter?



21 Adoption study of 14,427 adoptions-Most individuals that committed crimes had no genetic history 13.5% versus 20% convictions rate means high biological correlation But, consider If 95% of biological parents had no convictions 14,427 X.95=13,705 X 13.5% = 1,850 And 5% of biological parents had convictions 14,427 X.05=721 X 20% = 144

22 Nearly 90% of those convicted of occupational fraud never Charged previously And more than 90% of those not previously charged had also never been reprimanded 2012 ACFE Report to the Nations

23 Study: Auditor Prioritization Apostelou (2001) ; Wilks and Zimbelman (2004) Fundamental Attribution Error- A cognitive bias of over emphasizing personality characteristics and under-emphasizing situational awareness.

24 Ekman & O’Sullivan (1991) Sticky First Impressions Trait being judged.10 sec1 sec Trustworthy Competent Aggressive Likable Unlimited exposure times were highly correlated with briefest exposure times

25 Ekman & O’Sullivan (1991) Distinguishing Truth from Deception GroupAccuracy Rate (%) College students52.82 CIA, FBI, and military55.67 Police investigators55.79 Trial judges56.73 Psychiatrists57.61 U.S. Secret Service agents64.12*

26 (Dan Ariely, Duke University) A small percent of the population may be predictable, while the majority of crime is committed by those who aren’t Unlike some violent offenders-prefrontal cortex activity can look normal in “financial” psychopaths Subtle contextual differences change decision processes making behavioral predictions difficult for “normal” population (Johns, 2006) Prediction Challenges

27 Cheating Research (Dan Ariely, Duke University) 30,000 test takers 18,000 cheat a little 12 cheat a lot The 18,000 “little” cheaters stole $36,000 The 12 “BIG” cheaters stole $150

28 Neuroscience and Decision Making Instead of a conscious reasoning process to arrive at a judgment Usually have immediate and sub-conscious intuition Followed by conscious reasoning to support that intuition Logic versus emotion in decision making (J. Greene research) Haidt (2001)

29 Stability of Moral Position Hall, L. Lund University Study: “Large scale governmental surveillance of and internet traffic ought to be forbidden as a means to combat international crime and terrorism”

30 Stability of Moral Position Hall, L. Lund University Study: “Large scale governmental surveillance of and internet traffic ought to be permitted as a means to combat international crime and terrorism” 69% of people gave well constructed arguments for one of two altered statements after taking a moral position.

31 Economic Theory Assumption-Theory of Expected Utility: Assumes we will follow a logical process, weighing the expected gain from a crime against the likelihood of getting caught and severity of punishment. Does cheating increase/decrease relative to: The amount that can be stolen? The likelihood of getting away with it? The severity of the punishment? The research says…

32 The Precipice of Fraud Situational factors: Research shows when factors like these… Meeting debt covenants Meeting sales projections A surprise loss, legal problem, or business challenge A severe personal challenge Pressure for aggressive accounting treatment of any kind (starts a cycle) Are mixed with factors like these…

33 The Precipice of Fraud Over-optimism- A bias that causes a person to believe that they are less at risk of experiencing a negative event compared to others. Overconfidence- An over-estimation of one’s abilities or exhibiting greater certainty than warranted by existing circumstances. Loss Aversion- The motivation to avoid losing what you already have is even stronger than the motivation for additional gains. Framing errors-(Exercises)

34 The Precipice of Fraud Framing Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimate of the consequences of the program are as follows:

35 The Precipice of Fraud Framing Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimate of the consequences of the program are as follows: If program A is adopted, 200 people will be saved. If program B is adopted, there is a 1/3 rd probability that 600 people will be saved, and a 2/3rds probability that no people will be saved. If program C is adopted, 400 people will die. (Same as A) If program D is adopted, there is a 1/3 rd probability that nobody will die, and a 2/3rds probability that 600 people will die. (Same as B)

36 Group Psychology Like Taking Candy….. Do we Cheat More in Groups than as Individuals? Study observed 1,300 children visiting 27 homes around Seattle Some alone-some in groups Some asked names/where they lived-Some were not Children were asked to take one piece of candy then left alone as hidden observers watched Children in groups took the most candy In groups and not asked identity took even more Individuals asked identity were least likely to cheat/mirror (Beaman et al. 1979; Diener et al., 1976)

37 Group Psychology The Science Behind Collusion The overwhelming power of belonging “Need to belong”-Affiliation with similar others is a fundamental human motive. Pervasive drive to form and maintain relationships (Baumeister & Levy, 1995) Social connection is crucial for mental and physical well being Once in a group, these motives shape our perceptions and interpretations Threat of breaking a relationship causes great stress External threats trigger fear and strong motivation to affiliate (Schacter, 1959) Especially with others who face a similar threat

38 Group Psychology The Science Behind Collusion Research studies and real life repeatedly show the desire to affiliate with those facing similar threats Provides emotional support and cognitive clarity Hospital patients waiting for open heart surgery prefer to wait with those who have been through the surgery or those also waiting (Kulik & Mahler, 1989). Strangers band together after natural disasters or terrorist attacks. Study participants expecting painful shocks chose to wait with other nervous participants (Schacter, 1959)

39 Group Psychology The Science Behind Collusion Group Assimilation Norms-Unspoken rules of conduct Informal rules (culture) more powerful than formal rules A sense of what it means to be a good group member Figuring out the rules takes time and causes anxiety (investment) Once learned- breaking group norms is difficult and even traumatic from fear of social consequences Studies show that co-workers are very reluctant to report unethical behavior of others on their work teams (Benoit Monin, 2008). Individuals that go against group norms are strongly disliked by fellow participants-even when the norm was immoral and not personally accepted by other participants (rejection) People fear being divisive (Whistleblowers) (2008 financial collapse)

40 Group Psychology The Science Behind Collusion Group Cohesiveness-Forces that push members closer together More group related pride Engage in frequent and sometimes intense interactions Strong similarity features-similar backgrounds-homogenous Breaking group norms is especially difficult in highly cohesive groups Conformity bias-The power that pushes us to conform to our reference group.


42 Group Psychology The Science Behind Collusion Ingroups and Outgroups Strongly favor our ingroup -During conflict or unstable situations, opposing groups are feared Outgroups perceived as foreign Dehumanize outgroups-lack normal human qualities Dehumanization and “Us” versus “Them” =easier to attack outgroup members (used in military conflict, politics) Use behavior from ingroup as a cue (Ariely)

43 Group Psychology The Science Behind Collusion GroupThink-The tendency to seek concurrence among group members creating a dangerous bias in decision making like a social disease (Janis, 1984)-more likely in: Highly cohesive groups that reject deviant opinions and outgroup views (“US” verus “THEM”) Groups with strong leader that lacks procedures to review decisions Groups with similar backgrounds Stressful situations Under stress/ambiguity, urgency overrides accuracy and the reassuring support of other group members becomes highly desirable

44 Group Psychology The Science Behind Collusion Groupthink leads to Biased Sampling Tendency to spend more time discussing shared information-information already known by most of the group rather than information only known by a few People tend to share knowledge most likely to be known/accepted Failing to consider important information that is not common knowledge Leads to decisions based on flawed or incomplete information (Stasser, G., 1992; Stasser & Titus, 2003)

45 Group Psychology The Science Behind Collusion Research into NASA 1986 Space Shuttle Challenger Disaster VP of engineering objected to launch due to cold weather Cause “O”-rings in rocket boosters to fail Needing unanimous vote to launch, manager told VP to “take off your engineer hat and put on your management hat”. (Framing) The pressure worked and the VP changed his vote-sealing the tragic fate of the Challenger and her crew Biased Sampling-those who ultimately made decision to launch we not aware of all relevant information about risk of low temperatures

46 Group Psychology The Science Behind Collusion Research into February 1, 2003 NASA Space Shuttle Columbia Disaster Team of engineers review video of foam breaking off and hitting left wing May have damaged heat-shielding tiles Engineer Rodney Rocha makes more than 6 requests to seek images from spy satellites/powerful telescopes to review damage prior to reentry His manager says he “refuses to be a Chicken Little” and Flight Director sends chilling to Rocha saying further investigation is a “dead issue”. Space Shuttle Columbia disintegrates on reentry (Glanz & Schwartz, 2003)

47 Group Psychology The Science Behind Collusion Research into 1961 Bay of Pigs failure by President Kennedy’s “best and brightest” President Kennedy assembles one of most impressive groups of advisors in U.S. history Plan to invade Cuba in effort to spark a people’s revolt Plan reliant on invaders receiving support from Cuban Guerillas hiding in mountains Mountains were 80 miles away from landing spot and separated by swamp Invaders massacred and Cuba aligns with Russia President Kennedy “How could we have been so stupid?”

48 Group Psychology The Science Behind Collusion Famous Examples of Groupthink Research into the Manipulation of Libor Eurodollar contract starts trading-early 80’s-at CME (direction of interest rates) CME did own calculations, surveying banks to determine benchmark To make product more popular-CME suggests to CFTC to use BBA Libor-more commonly used rate-“Made sense”-other swaps used Libor Marcy Engel (Lawyer with Solomon Bros) writes to CFTC-since banks that set rates in London can also take position in CME contract-”might provide an opportunity for manipulation”-”bank might be tempted to adjust its bids to benefit its own positions” CFTC Division of Economic Analysis- Libor “does not appear readily susceptible to manipulation” Becomes “business as usual” to manipulate Libor at Barclays Bank

49 Group Psychology The Science Behind Collusion Reducing Groupthink Unspoken norms more powerful than written codes Reduce group pressure to conform by encouraging criticism Leaders should NOT take a strong stand early in discussions Establish a norm of critical review-”second chance” meetings to reconsider Discourage the search for concurrence Consult with outsiders

50 Group Psychology The Science Behind Collusion Do members of groups “average” their views or tend to the extremes? Group Polarization-Presence of others triggers Dominant Response The presence of others creates physiological arousal-energizes behavior. Happens in all animals, especially similar species-more similar=greater effect (Zajonc, R. 1965, 1980) Increased arousal enhances tendency to perform “Dominant Response”-that which is automatic. Performance and judgment quality depends on task Easy task=dominant response usually successful Unfamiliar or complex task=dominant response is often incorrect (Lambert et al., 2003;Perk & Catrambone, 2007)

51 Group Psychology The Science Behind Collusion Do members of groups “average” their views or tend to the extremes? Group Polarization Groups exaggerate their initial tendencies (more than individuals) More cautious on “Gain” related decisions More risky on “Loss” related decisions Through discussion, group norms, support of group members (Moscovici & Zavalloni, 1969; Myers & Lamm, 1976)

52 Group Psychology The Science Behind Collusion The tangible the close and the near term- Vivid factors and people “now” have a larger impact on decision making than abstract and distant factors. Diffusion of Responsibilty-Deindividuation-In a group, we feel that responsibility is shared by all, lessening our role. Also, if something were wrong, someone else would say something Small Steps Phenomenon-Redefine normality-subconsciously lower the bar over time. German doctors during holocaust-IPO accounting fraud-Enron traders Obedience to authority-The “draw” of following orders (diminishes self- responsibility)-Milgram experiments-60% continued to 450 volts-High status increases obedience

53 Group Psychology Cult of Personality High Status Authority increases obedience-Penn State, Catholic Church, German Doctors during the Holocaust-Andrew Fastow (Enron) and David Duncan raised so called “good nazi” defense-Enron Energy Traders Long Term Capital Management Started in 1994 by John Meriweather-Head of bond trading at Solomon Bros. David Mullins Jr Vice Chairman of Federal Reserve PhD MIT potential successor to Alan Greenspan 2 Nobel Prize winners in economics (Robert Merton-Leading scholar in finance PhD MIT & Myron Scholes PhD Prof at Stanford) 4 more arbitrage geniuses with PhD’s from MIT Clients clamored to invest and enjoyed 40%+ returns first few years In 1998 LTCM lost $4.6B, requiring intervention by the Federal Reserve

54 Group Psychology Auction

55 Group Psychology Why Does Fraud Continue to irrational lengths? Escalation Effects Escalation of commitment Commitment to a failing course of action is increased to justify investments already made (Haslam et al., 2006; Keil et al., 2007; Staw, 1997) Groups are more likely than individuals to escalate commitment to a failing project and to do so in more extreme ways. Numerous groups, businesses, governments have incurred huge costs on projects that should have terminated long before they did (Ross & Staw, 1986)

56 Group Psychology Why Does Fraud Continue to irrational lengths? Escalation Effects Cases of Escalation of commitment Nick Leeson-Barings Bank Concorde Fallacy-French-British consortium “Too much invested to quit” Boston’s “Big Dig”-High speed underground tunnel Started in 1983 to be completed by 1995 at budget of $2.6B Finished in 2008 for $22B Numerous labor strikes, lawsuits that continued beyond all economic viability for either side

57 Group Psychology Why Does Fraud Continue to irrational lengths? Escalation Effects Sunk Costs- Focus on lost investment of time/money-Decision makers often honor sunk costs by increasing their commitment to a failing course of action Battle between self-justification and regret fuel the escalation Continues beyond bounds of rationality Occurs in groups-experiments show that a second decision-maker will invest further in the failing program of an initial decision-maker. Gunia, Sivanathan & Galinsky (2009)

58 A K85

59 How did we miss it? Confirmation Bias- The tendency of people to favor information that confirms their beliefs or hypotheses. Studies show we tend to seek information that confirms rather than properly tests the validity of what we are told Selective Perception-A cognitive bias wherein individuals are subconsciously attracted to stimuli that falls in their range of reasonable expectation and are oblivious to other stimuli. Belief Perseverance- Our tendency to seek information that is consistent with our pre-existing beliefs. Biased Processing of Disconfirming Information- The subconscious bias towards being more critical of evidence that disconfirms our initial beliefs than evidence that confirms it.

60 Situational Awareness Attractors and Distractors We must be able to filter relevant information from a sea of irrelevant stimuli Requires balancing task and stimulus related factors Balance is governed by working memory and selective attention Research shows that the more extraneous contextual stimuli that exists, the harder our brains work to tune that stimulus out and focus on the original subject (U.S.) Sometimes that extraneous stimuli has significant implications on the context of the subject Time Limitations (seminary students) Ability to attend to limited number of stimuli


62 Y ou a e not r ading th s.

63 W at ar ou rea in ?

64 Pattern Seeking and Professional Skepticism Two types of errors in pattern seeking Type I-False Positive- Finding a pattern that doesn’t exist Type II-False Negative- Failing to detect a pattern that exists Signal to noise ratio (Attractors) Too low- Miss obvious patterns Too high- See false patterns everywhere What causes pattern detection errors?





69 Negotiation Research in Auditing The more ambiguous the accounting issue, auditor likely to accept clients preferred treatment. The more important/increased pressure surrounding the accounting issue, auditor more likely to concede The greater number of possible alternative treatments, the less likely the auditor was to insist on their judgment Clients perceive they are more likely to persuade auditors if firm has short tenure (retention) Auditors are much more likely to waive smaller adjustments that aggregate to a material amount than those that are individually material Brown & Wright (2008)

70 Choice Complexity and Professional Judgment Study on bias in professional decision-making using Doctors Decision to send patient-a 67 year old farmer for hip replacement surgery First group of doctors told they forgot to try one drug-Ibuprofen. Would they call patient back from surgery to try the drug? 50% said pull then back Second group of doctors told they forgot two drugs-Ibuprofen & Piroxicam. Would they call patient back from surgery? 72% let patient go on to surgery Why? Choice complexity increases chance of going with default option Redelmeier & Shafir (1995)

71 Cognitive Priming

72 Critical Thinking “Rules based thinking” type Spurs automatic responses to “recognized” patterns Narrows our thinking to specific and narrowly applicable rules and patterns Entails simple recognition of the situation and retrieving a typical response Does not address: How situational assessment is accomplished in new or changing circumstances How to deal with conflicting or unreliable data How to change your mind In unusual circumstances, our recognitional process needs to be supplemented by using “ Attentional Control ” We do this by shifting our attention from simply reading the cues in a situation To our expectations and the conclusion Use “As-If” reasoning by developing hypothetical or counter-factual ideas Imagine that the possibility is true and pose queries about what would happen

73 Critical Thinking “Real Time” Critical Thinking CURIOSITY is KING!-Situational Awareness Question underlying assumptions Reveal new connections in data Lead to new questions Think critically about the results of recognition on an ongoing basis Pose questions about those results Look at information from different perspectives “Assume” your assumptions are correct but conclusion is not

74 Tone at the Top

75 Motivation

76 Principles or Rules? Does the inherent nature of rules make it more difficult to decide to do the right thing? Control the tendency to act only in our self interest (Self protection-Good Samaritan laws) The tendency to focus on the letter of the rule rather than the spirit. Is tendency to interpret rules narrowly due to the characteristics of the rules themselves? Principles versus Rules based accounting standards CFO’s less likely to make aggressive accounting choices under “Principles” based system (Agoglia, 2009) CFO’s came to more similar conclusions under principles than rules based system U.S. accounting standards have become so precise as to invite opportunistic interpretation by corporate executives (Agoglia, 2009)

77 Principles or Rules? “Research-NASA’s culture of bureaucratic accountability emphasized chain of command, procedures, following the rules, and going by the book. While rules and procedures were essential for coordination, they had an unintended but negative effect. Allegiance to hierarchy and procedure had replaced deference to NASA engineers’ technical expertise” National Aeronautics & Space Administration REPORT OF THE COLUMBIA ACCIDENT INVESTIGATION BOARD (2003)

78 Behavioral Research and Interviewing Skills Style and content of interaction with the subject dramatically affects the quality, depth and scope of information you receive Behavioral science allows you to recognize important cues Illicit more and higher quality information Focus on the information you really need to know

79 Behavioral Research Communication during the interview one of the most important soft-skills – Provides situational information that cannot be obtained through data analysis – Makes rest of audit more efficient and effective – Establishes future sources of information and directions of inquiry

80 What an Interview Is A professional conversation with a specific purpose – Have a clear understanding of what you want to achieve A vehicle for collecting accurate, useful, complete and relevant information Gather evidence through information supplied by the interviewee

81 What an Interview Is Non-threatening format Non-accusatory tone Goal to gain information about processes Occurs within a limited time frame

82 What an Interview Is Not A lecture – Where either party dominates the process and limits questions and the path of the interview A general conversation – The interview is limited in time and not for discussion of off-topic subjects – The interview should have goals and flow An interrogation – Why isn’t an interview like an interrogation?

83 What an Interview Is Not Not an interrogation because an interrogation: – Seems involuntary – Has a threatening format – Accusatory in tone – Goal to gain information that may be used to take action against interviewee or others – Time frame is open, may take hours – Physical setting is critical and interrogation should never occur alone – Contrary to goals of an interview

84 Eight Stages of the Interview 1.Defining the purpose 2.Identifying the information needed 3.Identifying the people to interview – Who has the information needed? 4.Preparing for the interview 5.Conducting the interview 6.Recording the interview 7.Analyzing the results 8.Follow-up

85 Defining the Purpose of the Interview Do you define the purpose? What is it? Define – What are your audit objectives? – What information do you need? – Who might have that information – What position levels will you interview to get that information?

86 Purpose of the Interview Assess what kind of information the interviewee knows and does not know and the extent of that knowledge Obtain referrals to other sources – If the interviewee doesn’t have the knowledge, who does? What do we want to know about – People? Processes? Documents? Custody and flow of documents? Communication processes and flow?

87 Characteristics of an Effective Interview Being prepared before the interview A controlled interview process Focusing on information that the interviewee should know as opposed to guessing during the interview Interviewer is impartial – Does not poison the results with the interviewers biases

88 Interviewer Bias Confirmation Bias- The tendency of people to favor information that confirms their beliefs or hypotheses. Studies show we tend to seek information that confirms rather than properly tests the validity of what we are told Selective Perception-A cognitive bias wherein individuals are subconsciously attracted to stimuli that falls in their range of reasonable expectation and are oblivious to other stimuli. Belief Perseverance- Our tendency to seek information that is consistent with our pre-existing beliefs. Biased Processing of Disconfirming Information- The subconscious bias towards being more critical of evidence that disconfirms our initial beliefs than evidence that confirms it.

89 Conducting the Interview The physical environment Starting the interview Determine the appropriate types of questions and question sequence Controlling the interview Taking notes? Analyzing the answers

90 Conducting the Interview The Physical Environment What kind of physical environment do you want for an interview? – Your office or theirs? – Desk or no desk? – Attire?

91 Conducting the Interview The Physical Environment Professional environment-Interview frequently occurs at office of subject Minimum of distractions No Desk-Best if entire person is visible (Leakage) Interviewee should be positioned nearest the door. Exit should not be blocked by interviewer.

92 Conducting the Interview How to Start the Interview How would you start? – Before questioning begins

93 Conducting the Interview How to Start the Interview Establish rapport – Opportunity to establish “baseline” behavior – Set non-threatening tone for open dialogue Comfortable + Non-threatening=More Info! Introductions State purpose and what you will review

94 Conducting the Interview Types of Questions Informational questions – Information gathering questions that are non- confrontational and non-threatening Open questions –questions where a yes/no answer are not appropriate. Encourages free narrative. – Begin with “What….”, or “What about….” or “How….” – Do not interrupt Closed questions- When you want a precise yes/no – Avoid during rapport building/informational stage – Tips hand of interviewer as to what you want and limits responses so you may miss information that is important and unknown to you.

95 Conducting the Interview Types of Questions Leading questions –Contain an answer as part of the question – Can be used to confirm what is already believed Attitude questions- – To gain an understanding of the viewpoint of the subject (Can also be used to convey attitude of interviewer in forensic interviews) Interviewer should never display internal emotions unintentionally.

96 Conducting the Interview Assessing Risk How do you ask about fraud/Risk? – Consideration of fraud in a financial statement audit – “Seen any fraud around here?” – Inquire about Procedures being followed Documentary issues Where risks may be greatest, or least (opinion) – (take a break from note taking-use silence as a tool)

97 Conducting the Interview Question Sequence In what order would you put your questions?

98 Conducting the Interview Question Sequence Generally start with general information and move towards specific information Can move from known facts and then ask about things that are unknown Skilled interviewers will – move between open and closed questions – Advance the information gathering process by sensing gaps or conflicts in information and seeking additional information and new lines of inquiry

99 Conducting the Interview Question Sequence Skilled interviewers will – Ask logical follow-up questions – Adapt to new lines of inquiry when circumstances warrant – Move between open and closed questions

100 Conducting the Interview Controlling the Interview Stop interruptions or stop the interview Keep control of the line of inquiry Note taking – Should you take notes? Why?

101 Conducting the Interview Understanding the “subject” Adjust to their communication style Use their language – If they use terms you don’t understand, don’t hesitate to ask-(You are there to understand, not impress) Seek understanding: Ask them to “treat you like you know nothing about their job” Repeat the answer to clarify, when appropriate (“So are you saying…?”)

102 Conducting the Interview Barriers to an Effective Interview Language (terminology) Fear Poor preparation by the interviewer Lack of clear purpose Lack of control over interview process

103 Detecting Deception Non-Verbal cues (What are they?) – Body language Verbal cues (What are they?) – Changes in speech pattern – Speed of speech – Word choice – Tone

104 Detecting Deception Verbal Clues of Deception Changes in speech patterns – Speed up or slow down in reaction to certain topics of inquiry Tone Making repeated excuses Speaking in third person instead of first person Being unaware of events, people or processes where there should be some awareness Guilty people give truthful responses but evasive answers-not really answering the question

105 Detecting Deception Verbal Clues of Deception Non-relevant comments Character testimony – “Anyone will tell you I’m a good guy” Answering a question with a question Evasive answers-Lying by omission Distancing language Lying by referral – “Like I told Mark….”

106 Detecting Deception Verbal Clues of Deception Audio clip – What are the indicators of truthfulness? – What are the indicators of deceit?

107 Detecting Deception Behavioral Clues of Deception What does it mean and what should my response be if they… – Tell a story in random order? – Give an unsolicited denial? – Are overly friendly? – Are sweating? – Body language doesn’t match answers? – Won’t make eye contact? – Are fidgeting? – Are sitting perfectly still? – Suddenly change their willingness to cooperate – Smile at inappropriate times?

108 Detecting Deception Behavioral Clues of Deception Tricks of the trade – Ask to repeat the story in reverse order People rehearse what they say but rarely rehearse body language – Surprise them with something (as interviewer) you know

109 Truthful Composed Concerned Cooperative Direct and spontaneous Open Sincere

110 Deceptive Unconcerned Overly anxious Defensive Overly polite Evasive Complaining Guarded

111 Ending the Interview Summarize the interview Polite Thankful Leave the door open for further communication by either party

112 Documenting, analyzing and Preparing for Follow- up Arrange and review documents and notes as soon as possible after the interview Identify items that weren’t properly supported – Gaps – Inconsistencies – Missing documentation – Get collaboration/agreement on topic from others? – Search for disconfirming information

113 PsychologyofFraud Contact: LinkedIn: TobyGroves More about the story and research: Hear the story on National Public Radio at NPR.ORG (search “all dates” for Toby Groves) Read the research article in: CPA Journal (December issue) Links and further information available through

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