People often read stories of fraud, embezzlement or general dupery and wonder how the victims could have been so stupid. We hear daily about scams where people pay thousands of dollars to fake IRS agents, or for ransom money to a Nigerian Prince, and we all feel a bit superior that it couldn’t happen to us.
Well as any business lawyer will tell you, the truth is it can.
In fact, it happens to people like us, and people who, but for the grace of whatever you believe in, would be us every day.
In my role as a business lawyer, I recently had a case involving a bookkeeper who embezzled almost $500,000 from my client over a seven-year period. One of the defenses, of course, was that my client, the innocent victim, should’ve figured it out sooner. The owner of the business has a Ph.D. and runs a second successful business. The manager had a Master’s degree in business and was on site every day. Neither were dumb men. So, it makes you wonder, why didn’t they figure it out sooner? As a side note, from a legal perspective, you don’t have to distrust a person in a position of trust unless you have a really good reason. It’s why the defense didn’t work in my case. Our bookkeeper was altering records to hide their misdeeds.
Why don’t people see the bad actors long before
the damage is catastrophic?
I was recently reading (I mean listening to an audio book of) Talking to Strangers, What We Should Know About The People We Don’t Know by Malcolm Gladwell. He discusses three concepts that make our interactions with others so difficult at times: default to truth, transparency, and coupling. These concepts explain why it is so difficult for us to know when someone is lying to us.
I’m going to quickly summarize the concepts, but for more information please check out Gladwell’s book, which can be found here:
Default to truth is the very human notion that we tend to believe the other person we’re interacting with is truthful. For most of us, this is our “default” setting. Once we meet someone we decide they are being truthful. Remember, this is our default setting and it takes a huge amount of evidence to convince us differently. What this means is that every once in a while we are going to be taken advantage of. But the alternative is distrusting everyone, which is far worse.
In a nutshell, transparency means we expect people to act the way we’ve been pre-programmed to believe certain emotions are expressed. So, when someone is angry, we expect them to have a furrowed brow, thinned lips, a tight jaw, and body tension. When someone is happy, I expect them to smile and talk in a higher pitched and sometimes faster tone of voice. We assume people are being transparent and that their outward expressions match their inner emotions. People who are “mismatched,” meaning they don’t react the way we think they should (the happy person who is scowling or the grief-stricken person who is making inappropriate jokes), earn our distrust whether or not they deserve it. We assume they are lying to us because their demeanor is “off.”
The third concept, coupling, means that certain activities require a complicated side of events to occur and not just one factor. For example, research shows people who commit suicide do so because their chosen method is available at the time they are going through a particular moment and having certain thoughts Take the chosen method away, for example, put a net under the Golden Gate Bridge, and the suicide rate drops, dramatically. Those would-be jumpers generally do not find another way to end their lives. Yet, the belief that people who want to kill themselves will do so regardless of what interventions occur persists. The bottom line is behavior and people are complicated.
Take all three concepts together and Gladwell posits this is why most of us are terrible judges of other people’s truthfulness and true character.
Let’s go back to my embezzlement case or any of my other cases where employee dishonesty was the core issue. They all fall into this pattern. The business owner meets the (soon to be bad) employee. The business owner likes the employee and hires that person. The employee appears genuine. When asked questions, the employee meets the business owner’s eyes and has reasonable explanations for whatever issues might arise. Red flags are then dismissed because the business owner defaults to truth and believes the employee is transparent.
In the embezzlement case, the manager saw a check drawn on the business account payable to American Express. One small problem. The business didn’t have an American Express account. When the manager asked the bookkeeper about the apparent problem, the bookkeeper responded that the check was issued in error, it was supposed to be a payment for another client and it was accidentally printed on the wrong check stock. It was a reasonable sounding answer. If the manager hadn’t already had questions about other discrepancies with the finances the bookkeeper would likely have continued to steal from the business for years. But, the bookkeeper’s weekly financial reports seemed to be inaccurate because the internal sale system showed much greater revenue and the money wasn’t showing up in the bank accounts. The bookkeeper’s answers to the manager’s questions on this front – oh, there’s a delay in the funds clearing, there were more expenses, etc. – didn’t sound right. The manager went to the bank to get a copy of the bank statements and canceled checks. A review of one month of these records showed the thefts.
It took years to uncover the fraud because we presume the other person is honest and acting with integrity, and when confronted about a fact that would reveal the fraud the person had a plausible explanation and didn’t “look guilty.”
These issues get even worse when the person we are dealing with is of a different ethnic or national background than we are. Different cultures express emotions differently – from the British stiff upper lip to the Southern Belle’s histrionics over a minor slight – we don’t always show emotions the way people expect us to.
So, how do you detect a bad actor?
- Former President Ronald Reagan had it right — trust but verify.
Part of the issue with the embezzlement case I tried is the company expected that the bookkeeping firm was supervising and spot-checking the bookkeeper’s work. It wasn’t. However, because my client made an assumption that someone was verifying the work and no one was, the theft continued for years. A random audit, by the bookkeeping firm or the company, would have revealed the misconduct much earlier. While random audits may not have stopped the bookkeeper from stealing, those audits would have detected them quicker.
- Try to minimize how your feelings (good or bad) for that person color your response to their actions.
First impressions matter. We will discount information that goes against those impressions. So, if we have a positive impression of someone it will take a lot of “bad” or negative information to counter it.
- Don’t assume that smile means the same thing to them as it does to you.
We experience events and related emotions differently. Some people respond to grief by wailing and crying, others get angry, still others have no outward reaction or engage in “inappropriate” humor or conduct. The emotion mismatch can cause an individual to be suspected of a crime – why didn’t they respond “appropriately” to news that their loved one was murdered? Slick operators con people because they show a charming exterior. Just because you would act a particular way does not mean the person you are dealing with will do the same.
- Understand that people are complicated.
Humans are the craziest people. We’re complicated. Yes, we are. Why we do things is complicated. Try not to attribute one motive to conduct. It’s easy to cast the bad actors as two-dimensional villains. The truth is far more complicated. The pressures that cause one person to embezzle may not phase someone else.
People are horrid judges of character. We all can be scammed under the right circumstances. A little bit of preventive care can minimize your risks. Policies that require random audits of the work of individuals with access to the company’s finances can dissuade misconduct and will, likely, catch it sooner.
Protecting your business and you from fraud and embezzlement isn’t easy. We’re hardwired to trust the people around us. If you’re unsure of how to best protect your business from fraud, or would like assistance with any other compliance matter, please contact Nancy at N D Greene PC.
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