Minkow’s Fraudodynamics

I Was a Teenage Fraudster in the Guardian today.
Barry Minkow eventually imprisoned for a major wall street fraud, is “poacher turned gamekeper”, interviewed on BBC Today this morning. Describes small mis-representations leading to larger frauds, and an environment of collusion within business, even including ostensibly “independant” auditors. Makes explicit reference to the big accountancy firms and their independantly named consultancy arms. More evidence of Argyris / DeLorean / Galbraith effect.

Quote […not one of those companies went into business to defraud. Not one. Neither did I. What people don’t realise is that fraud is always a means to an end, never an end in itself. There is always a rationalisation ….] Unquote – That word “rationalisation” again.

Quote […shares soared from an initial offering of $4 to $18. Nobody was in the mood for asking questions – which was unfortunate, because Minkow might have had difficulty answering them …. Live for the now. Very existential. Jean-Paul Sartre. Camus.] Unquote. That’s the first time Sartre and Camus have crept into the philosophical thread.

Quote […auditors …. more criminally gullible than conspiring.] Unquote. Argyris calls it “skilled incompetence”.

Quote […’Things go from order to disorder …. This is one of the laws of what I call fraudodynamics. Let’s say Nick Leeson got the one good trading day he needed to cure the fraud. Well, he’s reinforced subconsciously the idea that he can do it – faced with pressure, he’ll do it again. Do you think Nick Leeson’s first trade was a billion? Of course not.] Unquote. Order, disorder, fraudodynamics – getting close to information as negative entropy view.

In my own experience they don’t start as “frauds” they are well intentioned simplifications to avoid hassle, embarassment, explanatory effort etc, but the effect is that “official” figures never tell the true story. I can think of many an occasion where I’ve had debates along the lines of why don’t we just capture the truth (say in manhour expenditure, or in bid tabulation) and put any allocation / rationalisation / interpretation (even spin if required) in the decision / recommendation / report. Unfortunately when the interpretation is reverse engineered into the numbers, to keep life simple (consistently rational) you no longer have honest information available. The right decision gets made locally, but any aggregate or historical view of the “facts” is in reality now misinformation. In the absence of continuity of people and experience, knowing the true circumstances, it makes knowledge management a very shaky prospect.

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