Tuesday, September 18, 2018
Business

Auditors notice execs' ego, new study by USF instructor finds

TAMPA — By the time Randy Kuhn started living out of a hotel to audit one of the biggest corporate fraud scandals in history, many of the major players already had been handcuffed.

But Kuhn still got big whiffs of WorldCom's culture in 2003 as he fought prickly managers for access. It was the biggest job he'd had, but the attitudes were nothing new. At different times in his career, he'd seen Porsches pull up to firms and CEOs step out. He'd been yelled at in hallways, watched young accountants go to jail because they didn't stand up to bad bosses.

Now, a new study confirms there's a human side to accounting — that when it comes to executives with inflated egos and glossy photos, auditors notice.

Kuhn, a University of South Florida assistant professor, all but missed the first year of his daughter's life when his company sent him to Virginia to work on the WorldCom scandal.

He later left auditing for academia but the intrigue never went away. He and three professors from other universities worked to put data to something they already suspected.

Auditors look for signs of narcissism to detect financial funny business and assess risk, according to the study published in February's Auditing: A Journal of Practice & Theory. They respond to things like the size and placement of the CEO's picture in the annual report, too many uses of the word "I," stress level of the staff, how managers react when egos are bruised. It contributes to the auditor's risk assessment, which helps spell their next move.

Auditors are trained to be critical and skeptical, but they cannot possibly look at every transaction in the early stages. At a certain point they call on gut feelings for help. Too many trophies on the wall. Arrogant chatter in the break room.

"You're kind of walking the hallways," said Kuhn, 41. "They don't feel you as a threat when you're walking to the bathroom. They're a little more open to how they act. You're paying attention, observing."

The research, which is controlled to get mathematical results, involved real auditors and fictional cases. Researchers surveyed 101 auditors from several U.S. offices of a large international public accounting firm. The auditors read a hypothetical case study involving a construction company gunning for big government contracts. In some models, the manager made comments like, "I make sure things get done on time, and let me tell you, it's not always easy," and, "My staff is small, and I keep them plenty busy."

Auditors in the study pointed to fraud traits such as being ostentatious, sensitive to critics, arrogant and dismissive. One said workers are more likely to rationalize fudging numbers if a boss is demanding. A manager with little tolerance for error is risky for fraud, the auditor said.

"It's one of those 'duh' papers," said Kuhn, whose career spanned decades with Grant Thornton, KPMG, Siemens Westinghouse, Deloitte & Touche and NASA. "You know that it happens, but nobody has investigated it. You don't know if it truly affects a broader population."

There's a difference, psychologists say, between general narcissism and a personality disorder. Being a little narcissistic is common, even healthy. You want to be successful, want to be beautiful, want people to like you. Many authors have penned books trying to understand this personality type, how it has molded some of the world's most confident, ambitious leaders.

But sometimes, experts say, those levels get too high. Extreme narcissists take unhealthy risks, justify bad decisions and prize ego above all else. As an auditor, Kuhn said it can be hard to tell the difference between ego and clinical narcissism, between someone who enjoys fine cars and someone who is a fraud.

Enron CEO Kenneth Lay played golf with presidents, and people described his chief financial officer, Andrew Fastow, as cocky and demanding. On the other hand, WorldCom CEO Bernard Ebbers was known to be more low-key and bragged to reporters that he took cabs.

"Most people at that level are type-A personalities to begin with," said Kuhn. "You kind of have to expect it. You understand that you're going to see it. At what level, you don't know until you're actually there. And you know, psychos are good at hiding that."

A deeper study is in the works, Kuhn said, with actors playing executives in office settings dotted with photos and awards. The researchers will film the auditors doing hypothetical interviews and will note things that tip them off to possible fraud risks.

In person, Kuhn said, the warning signs can be even more overt. When you ask about missing money and the person looks up to the left, he's usually thinking of a creative answer.

Stephanie Hayes can be reached at [email protected] or (813) 226-3394.

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