Business gurus Malcolm Gladwell and Chris Anderson have been in a bit of spat lately. They both put out books this year. Gladwell reviewed Anderson’s in the New Yorker. Anderson responded. Those of us with too much time on our hands and a cheap or free medium to express ourselves put in our two cents. Though not as cool a brawl is as Salman Rushdie vs. John le Carré or even Jay-Z vs. the Game, it does give me an opportunity to bring up an old Gladwell article of that’s a good read for investigators.
My favorite Gladwell article – fraud-related – is “Open Secrets—Enron, intelligence, and the perils of too much information.” In it, he discusses the difference between solving a puzzle and solving a mystery: In a puzzle, you need one more key piece of data to figure out an answer; with a mystery, you have too much data and must interpret it to find the outcome. He uses Enron as the example of a mystery, in that the company’s malfeasance was available in public records. Enron wasn’t hiding its accounting fraud, other than trusting that the excess of data about its operations would obscure the true actions behind them.
It’s a compelling construct for an investigator. Are you looking at a puzzle or a mystery?
I had minor beef with the article. Gladwell leaves the reader, or at least this reader, believing that there is as clear a way to solve mysteries, as there is to solve puzzles. I think a mystery is ambiguous and conclusions about a mystery are chock full of opinions.
To look at a modern case of fraud— the Madoff case was a mystery. The Madoff whistle blower, Harry Markopolos, didn’t stumble upon some sort of internal Madoff documents that proved the fraud. He did a detailed analysis based in part on fact-finding but mostly on his knowledge of finance and investing. He relied on financial models. Financial models are based on assumptions. Markopolos was solving a mystery and using opinions to do it. (More on this in a following post when I’ve got these ideas a little better organized).
Anyways, back to Galdwell’s article. The article ends with a discussion of a paper about Enron written by a group of Cornell MBA students for a finance class. The students made the argument that the company stock was overvalued back in 1998—several years before it finally collapsed. Gladwell wrote, “there were clear signs that ‘Enron may be manipulating its earnings.’ ” If anyone had bothered to read the 23-page paper, which was posted on the school website, they would have known there was something wrong with Enron. It was the amount of information and the ability to process it that mattered.
As with any mystery, there is no clear-cut conclusion. The students made a great analysis that also happened to be right. They did it using tools that are subject to interpretation. For example, the students used the Beneish model, which uses financial ratios and variables to determine if companies have manipulated earnings. Enron’s score was higher than the standard, which pointed to possible manipulation. This, by itself or with any of the other ratios or models used by the students, did not prove the case. Beneish himself says that, while the model is useful, “it can classify a firm as a non-manipulator when it manipulates and it can classify a firm as a manipulator when it does not manipulate.”
Classifying fraud as either puzzle or mystery is a good place to start. But when you have a mystery there is no certainty, it’s all just opinion until you do get your hands on the same facts that you need to solve a puzzle.