How to spot liars is big business. Over the past decade, if you believe the hype, applying the tools of contemporary neuroscience-eye-tracking, face-reading, fMRI, and the like-to the detection of falsehood is an emerging market all its own.
As far as the authenticity of these measures, scientists have come to no solid conclusions. The advocates claim they're fool proof. The naysayers are quick to point out that for the past 100 years we've learned that everything from fingerprints to eye-witness testimony are not to be trusted-so how to trust these new technologies is the better question.
This debate will go on for a while, but what is already clear is that these technologies seem much more geared to unraveling legal puzzles than in preventing financial ruin-which seems the much more critical concern right about now.
If we knew in advance that dotcoms were over-valuing their assets, that Enron was fudging their numbers, that Bernie Madoff was running the con-would our current mess be as horrid?
Again nobody can answer these questions, but as the saying goes: an ounce of prevention is worth a pound of cure.
And an ounce of prevention is what researchers at North Carolina State are now offering.
Fraud is a huge problem in the business world. Mess around with your data a little bit and financial statements mean nothing. So detecting such lies is exactly is exactly where these researchers turned their attention.
They have come up with a set of metrics that sees through accounting tricks by evaluating those facts easily verifiable, like the number of employees a company has or their square footage. They have dubbed these metrics "Non-Financial Measure" and believe that if a company says profits are up and these metrics are down, well that company is lying.
"When these companies commit fraud," says accountant Joe Brazel, one of the researchers involved with the work, "we found a huge gap between their reported revenue growth and related NFMs-their revenue was up, but the NFMs were flat or declining."
The researcher also did comparison studies (of 220 companies, 110 convicted of fraud between 1994 and 2002, 110 innocent ones) that further confirmed the data.
Brazel says that they found a difference of approximately 4 percent between revenue growth and employee growth in companies that did not commit fraud. Fraudulent companies, meanwhile, showed a 20 percent difference.
Even better, these metrics are easy to find. Companies are required to submit this data each year to the US Securities and Exchange Commission.
Which means that pretty soon what has only been a legal revolution in truth telling, may soon become a business one as well.
And it couldn't come a moment too soon.
