‘I’m Sorry’

Positive Results of Apologies for Fraud Examiners, Auditors


By BY RICK C. WARNE, PH.D., AND ROBERT M. CORNELL, PH.D., CMA

rick-warne-50x50.jpgrobert-cornell-50x50.jpg   FraudBasics  

Offering a public apology in reaction to negative events is becoming commonplace. Akio Toyoda, the president of Toyota Motors, issued a public apology to his company’s customers and employees for defects in Toyota vehicles. The heads of three national intelligence and homeland security agencies apologized to the American people and Congress for oversights that allowed the attempted bombing of an airliner over Detroit last Christmas. Even that infamous Ponzi-schemer we love to hate, Bernie Madoff, expressed remorse in court by saying that he lived “in a tormented state now, knowing all the pain and suffering that I’ve created. I’ve left a legacy of shame.”

While some people might question the effectiveness of public apologies, apologies are becoming a more common part of societal dialogue. In fact, the public might now expect an apology for alleged wrongdoing. Not issuing an apology could be perceived as an admission of guilt. How do these examples of public figures and criminals relate to working professionals such as fraud examiners, accountants, attorneys, law enforcement personnel, and physicians?

Can professionals accused of wrongdoing – even when acting professionally and ethically – effectively use apologies to help protect their credibility and reputations from negligence accusations and costly litigation?

THE USE OF AN APOLOGY 

An apology is a verbal (or written) expression of remorse and regret. An apology can be a very simple offering made in everyday life, such as saying “I’m sorry” when bumping into another person in the supermarket. Alternatively, an apology can involve a more thorough expression of remorse and regret used to remediate the results of a mistake or damaged relationship.

In some instances, individuals might accept responsibility for wrongdoing as part of the apology. In other cases, people might wish to offer an apology without accepting responsibility for causing an event.

The question of whether a person can apologize without admitting guilt can be deconstructed into two components: the legal and the practical. In other words, can professionals apologize without admitting guilt from a legal perspective, and can they realistically apologize without admitting wrongdoing? The simple answer to both questions is “yes.”

In a legal setting, an apology is specifically not synonymous with an admission of guilt. Massachusetts implemented the first “apology law” in 1986 (Mass. Gen. Laws Ann. ch 233, § 23D) to prevent the admission of sympathetic apologies into evidence against a defendant. According to the Sorry Works! Coalition, as of February, 35 American states now have statutory apology laws that disallow linking apologies and guilt in various contexts. Clearly, the trend toward legally protecting sympathetic apologies continues.

From a practical and social standpoint, people also can effectively apologize without admitting wrongdoing. Sidney Kanazawa, in his article, “Apologies and lunch: strategic options for every litigator,” from the July 2004 issue of For the Defense magazine, best described the effects of apologizing from a realistic, human perspective:

“First, an apology is not necessarily equivalent to the admission of liability. ‘I’m sorry’ is not the same as ‘I’m at fault.’ ‘I’m sorry,’ is polite and human. Not to say, ‘I’m sorry’ [can sometimes be considered] rude and arrogant. It has nothing to do with fault. Moreover, ‘I’m sorry’ in everyday speech usually means ‘I’m sorry we find ourselves in this current situation.’ It is not about fault.”

Individuals frequently apologize for events over which they had no control. When a friend or acquaintance suffers a death in the family, people respectfully apologize for the family’s loss. Certainly the apology doesn’t indicate responsibility for the cause of death.

NEGATIVE OUTCOMES AND THE DESIRE TO ASSIGN BLAME  

Academic research has found that accusations of wrongdoing are often made in hindsight based on what psychologists call the “curse of knowledge.” The curse of knowledge exists when the outcomes of a decision are used to evaluate the quality of a decision in hindsight. In other words, once the outcome is known for a decision made under conditions of uncertainty, everyone knows whether the decision was good or bad. The old saying, “hindsight is 20/20” relates to this phenomenon. A recent example involved European aviation officials who were criticized for grounding flights too long due to the Icelandic volcano when it was found that air quality wasn’t as threatening as originally predicted.

The curse of knowledge is prevalent in many professional settings. Business executives, accountants, fraud examiners, law enforcement officers, physicians, attorneys, and other professionals regularly make decisions without knowing the long-term future outcomes of those decisions. For example, when an attorney decides to take a case to trial, the quality of that decision might be questioned after the outcome of the trial is known, if the attorney loses the case. Likewise, an auditor who carefully follows professional standards could face accusations of professional negligence if future events reveal that an audit client committed undetected fraud.

In each of these examples, and in many similar circumstances, professionals rely on their judgment, experience, and training to make the best decisions possible when future outcomes can’t be known. Professionals should be judged based on the facts available when the decision was made, and not on outcomes. However, human nature involves second-guessing after outcomes are known. This presents a substantial problem to professionals who might face negligence accusations or even lawsuits.

Individuals tend to respond swiftly when negative outcomes occur through an emotional reaction called the “desire to assign blame.” People inherently assign blame for negative events even when the events were completely unforeseen. In business, government, medicine, and other circumstances, the professional auditor, fraud examiner, attorney, physician, or police officer is an easy target for blame even if the professional is faultless. This link between negative outcomes and the desire to assign blame to someone for causing the negative outcomes is crucial to understanding why apologies are so effective.

WHEN AND WHY ARE APOLOGIES EFFECTIVE?  

The vast majority of professionals diligently adhere to industry practice standards. Too frequently, however, the best efforts of professionals who regularly deal with complex issues might result in negative outcomes. Business executives might preside over a company that loses money, physicians have patients who remain sick or die, and attorneys have clients who lose in court. In these types of circumstances, heartfelt and honest apologies might be effective in reducing others’ emotional desires to assign blame to professionals.

An apology might prove effective in two types of accusation-related circumstances. The first type occurs when the professional can interact directly with a person or group of people who have experienced a negative outcome. For example, physicians often face lawsuits even after making medically appropriate judgments.

The second type of circumstance in which apologies might prove effective occurs when the professional can’t interact directly with a person or group who has experienced a negative outcome, such as a juror in a trial. For example, auditors (and often fraud examiners) face a widely publicized expectation gap that causes concern – the gap between auditors’ professional responsibilities and the public’s expectation of the auditor’s role.

According to Julius Melnitzer from the Jan. 1, 2007, edition of Inside Counsel magazine, legal expenses for public accounting firms (measured as a percentage of total revenues) increased from 7.7 percent in 1999 to 14.2 percent in 2004. All indications suggest that this trend continues today. Thus, the auditing profession provided us a context to investigate the effects of apologies offered to unharmed third-parties, such as jurors in a professional negligence trial.

We were interested in whether unharmed jurors in a trial setting would react positively to an honest apology when negative outcomes occurred. We chose the auditing environment to examine this issue, but the situations faced by other professionals (e.g., fraud examiners, law enforcement) are similar. Most professionals (e.g., attorneys, business executives) face scrutiny for decisions made under uncertain conditions.

Though auditors should be held accountable for violating professional standards, the vast majority of auditors act competently. When an auditor obtains sufficient, relevant, and reliable information to issue an unqualified opinion, what can the auditor do if he or she is subsequently the target of litigation?

We conducted a formal experiment to investigate whether an auditor can make an apology during trial that would result in fewer negligence verdicts. We recruited U.S. citizens to act as jurors in a hypothetical litigation case involving a professional negligence lawsuit. In our case, the auditors performed their responsibilities according to professional standards and issued an unqualified opinion. In other words, the auditor performed a high-quality audit.

However, an intentional, material inventory misstatement existed in management financial assertions. In the hypothetical case, the inventory fraud led to client bankruptcy and associated negative outcomes including substantial economic loss by investors, employee layoffs, and a dramatic economic downturn in a small community. The lawsuit against the auditor demanded substantial damages for the failure to detect management fraud.

This case highlighted the tension of the expectation gap: auditors can’t provide absolute assurance despite performing an audit according to professional standards. After reading trial transcripts with testimony from multiple parties, including experts, company management, and an auditor, participants rendered a verdict in favor of or against the auditor. In the absence of an auditor apology, jurors judged the auditor guilty of negligence 47 percent of the time. When the audit partner testified and offered a simple, honest apology for the negative outcomes surrounding the inventory misstatement, the guilty rate dropped nearly in half to 24 percent.

Interestingly, our results suggest that honest apologies are effective against an unharmed party: jurors. Jurors are independent from the dispute, yet they respond to sympathetic apologies. In the context of our litigation study, the jurors overwhelmingly indicated that the auditor offered a sincere apology without admitting fault. Examining the effectiveness of apologies in an auditing context has genuine relevance to practicing auditors. However, the results of our investigation into the auditing profession should apply to other fields as well.

There are certainly differences between formal negligence claims against business professionals and those working in public service. Negligence accusations against business professionals likely involve financial loss, whereas negligence accusations against public service professionals could be the result of injury, death, or incarceration.

Ultimately, when professionals make decisions absent the knowledge of what will happen in the future, the potential for reactionary criticism to negative outcomes is likely. When such events occur, individuals’ human-nature response is an emotional desire to assign blame. People inherently desire a scapegoat, and the professional is too often the recipient of the blame.

THE BENEFITS OF SAYING ‘I’M SORRY’  

Sincere, honest apologies are effective, which likely explains why we see business and government increasingly using apologies when dealing with negative events. The apology reduces peoples’ desires to assign blame to a professional for causing negative outcomes. The effects of the curse of knowledge are mitigated, both in circumstances in which the apology is offered to the person directly affected, and when the apology is offered to others who are asked to determine whether blame should be assigned.

Of course, jurors will detect if a professional is merely using an apology as a cynical strategy or is apologizing in an honest and heart-felt manner. (The ACFE Code of Ethics dictates that CFEs “exhibit the highest level of integrity in the performance of all professional assignments ... .”)

By reducing individuals’ reliance on outcome information when evaluating a professional’s prior decisions, the results of prior academic research and our investigation of apologies in business-related contexts indicate that professionals can apologize without admitting guilt to defend themselves from unfounded accusations of negligence and wrongdoing.

Rick C. Warne, Ph.D., is an assistant professor of accounting at the George Mason University School of Management in Fairfax, Va. 

Robert M. Cornell, Ph.D., CMA, is an assistant professor of accounting at the Oklahoma State University Spears School of Business in Stillwater. 

The views expressed here aren’t necessarily those of the ACFE, its executives, or employees. – ed. 

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