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Operational Fraud Risk

“Other than the label somebody’s written,” Mr. Farquar says, “you really have no idea where your food’s coming from.” See NYT, April 6, 2015. Cf. fraudulent financial reporting. This summarizes more or less the condition in which we find ourselves under many circumstances. The protective role of the independent gatekeeper (e.g., credit rating agency) has arisen and grown such that we make decisions, financial and non-financial, based on our expectation that these gatekeepers have performed effectively. Moreover, we have regulators that guard the gatekeepers (e.g., the SEC). Nonetheless, no matter how many labels layer over the original assertion (e.g., this label faithfully and neutrally represents the quality and origin of this food, and this overlaid label certifies that someone independent has reviewed and approved the appropriateness of the underlying original label), we have still have layers of labels that launder the original assertions as our documentation that the product / service is what it purports to be.

So whom do you trust? Experts battling in courts of law seem to present a difficult conundrum (e.g., if the matter were resolvable by expertise, and the expertise were valid, then how do these experts differ? Imagine astronomers arguing under oath about whether Mercury or Saturn were nearer the Sun?) If lay people (i.e., non-experts) only know what they perceive firsthand, good luck finding a lay person swearing to the truthfulness of the label RE: the alleged organic strawberries.

Of course, the issues become murkier – as we seem to trust those who agree with us more than those with whom we disagree, an existing confirmation bias expands and hardens into routine groupthink, though this consensus development is not recognized among the insiders as a hazardous slide into the yes-men culture but as a rational expression of preference and natural liking among individuals of similar belief and value structures. The outsider is rejected not because he / she challenges the routine but because he / she is not likable (e.g., he / she is not a good fit). Anyone who has ever worked with disagreeable individuals recognizes that this preliminary overview leaves much unsaid, but brevity is generally a good thing.

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