Excellent article in the FT of Oct. 30,  2015 by Conrad Wolfram RE: Binary thinking. Scholarly pursuits in the meta study of the investigation of potentially fraudulent financial statements or financial statements indicating under-appreciated financial distress may rely on models positing a relationship of comparative normalcy within the peer group. By analogy (the possibilities in development of a scale are numerous), a zero score may indicate a 0% chance of materially bad stuff (given the financial statements of the reporting entity and its peers) and a score of one may indicate a 100% chance of materially bad stuff, with many ambiguous possibilities for intervening scores. Bad stuff basically means the reporting entity’s financial statements indicate insolvency (or worse) in the short- to near-term. This type of meta study may be more helpful for gatekeepers such as credit rating agencies than fraud examiners such as FBI special agents. After all, we don’t dress for a walk today in NYC Central Park based on average historical temperature for Oct. 30 in the NYC metropolitan area.

The guidance I provide to my students includes the following questions to be asked in the development of professional divergent and critical thinking (in addition to the presumed awareness of convergent thinking – that is, what the commonly accepted ‘wisdom’ is):

• The question is not whether fraud existed / exists in the given reporting entity – the question is whether it was / is material. We cannot avoid fraud in this high stakes, excessively competitive, winner-take-all, coopting of independence in law gatekeepers by their clients, puffery-dependent marketing and promotion schemes, etc. (examine your own experience for other attributes that tend toward depictions of something other than the truth, the whole truth, and nothing but the truth) socioeconomic and political environment.
• Practice, at a minimum, tertiary thinking. For example, the question is often not either / or – it is either / or / neither / or something of a hybrid, and it may be something altogether different now!