Boffins build lie detector for crooked CEOs

Beware of bosses who say f**k a lot

Researchers have developed a method of rooting out fraudulent financial statements based on the statements CEOs and CFOs make during quarterly earnings calls.

The system was developed by researchers at the Stanford Graduate School of Business by analyzing the conference-call transcripts of companies that went on to report a significant restatement to financial earnings that involved a change in net income, the disclosure of a material weakness, a change of auditor, or a late filing.

They found that CEOs and CFOs from these companies spoke in ways that often differed from executives from companies that were on the up and up.

“In terms of linguistic features of deceptive narratives, we find that deceptive CEOs and CFOs use more references to general knowledge, fewer non-extreme positive emotions words, fewer references to shareholders value and value creation,” they wrote.

At the same time, they also found that deceptive CEOs and CFOs differed from each other. Fraudulent CEOs “use significantly fewer self-references, more third person plural and impersonal pronouns, fewer extreme negative emotions words, more extreme positive emotions words, fewer certainty words, and fewer hesitations,” than their peers at large, the researchers said.

“In contrast, deceptive CFOs do not have extreme negative emotions and extreme positive emotions words significantly associated with deception.”

Execs who use above-average amounts of expletives are also more likely to be crooked, they said.

The linguistic classification models performed “significantly better than a random classifier by 4% - 6% with the overall accuracy of 50% - 65%,” the researchers reported. A PDF of their paper is here. ®

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