Month: February 2019

COSO Fraud Risk Management Guide: As good as it gets?

There is much discussion with recommendations from accountants, auditors and loss reduction specialists on linear controls to reduce misuses and abuses of benefits payment systems, occupational fraud, theft and corruption. This article posits that people and organizations are “complex systems” in their own right, and that we ought to pay attention to science deep diving into this world. The irregular and unpredictable nature of these workplace harms will remain a puzzle for everyone attempting to make their organization more secure until we collectively understand the dynamics of misuse, abuse and fraud.

To this end, the advocates of chaos theory deserve our attention. They assert twentieth century science will be remembered for three great things: relativity, quantum mechanics and chaos. Chaos is the study of the dynamics of complex systems. Common characteristics of chaos across disciplines include sensitivity to the tiniest changes in initial conditions, or seemingly random and unpredictable behavior that nevertheless follows precise rules. Chaos cuts away at the tenet of Newtonian physics – that the universe is an orderly and predictable place.

The Origin of Chaos

Chaos begins where most science stops. Until fairly recently, it wasn’t recognized that scientific reductionism, which offers great discoveries including quarks, unveiling secrets of chromosomes and mysteries of neurons suffers a special ignorance about disorder. Reductionist thinking can’t explain disorder in the atmosphere, in the turbulent sea, in oscillations of the heart and the brain, in the fluctuations of wildlife populations and, where we spend our energy, in the behavior of people in organizations.

With more powerful computing in the 1960s and 1970s, scientists in the United States and Europe began to find a way through disorder; to explain those things in science that could not previously be explained. Up until this time disorder had been written off as residual “noise” in experiments. Some mathematicians, physicists, biologists and chemists began seeking the relationships and connections between different kinds of this irregularity. Their curiosity led directly into the natural world – the shapes of clouds, the paths of lightning, the microscopic intertwining of blood vessels, the galactic clustering of stars, and even tipping points (Clifford Shearing ‘et al’) in human behavior.

Early chaos mathematicians and scientists created special techniques of using computers and special kinds of graphic images – pictures that capture fantastic and delicate structure underlying complexity. A new language has emerged: “fractals and bifurcations,” “intermittencies and periodicities,” “folded-towel diffeomorphisms and smooth noodle maps”.

Chaos Observed

Now chaos seems to be everywhere. A rising column of cigarette smoke breaks into swirls. A flag snaps back and forth in the wind. A dripping faucet goes from a steady pattern to a random one. Chaos appears in such things as the behavior of the weather, the behavior of an airplane in flight, the behavior of cars clustering on an expressway, the behavior of oil flowing in a pipe, in genetics, other biological sciences disciplines and the behavior of people.

Wrapping up, chaos lays strong claims to nonlinearity. It eliminates the myth of deterministic predictability. It breaks across the lines of historically separated disciplines. It shifts focus to the global nature of complex systems. It forces understanding the relationship between things and an eye for pattern; especially pattern that appears on different scales at the same time. Chaos requires a taste for randomness and complexity.

Diving into the lessons of chaos will force a shift in mindset from the parts to the whole. We should include other failing tenets applied in misuse, abuse and fraud prevention and reduction strategies. New science belies homo economicus: “Man” as a rational actor always acting in self interest. Psychologists point to just how predictably irrational we are, that we are reciprocally altruistic and that imitate each other faster than any other species on the planet. The notions of determinism and free will have been rebuffed, and there is deepening understanding of innate human behaviors, environmental triggers inducing bad behavior, the role of affect (emotions) in judgments and decisions, and fallibilities (heuristics bias) in the way people logic.

Where does this leave us in the counter-fraud game?

Introducing chaos and other new science predictably poses problems that defy accepted ways of playing the counter-fraud game, beginning with how we ought to think about other people-centered threats such as workplace sabotage and workplace violence.

Figuring out this stuff will have us want to turtle at times. But, if we don’t think about it, discuss it, and talk to those people who deeply understand chaos and other new sciences – we are likely to continue to fall farther behind the adaptability curve in a time of fast-paced scientific discoveries and change.

We all know what happens to species that fail to adapt. Their numbers decline towards extinction.