The language used by company CEOs and top-level management – particularly the tone and choice of words in financial reports – holds clues to possible deceptive conduct, according to research.
In a paper just published by the Journal of Business Ethics, Professor Russell Craig, Head of Victoria University's School of Accounting and Finance, and his colleagues Tony Mortensen (University of Canterbury) and Shefali Iyer (Deloitte, NZ), argue that reports and letters written by fraudulent company bosses contain distinctive linguistic tendencies.
The researchers used as their case study the Indian multi-national Satyam, which collapsed in 2009 after company chair Ramalinga Raju confessed to extensive deception, in the order of $US 1 billion, relating to company earnings and assets.
Drawing on research into the common markers of deceptive communication, as well as software designed to quantitatively trace linguistic patterns and trends, they found that that Raju's choice of words was consistent with patterns used by those engaged in deception.
In particular, the researchers noticed the following linguistic 'alarm bells' in the five annual report letters preceding the company's collapse: a shift from first person singular pronouns (I me, mine) to plural pronouns (we, us, ours); a dominant positive tone; a tendency to use positive emotion words; and a pronounced reluctance to use numerical terms.
The researchers argue that these linguistic signals should serve as warning signs to auditors and regulators, and that systematic analysis of language, and not just numbers, should become routine in auditing processes.
While the methods demonstrated by the researchers would not automatically identify deceptive conduct, they could provide a useful warning signal of the need for closer investigation of a company's affairs.
"Changes to current risk assessment processes appear to be justified in view of the fact that neither Satyam's auditors nor market regulators identified or suspected that a major fraud was being committed," the researchers said.
"Our findings point to the desirability of encouraging the monitoring of letters to shareholders by senior executives for signs of possible corporate distress or improper or unethical behaviour. Such monitoring could be conducted routinely by auditors as part of their assessment of business leadership risk... They could also be used by credit rating agencies and financial analysts as part of their risk assessment procedures."
