Catching Creative Accounting and Preventing Financial Fraud

Carolyn graciously lent me a copy of “How to Lie with Statistics” by Darrell Huff. Despite its 1954 publication date, this book is remarkably relevant today. Below, I explain why the book, despite its high quality, will never achieve its aim, and my suggestion for a substitute.

How to Lie with Statistics is a gentle introduction to deceit with numbers. It is brief, the writing is elegant and light-hearted, and every single one of the lies described in the book is still in widespread use sixty years later. The book includes an informal catalogue of common statistical errors, reserving special scorn for the Precision Bias.

It is a valiant effort to craft an accessible and persuasive introduction to the issues. The author seems to believe that with sufficient widespread education, we can banish misleading numbers. I disagree. The problem is hard, in that the tiny individual payoff will never justify the effort needed to detect and oppose numerical deception. We need an easy way of certifying and enforcing honest data presentation.

The core of Statistics is the comparison of expectations to results. All of the lies present accurate and precise numerical results (technical honesty) but mislead about the appropriate comparable expectation (de facto dishonesty). The situation is complicated by the fact that even professionals frequently have difficulty crafting the proper expectations. Malicious numerists always have plausible deniability.

To put it another way, statisticians have considerable flexibility in methods and presentation. Special interests abuse the flexibility for their own purposes.

There is an analogy to accounting. Accountants have considerable flexibility in methods and presentation of financial results. Accounting is about leveraging that flexibility to avoid taxes. In response to the inevitable plethora of abuses, accountants developed the Generally Accepted Accounting Principles (GAAP), a catalogue of rules to govern the business.

I propose the development of Generally Accepted Numerical Principles. We must formalize the Expectation side of the statistical Expectation-Results dichotomy so that we may call out a liar and impose consequences where necessary.

How might such a system work? I would leave the details to the expert statisticians, but one way would be to develop a formal catalogue of Expectations given specific Results. It might look like something like the following (though this is not the formal proposal):

Use of “Average”

A number called an “average” in isolation entails the following assumptions:

• The number presented is an arithmetic mean.
• The sample of the average is an unbiased representative of the stated population
• The population has a normal distribution in the variable.
• The median is within 0.1 standard deviations of the mean.
• p <>

N out of M/Percentages

A statement of the form “N out of M Practitioners ” or “X% of Practioners ” implies:

• The sample is an unbiased representative of the stated population
• The population has a normal distribution in the variable
• p <>

Line Graphs

A line graph must:

• Have axes labelled and units included
• y-axis has 0 at the origin and no discontinuities
• All data points collected with equal sample characteristics

Appropriate uses could be given a trustworthy logo or stamp. Publications could be “GANP 2011 certified” indicating that they obey the rules of the GANP. It would become easy for lay people know what numbers to trust.

Obviously, the development of such a catalogue would be a monumental task. The organizing committees would be subject to perpetual corruption and interference attempts. The first several iterations of the GANP would permit rampant abuses while loopholes were found and closed. Chaos, confusion and doubt would run amok. During the development of the rules, at least 452,235,239 people will die and more than 1.37 billion will suffer in poverty. Nevertheless, four out of five University of Toronto experts agree, this is a good idea.

College Student Recipe - Tex-Mex Chicken Soup

This is my all-time favorite dish that I make. You're gonna love it, too. Here's how to do it:
4 chicken breasts on the bone (thighs work great, too)
1 onion, chopped
1 (each) red, green, yellow bell pepper- chopped
I made pinto beans the night before and used 4 cups of the leftovers ( cooked from dry w/onions, peppers, garlic)....or use 2 cans, rised and drained.
1 can black beans, rinsed
6 cups frozen corn, divided
4 TBS chili powder,2 TBS cumin,1 TBS salt, black & cayenne peppers to taste
limes, fresh jalapenos (not pickled in the jar- there IS a difference), sour cream, tortilla chips.
Boil the chicken. Skim & discard foam from pot. Debone when cool and tear into bit-sized pieces.
In a large pot- the one the soup will be in ( I use a big cast iron enamled pot), heat some olive oil. add the onions and peppers. Fry for 5 min. Add the chili powder, cumin, salt & peppers.
Strain the broth into this pot.
Take 4 cups of the corn + 1 cup broth and puree in blender until smooth. Add to broth. (do this in 2 batches if need be)
Add the chicken and remaining 2 cups of corn and simmer for 30 minutes.
Take a cup of sour cream and add 1/2 chopped jalapeno, a handful of chopped cilantro, juice from 1/2 lime & the "meat" from the other half of the lime. Mix well.
Now- this part is just as important!- crush a handful of tortillas into your bowl. Add desired amount of soup. Add a spoonful of the prepared sour cream, sprinkle w/shredded cheese and a slice of avocado.
Oh...my....Lord....talk about DELISH!!!
Let me know how it comes out if you make it!

Building the Habit of Waking up Early

It has been said that it takes 21 days to form a habit, and that our habits shape our destiny. I have always admired those that had the habit of waking up early, partially because of the results they got from it and partially because it has so alluded me. Waking up early is a sign of a strong work ethic and excitement to start the day. Of all the other great reasons I could include to support why I want to do this, it is more important to actually do it. I will be documenting my progress and failures in this article over the next 7 days to help others gain insight on how to do this in their lives.


Day 1 - 10:45 am
I got to sleep late last night, sitting in bed unable to let it go. After waking up at 7 am for a brief moment to turn my alarm clock off, I decided to stay in bed and be awake until I could think of something I wanted to do that early. Obviously, after this I immediately fell back asleep and before I knew it, a brief nap turned into a late start to the day.

So I am currently brainstorming ideas for waking up early. I usually have little problem when I have an obligation with someone else, for example a meeting or work. Since I can't think of anyone to get together with that early, I am going to brainstorm exciting things going on early in the morning. I suppose there is some good news on in the morning, however I could justify watching that later in the day. I enjoy drinking coffee, which may be a decent motivator. I'm currently at a loss, but I'm sure something will come of it.

As for these sleepless nights I have been having, I am planning on reading a book until I can't keep my eyes open anymore. If I finish the book, I suppose I will get another one! If I am to be up for hours, I might as well be entertained. Here is to waking up closer to 7am tomorrow!

Day 2 10:04 am

Last night I stayed up in bed reading until I fell asleep - this worked out well, as I felt entertained and as if I was keeping myself mentally sharp. Late night television is not the best at helping me get to sleep, and most of what is on is just garbage anyway. This morning it was raining so I was a little less motivated to wake up - however I did wake up at 7am, only to fall back asleep.

Day 3 10:14 am

So I fell back a little on my goal today, largely in part because of staying up late last night visiting a friend. I went to his house earlier and had a few beers with him, and next thing I knew I was laying down in bed at 2am. A big part of the reason I didn't wake up earlier today, I believe, is that I still don't have ingrained in my mind a good idea of when I should be going to sleep in order to get up early. I am so used to staying up very late; midnight was around the time I used to finish studying and then take at least a couple of hours to wind down. I am now going to have to shoot for 11pm as my target bedtime if I hope to get up early.

On the positive side, this morning I did get up very shortly after I became conscious. No reluctance to waking up, getting out of bed, etc. Considering I took some sleep aid last night, and didn't hear any alarm clocks going off this morning, I am happy that I woke up naturally at about the time I have been the last couple of days. We must remember that I would normally wake up around noon, sometimes later.

Day 4 6:59 am

Success! I am really surprised that I ended up waking up this early today, it was actually one minute before my alarm clock went off! All this success and it only is Day 4, I must admit I was expecting it to take longer before seeing this much progress. Another reason I am surprised I woke up this early was the timing of my sleep - I went to bed a little after 2am this morning again, bad me. It is no surprise that after I jumped up out of bed this morning, I drove to the gas station and purchased a coffee energy drink to help wake up - I didn't want to risk falling back asleep!

Here is a short list of reasons I am excited about being up so early today:

• I can start working earlier (I make my own schedule), and in effect get done earlier in the day, leaving me more time for recreation later in the day.
• I am further ingraining the habit. Even though I may be a little groggy today, I know I will be able to do this with a higher degree of mental alertness in the future.
• I will not only feel like I "get more done," but get more important things done which will bring me closer to my goals. This is partially due to less outside distraction from people, entertainment sources and from the media.
  

Day 5 - 11:10 am... ouch

Okay, so my day up early yesterday turned into a night out late too. The more I see how it is affecting me the next day, especially in relation to the time I woke up, the more I can see why staying out late is something to avoid. My whole day felt like it was slowed down and as if I was playing catch-up the whole time. This doesn't mean I can't go out and see friends, but I have to set reasonable deadlines for when I need to be home by.

Day 6 - 8:24 am

I got to bed at a reasonable hour last night, closer to 11:00 pm than I felt comfortable doing. Going to bed early is something I haven't done in so long that it felt alien, and it was especially difficult because of my excitement from the Cavaliers winning the basketball game that was over right at bedtime. However, it didn't take me as long as I expected it to in order to fall asleep. That is one thing I must battle in order to keep a regular schedule, falling asleep in a respectable amount of time. I have incorporated cardio back into my workout, which should help. I believe a foot injury was the reason I took it out, and I never got around to putting it back in.

Day 7 - 6:00 am (and 11:00 am)

Wow, I got up really early today! Surprisingly enough, I didn't get to bed until fairly late last night and woke up without the alarm this morning. However, to be completely honest, I did go back to sleep at around 8:30 am and woke up again once and for all at 11:00 am.

I think the main problem I have with waking up early is saying no to staying out late visiting with friends. Most of my friends don't like to get together earlier in the evening or afternoon, which is probably a large reason for why I end up staying out so late - they are and they don't make it seem like a big deal.