How Can You Tell When A CEO Is Lying? In the financial markets, a lot rides on the word of a company's top executives. If a CEO tells a lie, a lot of shareholders can get hurt. Two researchers have studied earnings calls and think they know how to gauge senior executives' truthfulness.

How Can You Tell When A CEO Is Lying?

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Transparency also matters in the business world. A lot rides on the words of a company's top executives. If an executive tells a lie, people get hurt. Now two researchers from Stanford University think they've come up with a way to tell when senior executives may be lying.

NPR's Jim Zarroli reports.

JIM ZARROLI: It's a question that people have been wrestling with for as long as humans have been interacting with each other.

DAVID LARCKER: I think since the Garden of Eden, we've been trying to figure this out, you know, who's lying and who's not lying.

ZARROLI: And David Larcker, professor of accounting at Stanford, says it's a question that has taken on real urgency in the business world in recent years. The financial crisis underscored how opaque the books are at a lot of companies.

LARCKER: There were some gigantic accounting frauds, big restatements, things like that. So a typical issue for us or for analysts or institutional investors: Is can you actually predict those companies that are likely to have problems?

ZARROLI: That's what Larcker and Ph.D. student Anastasia Zakolyukina set out to answer. It's a field that psychologists and linguists have studied a lot over the years, and they've come up with certain indicators that signal deception. For instance, in 2002, NPR interviewed Computer Associates CEO Sanjay Kumar - who later went to jail for securities fraud - about his company's auditing practices.

SANJAY KUMAR: There is no one out there today in the world of public companies who has the former chief accountant for the SEC running their audit committee. We do. There's no one out there who has the preeminent governance leader - Professor Lorsch, for example - on their board running their governance committee. We do.

ZARROLI: In other words, Kumar was asked, can your books be trusted? And he replied: We hire the very best auditors. Larcker says that can be a big warning sign.

LARCKER: You basically are not answering the question. You're basically making reference to somebody else, and those are the kind of things in a psychology you kind of look for.

ZARROLI: Larcker and Zakolyukina pored through the transcripts of thousands of corporate earnings calls, when CEOs and CFOs take questions from analysts. Then they studied the words of executives at companies that later had to restate earnings, which often happens after fraud has occurred. And they identified some key indicators of deception.

Zakolyukina says lying executives tend to overuse words like we and our team when they talk about their company. She says there's a reason for that.

ANASTASIA ZAKOLYUKINA: If I'm saying I or me or mine, I'm showing my ownership of the statement, so psychologically, I'm showing that I'm responsible for what I'm saying.

ZARROLI: Lying CEOs also tend to use a lot of words that express positive emotions. Things are fabulous and fantastic and extraordinary.

Here was Enron CEO Ken Lay, addressing his employees at a time when his company was about to implode.

KEN LAY: I think our core businesses are extremely strong. We have a very strong competitive advantage. Of course, we're now transferring this very successful business model and approach to a lot of new, very large markets globally.

ZARROLI: Words like that can be a form of overcompensation.

ZAKOLYUKINA: If all my speech is fantastic, superb, outstanding, excellent opportunity, and all my speech is kind of, sounds like a big hype...

ZARROLI: So, it sounds like an exaggeration.

LARCKER: It probably is. Yeah.

ZARROLI: Larcker and Zakolyukina have put their data into a computer model - one that can issue red flags when signs of deception occur. And they've already heard from a lot of people in the financial markets wanting to use it.

LARCKER: We got one that said something like: Thanks a lot for telling the CEOs and CFOs how to lie. But...

ZARROLI: What do you say to that? I mean, in a way, they kind of look at this research and say, well, here are the words I should never say.

LARCKER: Well, I mean, yeah. I think, yeah, there's some truth to that.

ZARROLI: Larcker acknowledges that there's a lot more research that needs to be done in this field, and he's the first to admit his model is not foolproof.

But in a decade when billions of dollars have been lost in accounting frauds, a lot of investors are ready to seize on any tool they can find to figure out whom they can trust.

Jim Zarroli, NPR News, New York.



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