How to spot deception in earnings calls

Are you an investor trying to unravel the truth buried in the barrage of information in earnings calls carefully crafted by companies?

Business Intelligence Advisors Inc. has solutions for investors who think executives are stretching the truth during earnings calls. The Boston-based analyst firm uses what it calls the “Tactical Behavior Assessment” methodology, which has its roots in the intelligence community, to analyze behavior of executives.

Bill Mayew, an associate professor of accounting at the Fuqua School of Business at Duke University, mentioned the company during a recent webinar on earnings-call coverage for journalists organized by financial information firm Sageworks Inc. BIA looks at “deception markers” in speech to determine a firm’s health.

“There are certain patterns of words, certain speech hesitations or certain aspects of voice that will mark that something is not right at the firm,” he said.

The company’s behavioral experts have analyzed more than 4,000 earnings calls, 50,000 question-and-answer exchanges and more than 1,500 companies in 30 countries since 2001. BIA’s clients include institutional investors, public accounting and financial services firms worldwide.

The company uses the behavior-assessment model based on certain verbal and nonverbal behaviors to evaluate the reliability of management commentary about their businesses, primarily through the analysis of public earnings calls, said Cheryl Cook, president and co-founder of BIA.

“The methodology has its roots in the intelligence community,” she said, “but has been evolved by BIA since 2001, when we pioneered its use on behalf of institutional investors.”

The company also teaches its clients to use the methodology to formulate questioning strategies in their meetings with management teams to elicit revealing responses.

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