Last month, we reviewed the lies in financial statements, which are both legal and ethical; this month, we move up to illegal and unethical actions. Electrical contractors must be vigilant to avoid the steps that can lead to lies and avoid being victimized.

Über predator Bernie Madoff bilked sophisticated investors out of $50 billion because he had a reputation built on the testimonials of his early investors. Although you would never engage in such insidious pyramid scheming, you might be tempted to embellish your qualifications to gain a new client, inflate your profit projections to impress your banker, or gloss over a problem no one will ever see. Don’t exaggerate testimonials, and avoid making promises until you have the financial resources to back them up.

As for investments, remind yourself that there is no such thing as a 100 percent safe investment. The Motley Fool (www.fool.com) reminds you that not even blue chip stocks, real estate or U.S. Treasuries provide always predictable returns.

Bad debt vs. good debt

The mortgage lending crisis was built on many lies, creating one big lie: mortgage debt must be good because property appreciates and the investment pays off. Borrowers lied to bankers about their income. Loan officers lied to their bosses about borrowers. Bank executives lied to rating agencies and sellers of the debt. Noses grew longer than Pinocchio’s until the system collapsed. Then, the blame shifted to the borrowers, who “should have known” they wouldn’t be able to make the payments.

Conveniently, the federal government bailed out the bankers who carried the lies upstream, allegedly for the benefit of the borrowers who were ignorant about what was in their loan documents. Each transaction was built on the great lie that bankers wouldn’t lend this much money unless they believed the mortgagee had the resources to repay it. When you borrow money, don’t tell yourself this lie.

Credit cards are always bad debt, regardless of interest rate, rewards program or other benefits. Credit cards can be useful to bridge over temporary cash-flow shortfalls, if you pay them off within the grace period. The debt becomes bad if you extend the payback beyond the life of the asset it supports. For example, you draw down your line of credit, and instead of repaying, you convert it to a one-year note. If this pattern continues, eventually you are financing old receivables with a multiyear loan.

There is no such thing as good debt. All debt is a liability, and the inability to repay on time converts it to bad debt.

Fraud

The FBI’s “Financial Crimes Report to the Public” summarizes investigations of white collar crime, such as fraud, theft and embezzlement. These are crimes of deceit, concealment or violations of trust—in other words, crimes based on lies. In 2002, following the Enron scandal, President Bush formed a task force on corporate fraud, comprising senior members of federal agencies. The FBI investigations have focused on accounting schemes, self-dealing by executives and obstruction of justice to conceal illegal activities.

Some of red flags include inflating profit and hiding losses, false transactions, insider trading, kickbacks, misuse of corporate property for personal gain, and individual tax violations related to self-dealing. Of the 123 investigations initiated in 2009, 77.8 percent resulted in incarceration, with an average term of 43 months. Billions of dollars in restitutions, recoveries, fines and seizures are documented each year. During the same year, the same percentage of the 338 construction industry investigations produced an average term of 29 months.

The report includes tips to avoid becoming a victim of fraud, such as money laundering. Know your customers and how their businesses operate, recognize and report suspicious transactions, and make sure your employees are trained to be skeptical, or you may unwittingly become a conduit.

Beliefs that become big lies

The most difficult lies are based on underlying beliefs, such as “The Five Most Common Lies in Business” from the December 2007 issue of Fast Company magazine, which are shown in the chart below.

It is imperative to question beliefs, values and core principles of your business, or you risk the slippery slope that leads from lies to damn lies.

Next month, we’ll see how statistics are misused.

NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at ddjohnson0336@sbcglobal.net.