The world of finance is built on trust and transparency, but at times that faith is shattered by greed and corruption. Financial scandals can cost companies and investors billions. They can also wreak havoc in entire economies. Some of the biggest frauds are uncovered through investigations by journalists and others, such as the Securities and Exchange Commission’s probe of alleged market manipulation in foreign currency markets. Others are uncovered by regulators, such as the recent scandal in which Volkswagen was accused of falsifying emission tests for its diesel engines.
Most companies are honest and recognize that Wall Street would be a ghost town if everyone committed accounting fraud, known as “cooking the books.” But even so, fraud does occur. In recent decades, a number of major corporate scandals have rocked the City and the wider world.
These include the collapse of Enron, a US energy company that appeared to be one of the most profitable businesses in the world but actually had massive debts; the fraud at health care giant HealthSouth, which overstated earnings by billions; and the spectacular Ponzi scheme run by Bernard Madoff Investment Securities, which was estimated to have lost investors $170 billion.
Often the perpetrators of such scandals are highly placed within an organization and are able to use complex corporate structures and tax-haven secrecy jurisdictions to conceal their schemes from regulators and investors. Managerial opportunism and lax regulations also play their part. This project explores the determinants of financial scandal, using databases that span the twentieth century and the global interconnectedness of finance to help identify patterns and trends.