Throughout history, the world of finance has seen its share of scandal. From Charles Ponzi’s scam in early 20th century Boston to the collapse of Bernie Madoff’s investment firm in 2008, these scandals can cause huge damage to investors and firms alike.
While the reasons behind financial scandal can vary, there are common factors that can lead to misconduct: incentives, pressures, and opportunities. Incentives and pressures may include the desire to make more money or gain a promotion, while opportunities may involve misusing company assets (including cash, inventory, or intellectual property) or creating false accounting entries.
Predatory lending and securities fraud are two types of financial scandal that can cause significant losses and even bankruptcy. For example, in 2007 the housing market crashed and mortgage-backed securities lost value, which was exploited by lenders and investment banks that produced these risky securities to boost profits. The result was a global financial crisis that caused major companies to fail and the loss of billions of dollars in investor wealth.
In addition to the direct impact of these scandals, they can also have indirect effects on consumer sentiment and the profitability of the affected companies. For example, when the high street bakery chain Patisserie Valerie was caught in an accounting scandal in 2018, the Serious Fraud Office and FRC opened investigations into their accounts. Accountants KPMG were criticized for their role in rubber-stamping the business’ figures.
A key part of any anti-fraud strategy is to prevent these types of incidents from occurring. This can be done by putting in place controls to detect fraud and enforcing compliance. For example, using an online trade reporting platform like TradeLog can ensure employees are not committing market abuse and can help businesses stay compliant with regulations.
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