Financial scandals have a powerful impact, eroding investor confidence and shaking the foundations of the financial system. They often result in corporate bankruptcies and economic crises that affect the whole economy. In addition, they can cause political turmoil and public anger that deflects blame from the root causes of the fraud and often results in sweeping reforms such as tighter accounting standards, new regulatory bodies, and anti-money laundering laws.
This article discusses the determinants of financial scandal, using evidence from over 25 years of databases of financial crimes, including fraudulent statements and insider trading, to examine the systematic structural causes of these events. Using long-run historical analysis, it shows that economic freedom, the relative importance of the industrial and financial sectors, the availability of credit, international capital mobility and secrecy, and banking stability are all key determinants of the prevalence of scandal and fraud.
A business scandal, or accounting fraud, involves a company violating federal laws by misreporting earnings or other financial statements. For example, in the late 1990s, scientific equipment manufacturer Perkins Elmer was discovered to have inflated its stock price by engaging in accounting manipulation. Their scheme was uncovered, and the CEO was convicted of securities fraud. In 2020, German payment technology company Wirecard was found to have committed an accounting fraud of a similar magnitude. We speak with Dan McCrum, the Financial Times investigative reporter at the heart of this story, and forensic accountants who have investigated several cases of financial statement fraud.
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