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Regulate the Fraud Too

September 12, 2010

It appears that bank regulators have reached an agreement on new standards for “the world’s largest banks in an effort to create a more stable financial system.”

The deal would create new capital standards for banks, a move designed to prevent the companies from loading up on the risk and debt many saw as a precursor to the recent financial crisis. The new rules will force banks to hold more capital against a wider range of their loans and investments. It will likely push down profits at the world’s largest banks, many of which have warned such a move could drive up the cost of credit for borrowers and restrict credit.

But are these new standards enough? What about the control fraud that takes place at these banks?

Control fraud — as defined by William K. Black — takes place when “the CEO or head of state uses the entity as a ‘weapon'” to engage in fraud.

Since CEOs are behind the control fraud in most cases, regulators need to focus on enforcing the Sarbanes-Oxley Act, which holds CEOs and other senior executives accountable for “accuracy and completeness of their companies’ financial reports and to set up internal controls to assure the accuracy and completeness of the reports.”

It’s important to hold not just CEOs, but their associates as well, accountable because they have a personal incentive to engage in the fraud even at the expense of company profits (i.e. personal bonsuses); otherwise, a Gresham’s is set up in which only CEOs who are willing to engage in the control fraud will be hired.

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2 Comments leave one →
  1. oliver permalink
    September 14, 2010 5:33 am

    You know what they say, “the best business ideas are the ones that are currently legal but border on criminal”!

    You don’t get to the top with hard work, you get there by being flexible, so flexible any time you see a hole you shoot for it, you do less work and more internal information mining, you act like a snake. Find, generally three pieces of information about everything that is good, and whenever it comes up, spew out the information quickly so you look like you are the one most on top of the success or reasons behind it. Always look to cut down any potential threats, but don’t appear this way by constantly supporting and speaking well of people who will never be any threat to you, this will also make you look good. Ever notice how many times people at the top will have a complete moron working close to them, that’s because they can always control them or rid them if they get insubordinate, never surround yourself with quality people, they are potential threats to your dominating success. Steal others ideas, make close-ended excuses, act big. Think of things that are blatantly illegal, change their structure slightly so there not, and implement these plans.
    The way to the top is through rape, pillage, murder and destruction, find ways to make it metaphorical and use business school terms and you’ll have a winning strategy for success in corporate America.

    • Trung permalink
      September 14, 2010 6:54 am

      gotta love good old corporate america

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