Introduction

Financial crises have been a feature of commercial and business life the last few centuries and there is no simple answer regarding their etiology. Corruption and fraud have existed since antiquity and for those, too, there is no consensus concerning their prevention. A quick search yields a large number of books and many more journal articles on all three—financial crises, corruption, and fraud. As is often the case, after years of research, the challenge has become how best to integrate knowledge about them in an effort to contribute to their prevention—a tall order by all accounts. In proposing the “corruption and corporate fraud prevention Model”(CCFP) in Chapter 5, I strongly believe that the risk of a financial crisis can be significantly reduced if certain measures are simultaneously implemented at the level of persons, the company, and the broader community/society. This should not be interpreted as a belief in panaceas but in the necessity for a well-informed and well-integrated holistic approach to corruption, corporate fraud, and financial crisis prevention.

When the financial markets are doing well very few people want to know about “problems.” As someone once said, only when the tide is out do we discover who has been swimming naked. Without claiming to be an expert on financial crises, what I tried to do in the book is to provide the reader with knowledge about the phenomena of fraud and corruption, their consequences, how each one can contribute to a financial crisis, and how, if there is the will, the risk of a financial crisis can be significantly reduced. I place emphasis on people’s own ethical code and, like some other authors, I believe that corporate ethical behavior is not incompatible with profitmaking. I don’t claim to have asked all the right questions let alone answer them. One thing is clear: there are no simple answers on how best to reduce corruption and corporate fraud and avert a financial crisis. However, given the political will and an approach that highlights the importance of working simultaneously at different levels of analysis (people, company, and society), we can be optimistic that the risk can be significantly reduced. This is the reason for proposing the CCFP model in Chapter 5.

2 • Corporate Fraud and Corruption

In writing this book I tried to draw on material internationally. When I used material from other authors my tendency was to let them speak for themselves as much as possible. The structure and content of the book to a large extent parallel the evolution of my own academic career and research interests.

The first chapter provides a brief review of the causes of the 2008 financial crisis. Adopting an international perspective and focusing on corruption and fraud against and by a corporation, especially mega corporate fraud, their role in facilitating the 2008 crisis is examined. The prevalence and cost as well as the causes and consequences of both corruption and fraud are addressed. The reader is provided with concrete suggestions for the prevention of both corruption and corporate fraud which, in turn, contribute to reducing a financial crisis risk. In the case ofcorporate fraud, the prevention measures include how to enhance fraud detection, reporting, and prevention by auditors.

The second chapter provides detailed assessment of the absence of a supporting infrastructure of governance, law, and culture that contributed to the 2008 crisis. The concept of regulation and justifications for it are considered. The need for regulation is emphasized, through both hard law and soft law. Attention then turns to a critical evaluation of different approaches to regulation, including legislation, fiduciary duty, corporate governance (CG), and self-regulation. The chapter uses examples of legislation from the United States, the United Kingdom, Australia, and the European Union (EU) to discuss the regulation of financial services, including banks, considering also the case of developing countries. Finally, the chapter provides a much-needed discussion of both the regulation of accountants and auditors and politicians and provides recommendations for improvement.

Chapter 3 focuses on the responsibility for corporate ethical behavior nationally and internationally, introducing first the principles of the UN Global Compact and the UN Code for Corporate Sustainability. It also discusses the relationship between ethical behavior and gender, neutralization techniques, and cultural factors as well as how corporate culture impacts on employee behavior. Attention then turns to corporate social responsibility (CSR), justifications for it, and its impact on financial performance and employees. It is argued that in times of crisis, CSR can be converted from a threat to an opportunity. Finally, the chapter discusses legislation in the United States, the United Kingdom, and the EU, the convergence into sustainability of business ethics, CSR, as well as the UN Guide on Corporate Sustainability, ISO 26000, and CSR in different cultures.

Having already addressed financial crises, corporate fraud and corruption, regulation, and responsibility for corporate ethical behavior, Chapter 4 addresses governance and CG, including their definitions by the World Bank,

Introduction • 3

the Organisation for Economic Co-operation and Development (OECD), and the UN. CG is discussed extensively, including its development and legislative reforms introduced to strengthen it in the United Kingdom and the United States, at the same time acknowledging, however, that CG approaches do differ in different countries. I tried to maintain a balance by focusing on both the private and public sectors. The OECD principles of CG, the Australian Stock Exchange’s Principles, and the UK’s CG Code illustrate good private sector governance. The reader will be pleased to know that key correlates of good and bad governance are discussed, with the Australian National Audit Office Guide being provided as an example of good public governance. Finally, Quality of Government across countries and regions in the EU is discussed as well as ways of improving it.

To suggest new ways of tackling old problems, we first need to evaluate what has already been tried. The final chapter first critiques well-known approaches to CCFP. Next, improving on the fraud triangle and my own ROP (rationalization, opportunity, and person) model of fraud detection and prevention, I put forward a new model of CCFP. It comprises three interdependent pillars (“people,” “company,” “society”) that hold the prevention edifice. Each pillar represents one level of analysis and contains specific measures to prevent corruption and corporate fraud and consequently to reduce the risk of a financial crisis. The “people” pillar encompasses ethics and moral values; “company” consists of ethical programs, CSR, and CG; and finally, the “society” pillar comprises ethics curriculum, institutional integrity, political accountability, and civil society participation. I consider the simultaneous implementation of the CCFP model in its totality a prerequisite for its successful implementation.