Twenty years ago, my research revealed one of the biggest institutional scandals in the history of USA: taught me that the fraud is everywhere, just waiting to be explained
I published a twenty years ago paper This helped the emergence of one of the largest institutional scandals in the US history. More than 100 public companies have been involved, dozens of administrators have resigned or face criminal charges, and billions of earnings should be rearranged.
I never intended to fly information. I was just doing what academics were trained to do: ask questions, follow the data and let the evidence talk. But what the evidence emerged was surprising: the executives in hundreds of companies manipulated the shares option grant dates to enrich their managers at the expense of shareholders. The application is known as return.
Now, on the 20th anniversary of this research, I see the disturbing parallels that emerge in other corners of the financial world.
A pattern too sensitive to be a chance
My journey to this dark corner of institutional behaviors began with the desire to understand how the executive compensation affects firm decisions. When analyzing great compensation and stock prices, I noticed something strange: the stock option coincided with recent decreases in the company’s share price. Very often.
The pattern was statistically impossible. It was as if the managers had a crystal ball, the most appropriate time was re -options again. But the truth was more ordinary and more disturbing. Companies had chosen the grant dates that overlap with low stock prices backwardly, instantly, effectively locked in uninspired gains. This allowed managers to buy shares while maintaining the illusion that they had to earn a discount by removing the stock price.
The simplicity of the plan
What made the fraud so insidious was simplicity. Adding back did not require complex financial engineering or detailed covering. It was quiet manipulation of documents – claiming that a date in which the stock price was low and the day is given.
This simplicity probably contributed to its spread. There is evidence that individuals in more than one committee have passed throughout the application. However, even insulated executives and directors can easily design the scheme, paid an invoice just like someone.
Straight -out
What impressed me the most was that returning was not noticed for at least ten years. It was a quiet epidemic of opportunism. The option grant data was open to the public. Thousands of participants were included. Of course, some auditors must have seen the isolated traces of fraud. But no one tied the points.
When my research was combined with a timely impulse, he finally pushed the SEC to initiate targeted investigations. Journalists, including a team Wall Street Journal Time to follow the story, with resources and incentives. The work first won the newspaper Public Service Pulitzer Award.
Parallels in other scandals
Since then, I have seen the parallels to return in other financial scandals. For example, return is not only the only fraud that depends on choosing prices from the past. Bernie Madoff’s famous Ponzi scheme used fabrication processes based on stale prices. Attentionally, Madoff’s investors have accepted these reports for years despite the irrational of returns. Similarly, the scandal, which invests late in the investment fund late, allowed the trade of investment funds illegally from the end of the trade day of the customers.
These cases show how easy it is to perform well when you choose a moment when you can go back on time and take action.
Today, I am concerned that similar dynamics may occur in private capital. Many funds declare values based on internal or third -party estimates shortly after purchasing assets. These values often appear to be inflated – sometimes accepted as by companies themselves. However, these funds are more involved in the pension portfolios by exposing daily investors to risks and potentially fraud.
Paradox of Corporate Fraud
Paradox of this corporate fraud: Both obvious and invisible. Data are usually there. Patterns can be detected. However, deception continues with silent perpetrators.
What gives me hope is that our tools to identify fraud is stronger than ever. We have better data, sharper analytical methods and a growing skeptical surveillance community.
Because the next scandal will not be stopped only by the organizers. It will be stopped by someone who notices a pattern, asks a question and refuses to look away.
Fortune.com The views expressed in the interpretation pieces are only the views of the authors and do not necessarily reflect their views and beliefs. Luck.
