With inflation continuing to soar despite numerous interest rate hikes on the part of the US Federal Reserve, financial conditions are getting tighter and driving Wall Street execs to resort to numerous tricks to stay in the game.
However, the recent collapse of FTX and the arrest of its head Sam Bankman-Fried for fraud (among other things) is a wake-up call to high street denizens that the Great Fraud Reckoning looms overhead. Indeed, as former Securities and Exchange Commission chief accountant Howard Scheck puts it, it’s going to be a very busy year for corporate investigators and auditors.
Here Comes the Dollar Drought
Following an entire decade when money seemed to flow in like a tidal wave, experts say we’re now in the midst of a dollar drought. This is a situation wherein money is harder to find and companies find themselves challenged to secure funding and investments.
Higher interest rates meant to stave off inflation are to blame here: purchasing power is greatly reduced, operational costs start to bite huge chunks out of revenues, and potential investors would rather hold on to their cash instead of looking into possible venues or buying stock. Likewise, customers shirk from making purchases, and profits are significantly reduced.
Such are the conditions that lead to what the experts refer to as a fraud triangle: a state wherein the pressure to commit fraud is given both purpose and opportunity. Executives feel justified in the need to fudge their ledgers until such time that the economy improves. They may also feel empowered to manipulate the relevant metrics to alleviate what they see as an unfair punishment meted out by unstable markets.
But when fraud ensues, there’s usually hell to pay in the end.
What Happens Now?
As stated above, former SEC chief accountant Scheck warned that this was going to be a busy year for investigators and auditors. So it may come to a point where there may not be enough law-enforcement or financial investigation people to look into everything – what happens then?
It’s a question that could be the key to knowing how many fraud incidents will come to light within the year, and possibly in the years ahead. While the conditions are right for exposing such cases, the actual number of companies that will actually be caught in the process will depend on either the SEC or the Commodity Futures Trading Commission.
While fraud enforcement went up following the change of power in the White House, investigators still don’t have enough people to differentiate between fraud and the end result of bad decisions made during an economic slump. In this case, increasing the number of people trained to handle corporate fraud as well as stricter penalties for guilty parties need to be looked into in order to give investors a sense of security while keeping businesses from fudging their numbers in the first place.