BELIEVE it or not, the investing public is one of the reasons listed issuers engage in fraud.

Today’s investors look for high-performance stocks. Any profit announcement that does not meet market expectations will result in a sharp drop in the stock price. 

If the performance of the company begins to decline, the management of the company could be forced to manipulate the accounting results to meet or even exceed market expectations. 

Certain information disclosed may be disguised or unrealistic, especially in the case of accounting for transactions between the parent company and its subsidiaries.

Also, if the directors are compensated in such a way that they benefit from substantial increases in the company’s financial performance, such as via bonuses or equity,  the could be prompted to make decisions to drive results in the short term – the period of time in which their decisions are likely to affect the executive’s power, influence, and monetary gain. 

This nearsightedness may lead them to engage in fraudulent activity, which may involve manipulating financial metrics and reporting to increase a company’s stock price and subsequently their net worth.

Research in criminological thinking agree that there are psychological peculiarities specific to financial fraudsters that are similar to the peculiarities of the psychopath. 

Even though they would never be diagnosed as psychopaths, financial fraudsters’ behaviour, to varying degrees, can be just as deceptive, dangerous, and remorseless as that of a full-blown psychopath.

Like all psychopaths, fraudsters give the image of a healthy, rational, and normal personality, which masks their true nature, with always a rationalising speech ready to justify their actions, and an arrogant attitude.

The people implicated in a fraud are always able to justify their action by minimising the seriousness of the consequences.

All of them first favour a centralised decision-making process, in the form of a powerful or dictatorial CEO/MD, who could also be the founder and single largest shareholder.

It can therefore be said that an ambitious, arrogant, and self-confident leader engages in fraud because he thinks he will never be caught. He is likely to think of the authorities and regulators are being of lower intelligence than he.

If the initial fraudulent act is committed without detection, it can lead to repetition of the same behaviour and the rationalisations shared within the company until the acts become routine practice.

If external governance mechanisms, such as regulation, or internal ones, such as the board of directors, are insufficient or even ineffective, it makes it easier for the fraudster to get away with cheating.

Generally, the opportunity to commit fraud arises when controls are absent and a corporate environment pushes its employees to use aggressive accounting policies.

The fraudster knows very well the administrative machinery and have access to data and systems, and when the fraudster is a significant shareholder, it will put him in a position of strength, giving him an edge over the other members of the board.

It can therefore be said that there is no counterweight to his authority within the company. 

Is it the responsibility of the auditor to detect fraud? Fraud is the weak point of the accounting profession and the auditor will always claim that it is not its duty or within its job scope to detect it. 

Acts of fraud cannot occur if a company’s disclosure practices are carried out in accordance with  regulations.

While full-blown psychopaths are not deterred by fear and do not learn from punishment, financial fraudsters can get the message that adverse consequences will follow misconduct. Strictly enforced firm policies can be effective in deterring those who may be tempted to engage in illicit conduct. – May 19, 2022.

* FLK reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.