Policing business – the importance of accurate accounting and clean conduct

There have been a number of stories over the last couple of weeks in which the forces of law and order have had occasion to pounce on businesses alleged of malpractice. It’s often a mistake to imagine that financial crimes have no victims: sometimes individuals are robbed of large amounts. More typically, a large number of people will each lose a small sum. Perhaps a more ‘interesting’ cost is the loss of confidence this generates. If investors can’t trust that the accounts of a firm are truthful, what effect will that have on investment? If ‘insider traders’ are creaming off profits, what room is there for outsiders? A few news links and issues follow.

According to the BBC the Financial Services Authority (FSA) and the and the Serious Organised Crime Agency (SOCA) have in recent weeks come down hard on corporate corruption, insider-dealing and other offences or crimes committed in the world of business and finance. These are no pussy cats. The chief executive of the FSA is quoted as saying “There is a view that people are not frightened of the FSA. I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA.”

Deutsche Bank, BNP Paribas and hedge fund Moore Capital are now known to have workers caught up in a current FSA probe. Their employees are among seven so far arrested under suspicion of taking part in a long-running insider dealing scheme. This is where people on the ‘inside’ use business secrets to stay one step ahead of the markets. A large number of prosecutions are in the pipeline from other investigations.

It’s one thing when criminals take advantage for personal gain. But what about accounting tricks that companies deliberately employ to mislead – sometimes with criminal intent?

The US financial regulator has launched an investigation see here into accounting tricks by Wall Street firms designed to mask heavy losses. A recent report accused collapsed bank Lehman Brothers of using this device to hide the true extent of its losses. It accused Lehman’s of removing temporarily $50bn (£33bn) of assets from its balance sheet in 2008 alone. The trick involves shifting around assets to reduce the size of a company’s balance sheet, and effectively give the appearance that debts have been cut. The subsequent collapse of the 158-year-old investment bank in September of that year was the world’s largest bankruptcy.

Practices like this damage all firms and so the honest ones have a strong vested interest in seeing the crooks weeded out. It will become impossible for banks to lend and shareholders to invest if a culture of misleading accounting takes root.