Executive and managerial motivations for fraud Acconting

Sep 6, 2021 - 16:10

A top executive can reduce the price of his/her company's stock easily due to information asymmetry.

The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in off balance sheet transactions to make the company's profitability appear temporarily poorer, or simply promote and report severely conservative (e.g. pessimistic) estimates of future earnings.

Such seemingly adverse earnings news will be likely to (at least temporarily) reduce share price.

(This is again due to information asymmetries since it is more common for top executives to do everything they can to window dress their company's earnings forecasts.

Top managers tend to share price to make a company an easier takeover target. When the company gets bought out (or taken private) – at a dramatically lower price – the takeover artist gains a windfall from the former top executive's actions to surreptitiously reduce share price.

This can represent tens of billions of dollars (questionably) transferred from previous shareholders to the takeover artist.

The former top executive is then rewarded with a golden handshake for presiding over the firesale that can sometimes be in the hundreds of millions of dollars for one or two years of work.

Managerial opportunism plays a large role in these scandals. Similar issues occur when a publicly held asset or non-profit organization undergoes privatization.

Top executives often reap tremendous monetary benefits when a government-owned or non-profit entity is sold to private hands.

Just as in the example above, they can facilitate this process by making the entity appear to be in financial crisis – this reduces the sale price (to the profit of the purchaser), and makes non-profits and governments more likely to sell.

It can also contribute to a public perception that private entities are more efficiently run, thereby reinforcing the political will to sell off public assets. Again, due to asymmetric information, policymakers and the general public see a government-owned firm that was a financial 'disaster' – miraculously turned around by the private sector (and typically resold) within a few years.

Under the Special Plea in Fraud statute, “the government must ‘establish by clear and convincing evidence that the contractor knew that its submitted claims were false and that it intended to defraud the government by submitting those claims.’” Mere negligence, inconsistency, or discrepancies are not actionable under the Special Plea in Fraud statute.

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