Abstract
The most popular frauds known in the early 21st century eroded investor and society confidence in the financial markets contributing to economic and social destruction. In response, the United States enacted the Sarbanes-Oxley Act (SOX) and the European Union issued several regulatory instruments, but the fraud cases have continued. Motivated by the idea that if we understand where the possible causes are, then the problem of fraud can be avoided or at least reduced in its dimensions and consequences. So, this study intends to understand the causes of fraud and its relevance, identifying their common points and also measuring if they changed in the post-SOX period. From the analysis carried out, it results that the lack of an ethical tone in top management is the cause that remains transversal to both sides of the Atlantic and to the two periods studied. In the post-SOX period, the fraudulent financial statements lost relevance, ceasing to be part of the most relevant causes, and internal control failures became one of the most relevant causes.
TopIntroduction
In 2001, with the Enron case, a phase of financial scandals broke out, such as WorldCom, Adelphia, and Tyco, in America, followed by others in Europe (Ex.: Parmalat and Vivendi) and elsewhere in the globe. These cases have shaken investor confidence in the capital market worldwide. The United States (US) government responded by legislating, namely by issuing in 2002 the Sarbanes-Oxley Act (SOX) so that such cases would not be repeated. On the European side, instead of a single response, the European Union (EU) created several regulatory instruments to also respond to fraud. Despite all the efforts, it did not take many years for new large-scale fraud cases to reappear (remember the cases of Siemens, Société General or Banco Espírito Santo (BES)). Which begs the question: how did this happen?
This study focuses on understanding the most relevant causes that led to the fraud cases, motivated by the idea that the understanding of the probable causes, the problem of fraud can be avoided or at least reduced in its dimension and consequences. Thus, this study aims to understand if there are common points between the various frauds before and after SOX in US and EU and seeks to know whether the effort made resulted in a change in the relevance of the causes of fraud in the post-SOX period.
To meet its objectives, this chapter compares the relevance of each cause to the outbreak of fraud in a sample of US and EU cases, in the periods before and after the implementation of SOX, analyzing common causes and identifying their relevance changed after the entry into force of the different responses.
The present work is structured in five parts: introduction, background, methodology, multiple fraud case study and conclusions.
Key Terms in this Chapter
Case Study: A research method that involves a detailed examination of a subject of study (the case), considering its related contextual conditions. The case to be studied can be an organization, an action, or an event, existing at a specific time and place.
Fraud Triangle: Is a framework developed by Cressey that tends to explain the reason behind an individual’s decision to commit fraud. It considers three components that contribute to increasing the risk of fraud: (1) opportunity, (2) incentive, and (3) rationalization.
Multiple Case Study: When it is studied two or more cases allowing to do a comparative analysis among cases, identifying similarities, differences, benefits and tries to understand and explain a phenomenon in its context.
Cause Relevance: Is the classification of the causes into 4 levels of relevance: “0” when the cause was not relevant to the case in question, “1” when the cause was relevant to the initiation of the fraud; “2” when the cause was highly relevant; and “3” when the cause was critical for triggering the fraud.