Recently, I asked a friend and former colleague why there are so many (big) financial scandals in a BULL market (eg, Archegos Capital Management, Greensill Capital, Wirecard). Usually, such scandals occur in a BEAR market because losses can no longer be hidden (eg, from banks, press, public). This discrepancy is bugging me.
After some further reflection, I could come up with only one argument for both situations: cash – or a lack of it. Like American economist Alfred Rappaport (b.1932) once stated: “Cash is a fact, profit is an opinion.” Or in the words of Alan Miltz: “Revenue is Vanity, Profit is Sanity and Cash is King”.
In the early 1990s, I was a senior audit manager. One of my clients had prepared its draft financial statements. Everything looked normal, except for a huge swing in Work in Progress (WIP). It went from a liability (eg, pre-invoiced, deferred profit) into an asset (eg, cost-to-be-invoiced, capitalized losses).
I started questioning management, who became increasingly nervous following the nature of my detailed questions (eg, % of project completion). We refused to sign off on the audit because I suspected a fraud. A few months later, we were informed that local management had been fired after asking HQ for a loan.
My example is a management information fraud. Project losses were capitalized in order to hide operational losses. Usually, this type of fraud does not involve making personal gains. Probably, it’s about saving reputation (sic!). Management assumes that they can fool the auditors and HQ.
It’s tempting to argue that greed, lack of morality & principles, and/or opportunism are on the rise. If that would indeed be the case then there would also be a correlation with the rise in Liberalism (ie, stage 6: individualism), and the decrease in organized communities (eg, religions).
My friend and former colleague made a similar observation: “I believe man is fundamentally much more greedier than he is principled.” Mid 2017, I came to a similar conclusion in my blog Advantage vs Empathy:
“Our relentless efforts in gaining advantage (eg, Knowledge, Power), might be what really separates humans from anything else on this planet. This might be my most pessimistic blog ever.”
In accordance with the 2001 Daft Punk song, today’s frauds are probably just “harder, better, faster, stronger” (video). Its ingredients are cheap money and technology. What will always remain are beliefs and gullibility.
“You can fool part of the people some of the time, you can fool some of the people all of the time, but you cannot fool all the people all of the time.” An alleged quote by Abraham Lincoln (1809-1865), 16th US president.
Fool’s Overture (1977) by Roger Hodgson (former lead singer of Supertramp)
artist, lyrics, video, Wiki-1, Wiki-2, Wiki-3
Note: all markings (bold, italic, underlining) by LO unless stated otherwise.
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