
How to get away with financial fraud - oska
https://www.theguardian.com/news/2018/jun/28/how-to-get-away-with-financial-fraud
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slededit
The claim you could have caught Enron had you knew where to look in their
financial statements was never backed up. Given the length of the article it
would have been nice if they had quoted concrete facts instead of vaguely
alluding to evidence that may or may not exist. There were also lots of
concrete examples they could have used such as Crazy Eddie using their best
looking secretaries to distract the auditors.

Instead the article gives a false sense of certainty to what is really a long
opinion piece. I say this even though I agree with its thesis.

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fauigerzigerk
Lengthy as it is the article fails to mention how the Libor fraud actually
worked and that it had two very distinct motivations.

Understating the interest a bank had to pay during a short dramatic period in
2008 when there could have been disastrous bank runs was the less problematic
part of it. In my opinion, breaking the letter of the law to avoid a run on a
healthy bank is the right decision.

But that's not all there was. The article fails to mention the second part,
which was traders trying to make a profit by colluding with those at the same
bank who were in charge of setting (or rather influencing) the Libor rate.

The bankers knew that they would be forgiven for the first part, and that's
why they tried to use it as an excuse for the second part. That's also where
Bob Diamond's claim about the BoE comes from.

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cm2187
I am not sure I follow your reasoning. The second part (collusion between swap
traders and libor submitters) occured in the years preceding the financial
crisis, 2005-2007, while the first part (the lowballing at the height of the
financial crisis) happened in 2007-2008.

So no there is no way they did the collusion thinking it would be forgiven
because of the lowballing.

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fauigerzigerk
I didn't mean to imply that at all.

What I meant is that when the whole thing blew up in 2012, they clearly
thought they could use the crisis and the understandable attempts by
themselves and the BoE to avoid a bank run to deflect all criticism of their
Libor rigging more generally.

That's what I think the purpose of Bob Diamond's accusations against the BoE
was. An attempt to confuse the two issues. The Guardian article doesn't make
the distinction clear at all.

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cm2187
Hum. I am pretty sure the investigation started with the lowballing (as many
investors were complaining about it) and that in the process of that
investigation they uncovered the swap desk collusion (which had an impact in
fractions of basis point and which wasn't really on anyone's radar).

So I'd argue the contrary. Barclays had rather a good hand on the lowballing,
having reported the issue to every regulator, and in the end by lowballing
themselves in a way that wouldn't affect the resulting index (by remaining one
of the top contributions that get excluded by the Libor calculations). The
swap trading collusion is what made their position morally indefensible when
the BoE joined the two in a single report.

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fauigerzigerk
I don't understand how this is the contrary of what I'm saying. I agree that
they had a pretty good hand on the lowballing issue. That's what I said all
along. Everybody understands why they did that, and most would believe that it
was at least tolerated by the BoE.

So they tried to keep the focus on that issue and use it to sweep the rather
more shady collusion business under the rug, at least as far as the wider
public and perhaps parliament is concerned.

All I'm trying to do here is to make it clear that there are two entirely
seperate issues with wholly different motives.

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chiph
What I've seen is that most audits are incomplete, because the audit is time-
boxed. The auditors only have a few weeks to examine the books, either because
that's all the budget by the client will allow, or because the audit firm hits
the profitable/not-profitable limit around the extra services they sold to the
firm.

So the firm has an incentive to draw out the process and gamble that the
auditors won't find anything actionable before the clock runs out.

~~~
jimnotgym
This is a very common misconception. Whilst auditors should always report
fraud if they find it, an audit is not there to detect fraud. They call this
the "expectations gap".

An audit is trying to demonstrate that the accounts of a company show a 'true
and fair view' of the companies performance. Things that interest auditors are
things like, is the stock all there, will the company be able to sell the
stock for what it bought it for, does the income booked to these accounts
properly belong in this time-frame, are these assets still worth their book
value.

Obviously this turns up various kind of fraud, but wouldn't for instance
detect a fraud like Libor.

edit:

> So the firm has an incentive to draw out the process and gamble that the
> auditors won't find anything actionable before the clock runs out.

Auditors are trained to look out for this, but it is certainly possible to
some degree. I would say it is getting harder to do, because much more of the
audit methodology is about 'analytical review' (do the results seems possible)
rather than 'substantive testing' (checking documents). If the audit partner
is not happy with the access he has been given he can always 'qualify' the
accounts in his statement. This is then public information, and a qualified
audit would raise a lot of suspicion with counter-parties

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Danieru
Good article worth your time to read, but I am not sure there is much for
comments to discuss. From the title I expected the article to be preachy, but
rather I found it informative and nuanced.

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PaulAJ
From the article:

It is much more difficult to be a fraudster in a society in which people only
do business with relatives, or where commerce is based on family networks
going back centuries. It is much easier to carry out a securities fraud in a
market where dishonesty is the rare exception rather than the everyday rule.

I don't think thats the case. The skillsets are different, but fraud happens
just as much in societies which depend on inter-personal trust.
[https://www.cbsnews.com/news/ohio-man-sentenced-
in-17-millio...](https://www.cbsnews.com/news/ohio-man-sentenced-
in-17-million-amish-fraud-case/) [http://amishamerica.com/amish-investors-
lose-3-9m-in-alleged...](http://amishamerica.com/amish-investors-lose-3-9m-in-
alleged-investment-scam/)

~~~
coldtea
It's not about happening, it's about happening "just as much". A couple of
Amish examples don't prove that. Not to mention that the guy was Amish, but
not necessarily part of the communities that invested, in the sense of the
article.

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rahimnathwani
This article talks about the LIBOR fixing scandal at length, without once
explaining or even hinting at the mechanism by which those doing the fixes
would profit.

AFAIK the individual LIBOR submissions are not circulated: on the average of
the non-outliers. So submitting a lower number doesn't make your own bank look
less risky than other banks.

The problem/opportunity arose because many contracts use LIBOR as a benchmark
rate. And these contracts are often tradeable. So you can make trades to bet
on LIBOR.

An article from the same source that does a better job:
[https://www.theguardian.com/business/2017/jan/18/libor-
scand...](https://www.theguardian.com/business/2017/jan/18/libor-scandal-the-
bankers-who-fixed-the-worlds-most-important-number)

It doesn't seem like the design of LIBOR is the major problem. It's more that
people are using it in ways that were not intended when it was designed.

It's like writing code that relies on undefined behaviour: when it stops
working, who do you blame?

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rossdavidh
The last paragraph in that article packs quite a punch.

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HIPisTheAnswer
Easy: Call it a central bank.

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sonnyblarney
No, call it an ICO.

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lifeisstillgood
>> criticism that is at once overheated, ill-informed and entirely justified

The article is pretty good, and relatively sensible - and I think there are
occasionally attempts by accounting bodies to do the sensible thing and only
recognise revenue when it actually arrives - but usually that means that the
current profits would get restated for everyone and ... that would look bad.

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partycoder
Highly complicated synonyms help.

e.g: instead of "shit", call it "subprime"

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qrbLPHiKpiux
Call it Bitcoin.

