On Nov 1, 2010, at 11:10 AM, [email protected] wrote: > First impression : Absolutely profound analysis. Will need some time for this > to sink in. > Want to think about this for a while, but WOW ! what great insights. > > Big observation : Where is this wrong ? Damned if , at least for now, > I can see any serious flaws. Seems to hit the nail on the head with a > sledgehammer. > There are other arguments that knock the props out from under classical > laissez faire > ( some of which is perfectly OK, but NOT as an infallible theory that covers > all bases, which it cannot do ), but this utterly flattens that theory. > > WWLS ? What will libertarians say ?
They would probably say the solution is greater transparency in accounting regulations, rather than *business* regulations which only increase complexity and inspire fraud. As usual, they'd be about 1/3 right... -- Ernie P. > > Billy > > ===================================================== > > > > In a message dated 11/1/2010 9:39:21 A.M. Pacific Daylight Time, > [email protected] writes: > I think Billy will like this. True, neo-classical economics in theory > recognizes this as part of the danger of agency failure, but in practice > virtually nobody seems to have made any effort to understand (much less > mitigate) this threat. > > Especially since the line between "fraud" and "creativity" is awfully thin, > when it comes to accounting... > > -- Ernie P. > > http://www.schneier.com/ > > Schneier on Security > > A blog covering security and security technology. > > « Halloween and the Irational Fear of Stranger Danger | Main > > November 1, 2010 > > Control Fraud > > I had never heard the term "control fraud" before: > > Control fraud theory was developed in the savings and loan debacle. It > explained that the person controlling the S&L (typically the CEO) posed a > unique risk because he could use it as a weapon. > The theory synthesized criminology (Wheeler and Rothman 1982), economics > (Akerlof 1970), accounting, law, finance, and political science. It explained > how a CEO optimized "his" S&L as a weapon to loot creditors and shareholders. > The weapon of choice was accounting fraud. The company is the perpetrator and > a victim. Control frauds are optimal looters because the CEO has four unique > advantages. He uses his ability to hire and fire to suborn internal and > external controls and make them allies. Control frauds consistently get > "clean" opinions for financial statements that show record profitability when > the company is insolvent and unprofitable. CEOs choose top-tier auditors. > Their reputation helps deceive creditors and shareholders. > > Only the CEO can optimize the company for fraud. > > > This is an interesting paper about control fraud. It's by William K. Black, > the Executive Director of the Institute for Fraud Prevention. "Individual > 'control frauds' cause greater losses than all other forms of property crime > combined. They are financial super-predators." Black is talking about control > fraud by both heads of corporations and heads of state, so that's almost > certainly a true statement. His main point, though, is that our legal systems > don't do enough to discourage control fraud. > > White-collar criminology has a set of empirical findings and theories that > are useful to understanding when markets will act perversely. This paper > addresses three, interrelated theories economists should know about. "Control > fraud" theory explains why the most damaging forms of fraud are situations in > which those that control the company or the nation use it as a fraud vehicle. > The CEO, or the head of state, poses the greatest fraud risk. A single large > control fraud can cause greater financial losses than all other forms of > property crime combined they are the "super-predators" of the financial > world. Control frauds can also occur in waves that can cause systemic > economic injury and discredit other institutions essential to good government > and society. Control frauds are commonly able to defeat for several years > market mechanisms that neo-classical economists predict will prevent such > frauds. > "Systems capacity" theory examines why under deterrence is so common. It > shows that, particularly with respect to elite crimes, anti-fraud resources > and willpower are commonly so limited that "crime pays." When systems > capacity limitations are severe a "criminogenic environment" arises and crime > increases. When a criminogenic environment for control fraud occurs it can > produce a wave of control fraud. > > "Neutralization" theory explores how criminals neutralize moral and social > barriers that reduce crime by constraining our decision-making to honest > enterprises. The easier individuals are able to neutralize such social > restraints, the greater the incidence of crime. > > [...] > > White-collar criminology findings falsify several neo-classical economic > theories. This paper discusses the predictive failures of the efficient > markets hypothesis, the efficient contracts hypothesis and the law & > economics theory of corporate law. The paper argues that neo-classical > economists' reliance on these flawed models leads them to recommend policies > that optimize a criminogenic environment for control fraud. Fortunately, > these policies are not routinely adopted in full. When they are, they produce > recurrent crises because they eviscerate the institutions and mores vital to > make markets and governments more efficient in preventing waves of control > fraud. Criminological theories have demonstrated superior predictive and > explanatory behavior with regard to perverse economic behavior. This paper > discusses two realms of perverse behavior the role of waves of control fraud > in producing economic crises and the role that endemic control fraud plays in > producing economic stagnation. > > > Posted on November 1, 2010 at 6:02 AM • 16 Comments > > To receive these entries once a month by e-mail, sign up for the Crypto-Gram > Newsletter. > > > > -- > Centroids: The Center of the Radical Centrist Community > <[email protected]> > Google Group: http://groups.google.com/group/RadicalCentrism > Radical Centrism website and blog: http://RadicalCentrism.org > > > -- > Centroids: The Center of the Radical Centrist Community > <[email protected]> > Google Group: http://groups.google.com/group/RadicalCentrism > Radical Centrism website and blog: http://RadicalCentrism.org -- Centroids: The Center of the Radical Centrist Community <[email protected]> Google Group: http://groups.google.com/group/RadicalCentrism Radical Centrism website and blog: http://RadicalCentrism.org
