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4 Corporate
Failures
CEOs and CFOs commit accounting fraud Consideration of the specific character identified as indicators of fraud
to conceal poor financial performance, traits that have been observed in provide insight into the various broken
preserve their personal status and control corporate failures could provide insight windows, ie:
and to maintain their personal income into why more legislation and regulation
through performance-based bonuses. has not reduced the occurrence of • Non-independence of auditors
management fraud.
Leaders in corporate • Compromised quality of audit work
failures The nature of fraud due to reduced fees
causes
Not only have auditors been in the firing • Deliberate actions and
line following corporate failures. CEOs It is well known that Rudolph Giuliani misrepresentations by management
and boards have also been called to task (“Giuliani”), the former mayor of New to delay or divert auditors’ attention
on the execution of their duties and why York City, implemented the broken from problematic areas
fraud occurred under their management windows theory to reduce crime.
and oversight. Giuliani indicated that “… you had to • Misconception of the role of an
pay attention to small things, otherwise auditor and to what extent they are
Leaders in corporate failures have been they would get out of control and able to identify fraud through their
sentenced to jail, paid substantial fines become much worse”. audit procedures
and walked away with reputations a
little less intact. Various authors have Considering the wide variety of causes • Poor or lack of corporate governance
highlighted the character traits of observed in the corporate failure case despite legislation and regulation,
leaders of failed corporates. studies, the challenge of detecting including non-independent and
and deterring fraud is therefore not inadequately qualified board or
However, one transparent easy to solve due to the numerous committee members, lack of debate
fact cannot be ignored and is role players, possible scenarios and of business issues at board level and
observed across all case studies, the unpredictable nature of individuals. a deliberate disregard of legislation
namely a blatant belief in their The obvious question is then how by management
own power and ability to create to apply the broken windows theory
magic and their deliberate actions to corporates in an effort to detect • Unrealistic expectations of
and deter fraud. The various themes stakeholders for performance and
to execute such belief. growth or the fear of management
to look like a failure and thereby
