Why people commit fraud

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This post is a twin of my last one on Teaching Ethics in Management and Accounting because they originated in my reading of two related articles on fraud by Seb Murray (Financial Times, 13 June 2022). As the post became too unwieldy, I decided that it made better sense to split it into two.

This post also takes off from a passing reference to Donald Cressey in another recent post on Strategic Risk in Banking. Another post on Fraud, Terrorism, and Bathtub, had mentioned how those who want to commit fraud learn the loopholes over a period of time. Those loopholes provide the opportunity for fraud as discussed below. The discerning reader may also find in this post a resonance of the determining factors mentioned in yet another post on Why People Wore Masks. While wearing a mask is an act of compliance with a regulation, committing a crime is deviant behaviour, essentially constituting noncompliance with socially and culturally accepted norms, and/or in defiance of legal or regulatory sanctions. Continue reading “Why people commit fraud”

Teaching Ethics in Management and Accounting

The importance of teaching ethics in management and accounting in the context of persisting cases of corporate misdemeanour and falling accounting standards.

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In 2001, at an Enron press briefing announcing their financials, Richard Grubman, a Wall Street analyst, asked Jeffrey Skilling, the CEO, why Enron had not come out with a balance sheet. Bethany McLean and Peter Elkind described the exchange between them as follows: Continue reading “Teaching Ethics in Management and Accounting”

Strategic Risk in Banking

This is the second part of my earlier post on reputation risk. It is an enlarged version of the portion on strategic risk from my speaking notes used for a talk on reputation and strategic risk to the members of the Board of Directors of a bank based outside India. Needless to say, this is an introductory piece, as strategy, its risks, and their management, together constitute a huge subject in itself.

Strategic risk
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Continue reading “Strategic Risk in Banking”

Managing reputation risk

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This is an edited and updated version of my speaking notes used for an address on managing strategic and reputation risk to the members of the Board of Directors of a bank based outside India. I will cover strategic risk in a future post. The talk drew substantially from the writings of Prof. Charles R. Fombrun, especially his book on Reputation, apart from other references as indicated. Continue reading “Managing reputation risk”

Frauds, terrorism, and bathtub curve

Lessons from reliability and bathtub curve for busting crimes

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Frauds and terrorism

Formidable military cantonments with awe-inspiring security have existed for centuries. Treasure, including notes and coins, have also moved for centuries. Banks have time-honoured systems and processes for internal control and audit.

Nevertheless, we hear of security breaches in military establishments. The choice of time, location, and other details point to a high level of planning. Daring and well-planned train robberies involving sovereign treasure make some Western flicks seem like minor pickpocketing. Bank frauds the size of several Satyam frauds point to governance failures from top to bottom. Investigations followed, and responsibility fixed. The immediate causes were familiar. System failures, noncompliance with laid down procedures, and ignoring established norms. One rarely identified root causes to see why noncompliance took place. And what actions could prevent them in the future. Continue reading “Frauds, terrorism, and bathtub curve”

Fintech and Financial Stability

A critical look at IMF recommendations on financial stability concerns from Fintech and DeFi

Decentralized Finance
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Fintech and financial stability

Fintech is technological innovation in financial activities, or in other words, financial innovation aided by technology. This by itself is not new. The ATMs which made their entry in the late 1960s was also in this sense, fintech. With the rapid growth in crypto assets in recent years, and that of decentralised ledger technology (DLT), fintech has evolved and grown rapidly in recent years to provide traditional banking functions, including deposit taking and lending. Referred to as Decentralized Finance, or DeFi for short, it threatens to disintermediate banks from savers and borrowers, transform the traditional banking landscape, and threaten financial stability. The IMF flagged its concerns in the third chapter of the April 2022 issue of its biannual Global Financial Stability Report (GFSR). Continue reading “Fintech and Financial Stability”

Why People Wore Masks

An overview of research findings explaining mask compliance across countries

Social distancing and mask compliance
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Introduction

According to Francis Fukuyama, leading political thinker, institutional arrangements, including increasing judicialisation and influence of interest groups, constrict decision making in democracies. These along with legally mandated checks and balances can slow decision making in crises. Fukuyama was writing in the US context (The Origins of Political Order, 2011; Political Order and Political Decay, 2014). But, India too is no exception. This perhaps explains the need for seemingly autocratic decisions. Whatever be the method, public view and experience of governmental decisions, through law or regulation, are manifested in compliance. Continue reading “Why People Wore Masks”

CBDC and the Future of Money

My review of Eswar Prasad’s new book on fintech, cryptos, and CBDC: Future of Money: How the Digital Revolution is Transforming Currencies and Finance

Contents

Introduction
Fintech
Crypto Mania
Regulatory Concerns
Central Bank Concerns
National Responses
Central Bank Digital Currency
Relevance of CBDC
Critique of CBDC
CBDC and EMEs
Whether CBDC and when
Designing CBDC
Current status of CBDC and lessons
Impact on cash
Impact on dollar
Global currency
CBDC in India
Conclusion
Postscript

Introduction

Future of Money

William Stanley Jevons started his career as an assayer in a mint in Sydney. In 1855, sending money to his father, Jevons wrote:

“I must say the money has given me very little satisfaction, except that of sending it home. Whether in the bank or in your pocket I find £100 like a very disagreeable weight on the mind, so I shall be very glad when it is off my hands, though I hope safe in yours.”

Harriet A. Jevons, ed., Letters and Journal of W. Stanley Jevons, p. 52

In 1875, as a professor of ‘political economy,’ Jevons laid down the functions of money in Money and the Mechanism of Exchange. These are unit of account, store of value, and medium of exchange. Money combined these functions performed earlier by different objects. Even today, it remains a useful framework for assessing currencies. Continue reading “CBDC and the Future of Money”

Bank of Russia in War and Peace

How Bank of Russia and Russian Central Banking is coping with war and other political expediencies

Central Bank of Russian Federation Head Office building
Bank of Russia

War and Peace

War and Peace, Tolstoy’s enduring masterpiece, starts with a party scene. Set in the St Petersburg of 1805, the main characters are introduced here. Most of us would have read the ‘novel’ (Tolstoy did not call it one) in English. Lost in translation is the fact that almost the entire conversation, page after page, is in French. It was the preferred language of the Russian aristocracy. For Tolstoy, it was a literary device. He was making fun of the nobles of the day who spoke French to flaunt their exclusivity. He wanted to show how disconnected they were from core Russian values and the world around. Continue reading “Bank of Russia in War and Peace”

Holmes and the Theranos Affair

Lessons from Theranos for Corporate Governance

Elizabeth Holmes, founder and CEO of Theranos
Elizabeth Anne Holmes, founder and CEO of Theranos

This Holmes was the subject of many investigations and a trial that ended in conviction. She was not just complicit. She was the perpetrator. If the DOB (Directors on Board) did not bark or howl, they were well taken care of. Even if they whined, she charmed her way through. In any case, they seemed keen to add a new generation tech firm to an already impressive list of credentials. They were victims of the promise or illusion of mentoring the next Bill Gates or Steve Jobs.

Such a bland assessment would have been kosher for most ordinary Boards. But we have here the likes of George Shultz (1920-2021), former Secretary of State, and also of labour and treasury, best known as the man who ended the cold war. If Shultz was not enough, we have Henry Kissinger (b. 1923), former secretary of state, and William Perry (b. 1927), former secretary of defence. All of them were then, or are now, in their 90s. The Holmes-Theranos affair offers interesting lessons for good corporate governance. Continue reading “Holmes and the Theranos Affair”

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