Can Better Financial Regulation Prevent Investors from Being Defrauded?
Chapter 10: What can be done about Ponzi schemes?
There would seem to be a clear market problem to be resolved, in that no financial system can operate effectively without investors’ trust in market intermediaries, yet Ponzi schemes and other misleading and fraudulent behaviour erode that trust to everyone’s detriment. But what is to be done? Important conceptual issues can be raised with respect to three matters: trust and decision-making, auditing and stewardship, and regulation and fraud. The critical role of trust (Henriques’s 2011 book is subtitled Bernie Madoff and the Death of Trust) was examined in Chapter 8. Here, some lessons for accounting and regulation are considered. Clearly, trust is also a central aspect of auditing which has been described as a ‘trust-engendering technology’ by providing an external and objective check on the way in which financial statements have been prepared and presented, so constituting an essential component of the checks and balances required (Power, 1999; Arnold and Sikka, 2001; Sikka, 2009). In fact, in the Ponzi schemes examined, there were no checks and balances, and as would be expected in cases of fraud, all of the principles of stewardship (with perhaps one exception) were violated.
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