Abstract
The corporate fraud narrative suggests that misleading and inaccurate accounts engender misplaced confidence that robs creditors and investors alike. Yet, this view underplays nested ambiguities in business accounts first in the (im)possibility of accuracy in a set of accounts and second in the constituent figures themselves as embodying uncertain monetary value. This article analyses these phenomena and argues that confidence, nurtured by governments through their regulatory practices, is essential to maintaining perceived integrity to both in spite of continuing ambiguity. This management of confidence is engendered through the interdependent yet contested relationships between government, business and professional elites. Corporate fraud is embedded within these relationships and hence difficult to dislodge without threatening the productiveness that business promises and government craves. Criminalization of corporate fraud deflects attention to one of these actors, the business and its directors, without clear recognition of the role played by government itself.
Ambiguity is well recognized as a central feature of white collar crime with dubious practices associated with finance in recent times subject to particular scrutiny. Critical criminological concerns centre on the way those with economic, political and institutional power shape whether and how certain business practices become criminalized (see, for example, Aubert, 1952; Carson, 1980; Nelken, 1997) and frame divergent, and often weak, sanctioning practice (for a recent example see Simpson, 2011). Hence, financial practices that threaten corporate interests, such as embezzlement, are clearly identified as criminal even as obscenely high salaries remain relatively untouched by regulatory controls (Williams, 2005). Sharp practices such as insider trading that threaten confidence in equities markets have enjoyed vigorous prosecution (at least in the USA). They are seen as opaque transactions that give an unfair advantage to those with inside (and private) knowledge. Yet, businesses continually seek new opportunities for gaining an inside edge. ‘High Frequency Trading’ has become increasingly common where computers programmed with algorithms trade in nanoseconds and ‘dark pools’ where significant investors trade far from the gaze of the average investor (Snider, 2011). High Frequency Trading might be seen as yet another example of regulatory arbitrage and creative compliance that characterizes the world of finance (McBarnet, 2006; McBarnet and Whelan, 1999).
Criminological attention on the activities of business, their creativity and economic power, though, risks underplaying the political influence of both business and professional elites and the nature of their leverage. This article critically analyses this leverage through analysis of corporate fraud and the nested ambiguities in both company accounts and in the materiality of money that lie at the heart of that crime. Critically governments, in close consultation with the professions, enact legal and regulatory reforms that engender confidence in both the accuracy of accounts and the materiality of money while also further institutionalizing their underlying ambiguities. Hence, even as governments are exhorted to sanction corporate criminals with more vigour they also need to be understood as implicated in their creation.
Corporate fraud 1 is premised on an understanding that there has been a criminal misrepresentation of a financial or business state of affairs by one or more individuals (or businesses) to seek financial gain. Yet, misrepresentation presupposes the possibility of accuracy, a quest that remains elusive. Scrutiny of the nature of accounts and the role government plays in engendering confidence in those accounts despite ongoing ambiguity is fruitful. The first section of the article begins with one example of corporate collapse—that of HIH Insurance—and uses the case, together with the critical accounting literature, to explore the elision of the distinction between accuracy and integrity in a set of accounts (Bayou et al., 2011; Ferguson et al., 2009; Toms, 2010). In this elision, confidence, nurtured by governments working at arm’s length through the audit process, provides the assurance that the accounts are indeed a true representation of the value of a business. The second half of the article subjects the substance at the heart of the accounts, monetary value, to scrutiny. Confidence is important not only in ensuring integrity of a set of accounts but also in ensuring the value of money, as denominated in a particular currency or as identified in the various investment, debt and credit systems. That is the figures themselves have integrity. Government plays an important role here also (Ingham, 2001). At both levels confidence may be well or ill-placed which adds to the difficulty in drawing clear lines between legitimate and illegitimate business practice.
Governments sit at the heart of a tension. They must protect confidence in auditing and accounting processes and the value of the national (or regional) currency to support liquidity and economic exchange while supporting police and financial regulators in bringing fraudsters to account. Government dependence on business and trade and the wealth they promise generates ambivalence about the latter. Vigorous prosecution, where it occurs, is likely to focus more on easily identifiable malfeasance than sharp practice (or ‘entrepreneurial’ practice depending on your perspective) (McBarnet, 2006) and so do little more than provide a temporary salve to understandable public anger. The article concludes by drawing out the implications of these ambiguities within accounts and money for a criminological analysis of fraud.
HIH as a crime of confidence
The life history of HIH Insurance and eventual collapse highlights the interplay between government and business in generating confidence. The synopsis below will be drawn on and extended throughout the article to illustrate key arguments made. The demise of HIH Insurance was Australia’s largest corporate collapse 2 (Haines, 2011: see particularly 81–97). The changing fortunes of the HIH group illustrate nicely the interdependence between government and business in engendering confidence that was both well and ill-placed. At its height, HIH was perceived as a ‘prophetic’ company, with a business model that attracted considerable investment and government support, yet after its demise many saw senior executives as ‘swindlers’ that tricked unwitting investors.
Throughout much of its existence HIH was considered a pace-setter, driving down premiums and posting high levels of growth that benefitted both policyholders and investors. Setbacks were countered aggressively. HIH (in an earlier iteration as MW Payne Liability Agencies Pty Ltd) responded decisively to the removal of its core workers’ compensation business, due to the nationalization of that form of insurance in many states in Australia, by extensive diversification and acquisition to ensure ongoing high levels of profit growth. Government removal of a key source of HIH profits, workers’ compensation, was countered by aggressive growth.
While government dented confidence on the one hand by nationalizing a key market, it demonstrated strong belief in the productive nature of private investment markets on the other. Indeed, the legal regime covering insurance in Australia in the 1980s and 1990s was characterized by faith in the productive capacity of investment markets. Insurance law allowed insurers to make a loss on their underwriting business on a continuing basis, since it was assumed they could make up the difference and produce healthy profits by judicious investments. For a number of years this strategy appeared to work well, with a tripling of HIH’s share price from $1 to $3.70 in the mid-1990s and a credit rating by Standard and Poor’s of AA–. Fortunes for the company changed with the exit of a key partner, Wintherthur, in 1998, the downturn of conditions in the insurance market and about a year later a deterioration of economic conditions more broadly. Investments failed and poor business decisions saw heavy losses.
HIH sought to bolster investor confidence by employing accounting practices that placed a most glossy view on accounts, prudential practices that were similarly optimistic and a heavy value placed on goodwill. Notwithstanding this strategy, HIH retained a clean audit as assessed by their auditor, Andersens. All these allowed for the appearance of a healthy ‘bottom line’. Indeed, for a while, confidence was retained with the general investing public buying the stock in great numbers as institutional investors left the company. Even after its demise, some in the business believed that with an upturn in economic conditions HIH could have continued. What was needed, they argued, was for the company to retain confidence in its future profitability that could carry the company through times of economic hardship (Haines, 2011: 202). When confidence was lost – the final loss precipitated by the intervention of the prudential regulator APRA – the business folded.
The influences of confidence, overconfidence and corporate fraud in the collapse were blurred. The royal commission (Owen, 2003) that followed HIH’s demise was condemnatory of the company and its leadership, yet argued the problem was not widespread fraud, but rather a misguided attempt to keep the business afloat. Others saw key leaders as ‘swindlers’ deserving of imprisonment and in the case of some, including Ray Williams the founder of the business, the courts concurred. Yet, what is argued below is that all perspectives on the executives of HIH: confident and entrepreneurial, overconfident yet well intentioned and clearly fraudulent, and the relationship of these qualities to the nature of the accounting and auditing practices, are important to understand. This examination turns attention to the endemic nature of corporate fraud and the role government plays in its continuing presence.
The auditor and the accountant
Accounts of corporate fraud often focus on questionable accounting practices that obscure major problems with the businesses involved yet still are signed off by auditors as a ‘true and fair’ view (see, for example, Bayou et al., 2011; Calavita et al., 1997). However, these analyses are often made in hindsight in the wake of collapse. Why, despite multiple changes to accounting standards and requirements in auditing practices, is it so hard to identify problems prior to disaster?
To answer this question requires a closer view of accounts and the purpose they serve. In particular, there needs to be careful scrutiny paid to what actually is a set of accounts and whether it is (a) possible to have a commonly agreed view on the accuracy or otherwise of a set of accounts, and (b) whether it is politically possible to bring into play the institutional settings that would make sure accuracy is a reality.
What is a set of accounts?
At a risk of oversimplification, a set of accounts can be understood to be comprised of two separate components: the record of income and payments and second, an evaluation of the worth of a company and its capacity to earn money into the future. Taken together, then, a set of contemporary accounts can be understood as a ‘rational calculation of income yield from capital invested’ (Toms, 2010: 205). They are a statement of company profitability or its lack.
These two components are inter-related but can be conceptually distinguished. The former component is relatively straightforward and can be understood as a bookkeeping function with the practice of double entry book keeping central to its perceived integrity (Carruthers and Espeland, 1991). It is here that managers are held to account for transactions of selling commodities and services and of purchasing goods and services (including labour). A conservative reading of accounts would focus on this component. It is the latter element, however, that has been subject to the most debate. Further, the ways in which value has been calculated have been subjected to considerable change.
Accounts now are seen primarily as an assessment of the value of a particular company, a signal to investors in the market regarding its investment potential. 3 How this assessment of value is undertaken varies between different methods of accounting for value and as a result the ‘bottom line’ varies. In general, there has been a shift away from historical cost methods (based on what an asset cost to purchase at the time it was bought) towards mark to market or ‘fair value’ accounting (predicated on what the market would pay for the asset in current market terms). This shift alters the nature of accounts away from a focus on what managers have done, towards a set of accounts being a decision-making aide to guide investment (Bayou et al., 2011). They comprise an aide to investors, not evidence for the criminal courts.
It is important not to overstate differences between these two methods particularly in light of the pursuit of accuracy. Irrespective of method, accounts are based on financial records and a professional rendition of the particular monetary values that should be present within the statement of accounts. This is a task of variable complexity and problems arise with any accounting method (see, for example, Laux and Leuz, 2009). Necessarily, the process of compiling a set of accounts comprises a range of questions from the simple ‘does that asset (e.g. a car) exist? Is it recorded as being there?’ to the complex ‘what is the expected income from this investment over the next 12 months?’ (Bayou et al., 2011: see p. 116). In the case of a true and fair view, the intention is to try to get beyond the limitations of historical expenditure (how much did you buy that for?) to look at external social factors (what are people willing to pay for this asset you bought last year?). The attempt is to represent the financial value of company assets in real time.
Accuracy, ambiguity and integrity
However, the change in emphasis that has accompanied the move to fair value has exacerbated debates around whether it is possible to have accuracy in a set of accounts (Moore, 2009; Smith-Lacroix et al., 2012). This is because the first (historical cost method) emphasizes an historical transaction and the transparency that this affords whereas the second emphasizes contemporary assessments of value (Bayou et al., 2011). Historical methods provide an historical record of expenditure albeit ones that, subject to particular rules, may be re-evaluated at particular times. Fair value, according to Bayou and colleagues (2011), combines assessments of the past and present with predictions of the future.
The economic and political environment within which accounting rules emerge is also important to understand. For Bayou et al. (2011), the account has changed character through neoliberal economic precepts that require this combining of assessments of past, present and future through fair value (see also Ravenscroft and Williams, 2009). While an assessment of past and present might provide for some form of contestability (“is that really what you paid for that? Where is your evidence of market price?”), predictions of the future are less certain. Rather than giving a history of income and outlay, the accounts assess value at a point in time from an ongoing flow of money. Accounts comprise probabilistic figures, not merely a statement of transactions actually completed. Further, that flow of money is subject to change. Some argue that the shift to fair value accounting involves more complex and erratic valuations than previous methods, with auxiliary professions such as valuators rising in importance as key actors in the compilation of the accounts (Smith-Lacroix et al., 2012).
This debate on the challenges to accuracy highlights the role of confidence in determining future predictions of company worth. Confidence emerges from the professional application of a framework (here accounting rules) that provides the figures with a sense of authority. The uncertainties and ambiguities that necessarily accompany a set of accounts are compensated for by accounting standards that draw on the tropes of the current era to render the accounts legitimate (Judge et al., 2010).
Yet, the impossibility of accuracy brings a credibility gap into play (Sikka et al., 1998) that is between a public, and possibly criminological, assumption that accuracy is possible and a profession that expresses doubt. For this reason, there are those within the profession that push to retain accuracy in accounts. This remains essential precisely because it is what the lay audience expects. The difficulty, though, is that to get an accurate set of accounts means dramatically changing—and narrowing—what a set of accounts contained, ‘(including) things with no prospect of objective representation should not be embraced as the things accounting will represent’ (Bayou et al., 2011: 117).
To date, there is little indication of moves in this direction. Arguably this is because accounts, when scrutinised by investors, are read more for their predictions concerning future financial performance rather than the value of their products or services per se. Certainly, in the case of HIH comment was made on the increasing pressure on business to engender ongoing high returns (Palmer, 2002), a pressure exacerbated by institutional superannuation firms and self-managed retirees.
Instead, governments have championed alternative forms of enhancing the authority and integrity of a set of accounts. First, there has been an emphasis on the need for harmonization of accounting standards, most prominently under the International Financial Reporting Standards, a process begun Australia in 2002 and completed by 2005. The logic here has merit. The idea is that a single set of harmonized rules prevents the possibility of regulatory arbitrage, the playing off of one set of rules against another for the purposes of financial gain. But, harmonized rules do not resolve the problem of accuracy, nor do they remove the need for professional judgement—judgement that may vary between professionals. Further, harmonization speaks to global financial markets, even as it ignores the problem of whether the harmonized rules suit all jurisdictions, some with very different legal systems (Baker et al., 2010).
Reforms to audit processes also require scrutiny. Much is made in the context of collapse of an auditor’s providing a ‘clean’ audit in the weeks and months preceding the event. Such was the case with HIH (Haines, 2011: 90–93). This appears as a travesty of the auditor’s role in verifying a set of accounts as a true and fair representation of company worth. In short, the auditor is the body employed by the board to verify the accounts for the owners/shareholders.
In the wake of corporate collapses there often are significant legislative reforms governing audit processes. Yet, if the problem of accuracy has not been resolved at the level of compiling the accounts what do reforms to audit procedures do? In the case of HIH audit reforms were premised around increasing accountability, transparency and independence of both the auditors and the board. The rigour of the accounting and auditing process was to be strengthened through ensuring greater independence of the board from the executive, and the auditor from the executive. These principles were enshrined in the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth) (CLERP 9) (for overviews of the reforms see ASIC, 2009; Blake Dawson Waldron, 2004; Brown and Tarca, 2005; Clarke and Dean, 2005).
Arguably, these reforms compound ambiguity in a set of accounts. They sidestep the thorny issue of whether a set of accounts can and cannot be accurate while attempting to shore up confidence in the integrity of those who are put in a position to compile—and to judge—a set of accounts, namely the auditors. The irony here is that in the wake of an egregious failure of both accounting and auditing practice highlighted by HIH the dependence on that professional knowledge increased.
The justification from securities regulators is that they see their primary role as bolstering the capacity of the market to discipline business. This view is consistent with a neoclassical frame which considers that the market should regulate itself. So, to date, reforms have failed to engage in a structural re-alignment to remove a fundamental conflict of interest, namely detaching the umbilical connection between the business and auditor (albeit as they act for the board). Governments fail to consider reforms, such as nationalizing the role of auditing or publicly allocating audit services, that would eliminate this conflict. This would be one step too far in ‘interfering’ in the market. Without such a change, legislative requirements for independence may temper, but do not remove, the fundamental tension within audit firms between their role as professionals and as entrepreneurs (Bayou et al., 2011; Kornberger et al., 2011).
However, governments are drawn in to take on a greater and greater level of responsibility in order to shore up confidence. In Australia for example government now sets accounting and audit standards, a role previously undertaken by the profession itself (Haines, 2011: 136). In the generation of confidence, the criminal law too plays an important role. CLERP 9 saw personal accountability enhanced for those charged with ensuring the market was fully aware of information that could have a material effect on company value. It also increased criminal penalties for ‘knowingly making false or misleading statements’ by an officer of the company (ss. 1308 and 1309). Much was made of the need for directors to ‘sign off’ on the accounts and be held criminally liable for that action should it later be proved false or misleading.
Ultimately, each of the CLERP 9 reforms can be seen to reassure while glossing over ambiguity. They provide cognitive legitimacy rather than promoting accuracy (Suchman, 1995). Each of the tropes—independence, transparency and accountability—resonate with cultural norms (Judge et al., 2010), but each is contestable. Certainly, there are debates not only about the capacity of law to generate independence, but also the value of independence itself in generating value (see, for example, Sutton and Wild, 1980). More recently, too, in the context of a discussion of private equity arrangements, the emphasis placed on independence as generating value has been questioned with some arguing that dependence creates greater oversight and therefore greater care with investment decisions (Reserve Bank of Australia, 2007). Transparency also might be questioned in light of our discussion above, since if accuracy is an impossibility it may not be clear what it is that is being made transparent (see also Ravenscroft and Williams, 2009). The audit, then, can be understood as a ritual to provide assurance, a process that involves following rules—even as the rules are debated—a ritual that centres on whether the rules have been applied correctly, rather than a verification of accuracy or even integrity in the account itself (Power, 1997; Sikka et al., 1998; in the case of HIH see Clarke and Dean, 2005).
Financial regulators, together with their governments, form an intrinsic component of the relations of confidence in the face of persistent ambiguity. This role they share with company accountants and the auditors. This places regulators in a challenging position when trying to ensure accounting integrity and business health. If they move in too soon on a struggling business and it collapses they can be blamed for precipitating the collapse (by not allowing the company to trade out of difficulty), if they wait too long, they are castigated for being weak. Hence, a criminal prosecution is more likely in the aftermath of a collapse, than in the weeks and months preceding it.
The elusive nature of money
The ambiguities in company accounts are not only borne of the difficulty in generating a true and fair set of figures that represent company value. Nested within this challenge of accuracy is ambiguity in the figures themselves as an indication of monetary value. In this second part of the article the intrinsic role of confidence to monetary value itself, and of government in engendering that confidence, is explored. Of course, a set of accounts comprises a wide array of forms of monetary value, money as currency, as sales, revenues, profits and so on. Yet, these differences share a common feature, namely that the various figures represent a quantum of some value, either immediate or deferred. Money in its various manifestations, and as denominated in a particular currency, is an indication or token of value that holds the promise that it can at some point, be made liquid and used in the exchange of commodities.
Money as a neutral means of exchange holds pride of place within neoclassical economics. It appears as a ‘price signal’, the point at which the ubiquitous supply and demand curves intersect. As such it is a cornerstone of microeconomic theory (and indeed public policy). Money appears as the perfect medium—a seemingly neutral token of value that can be transported, amassed at the point of sale and exchanged for the necessities and luxuries of life. Zelizer (2011: 95) succinctly describes this view of money as ‘infinitely liquid, divisible & interchangeable’. 4 Money is fungible and so has value not only in exchange but as a store of value; it can be kept, saved, invested and so on. Money, then, is a valuable commodity in and of itself; for Marx ‘god among commodities’ (cited in Zelizer, 2011: 95).
In keeping with the analysis of accounts and audit above, there are two concerns here. These stem from an understanding that money is a constructed metric and has no intrinsic worth. As such, the first question concerns what provides that value? The second and related issue to explore is what role government plays in ensuring the value of money and how this role can be reconciled with the need to detect and punish corporate fraud.
That money (as legal tender) has value is of critical importance. Without value, accounts are rendered problematic at two distinct levels. First, estimations of value are vulnerable to investor confidence that is the figures on the balance sheet may need radical readjustment. In the discussion below a second vulnerability arises, namely that the figures themselves are rendered suspect. In the latter case, they cease to anchor the accounts in any meaningful way.
Money and meaning
For money to have value requires a realization that the figure representing monetary value on a coin, note or ledger itself needs to be anchored into a system of meaning in order to give it value. This section explores the question of what it is that comprises that system of meaning. Certainly, money is itself a symbol of communication (Carruthers, 2005; Zelizer, 2011). Money transactions are imbued with significance and Zelizer (2011), for example, argues that these values go beyond quantification. Monetary exchange constitutes meaning, as Weber understood the capacity of status groups to influence markets was through their patterns of consumption. People express their values through what they buy (Weber, 1991 [1948]). Consumer products are designed to give an impression (Carruthers, 2005); values are embedded in the exchange of money.
Yet, our concern here is precisely with the figure, the quantity. How is it that the figure itself is rendered real so it becomes fixed not arbitrary—even as it is able over time to purchase more, or less, of a particular product or service? For some (e.g. Simmel, 1978; Weber, 1978: 86–87) these values are largely based on an assumption of a particular form of rationality when it comes to money. The fact a figure is present on a currency note or on a balance sheet brings with it the possibility of a rational calculation of profit and loss. So, the figure itself is critical to the overall meaning of money. Money as a store of value is associated with quantification, as ‘science’ not only is associated with the elevation of neoclassical economic reasoning but also is part of an overall capacity for quantitative reasoning, for an assessment of probability (Bernstein, 1996). The quantification process itself is part and parcel of what it is that gives money meaning. Indeed, Carruthers and Espeland (1991) note that quantification, at least as evident through double entry book keeping, has rhetorical value. It denotes rectitude and sober calculation. It inspires confidence. The capacity for calculation, through quantification, then re-emphasizes the reality of money. The actual figure becomes critical to calculation, even calculation that is written as a probability. Without a figure calculation becomes impossible.
In these twists and turns calculability remains both prominent and problematic. The multiple meanings of the adjective, calculating, defined as ‘selfishly scheming’ by the Concise Oxford Dictionary or ‘marked by prudent analysis or by shrewd consideration of self-interest’ by Merriam Webster, embodies this ambiguity of meaning centred on the possibility of calculation. Indeed, the calculative mentality might well be seen to undermine the very thing that is required in maintaining a particular monetary system—namely confidence in its integrity.
Exploration of the importance of the figure and its relationship to calculating behaviour reveals further tensions. Arguably, a calculative rationality is implicated more in distant than close relationships (Carruthers, 2005). It can also be seen to relate to the problems with commodification that Offe (1984) described, the process of carving up human relations and needs to a figure/monetary value as in a Marxist account (Ingham, 2001; Lapavitsas, 2005; cf. Dodd, 2012). All these elements are of central interest to criminologists and the problem of ambiguity in white collar crime. White collar crime historically has been associated with a calculating mentality and as such the most rational form of offending (for a discussion see Friedrichs, 2010). Yet, it also allows for ‘whiter than white collar crime’ (McBarnet, 2006), perfectly legal behaviour that adheres to the letter of the law while abusing its spirit (Black, 1997; McBarnet and Whelan, 1999; Shah, 1996) in the pursuit of profit at the expense of others.
Money, confidence and the problem of an external referent
Calculations based on figures can only succeed where there is confidence that the figures are meaningful. It is this production of meaning and the role government plays in its generation that is of critical importance. The rich and diverse literature on money and its relationship to value reveals several elements to the problem, elements that can both embody tension and be in some tension with one another. The first is centred on ambiguity in terms of an external referent, discussed here, and the role government plays in generating value.
Money, and figures pertaining to material value, have an uncertain, and shifting relationship to an external referent. In the absence of this characteristic the embodiment of value shifts between material objects (e.g. gold) and personal, professional or institutional qualities of those who vouch for the value in the figures and the integrity of the figures themselves (Poovey, 2008). Arguably, belief in integrity shifts from person to paper, and paper to screen (Ferguson, 2008; cf. Spang, 2010). Yet, this evolution is not neat and is characterized as much by disruption and circularity as it is teleology (Maurer, 2012). The value of money, then, remains uncertain.
In light of this ambiguity confidence becomes essential to ensure the value of money. It brings a sense of certainty into the numbers that particular manifestations purport to represent. It is confidence for Barbalet (1998: 90–101) that makes calculations appear sound when they purport to ‘see into the future’. Confidence ‘brings the future into the present’. For him, market exchange transacted through money is not a rational ‘means end’ calculation, but confidence that the future will be like the past. Thus confidence is embedded both within the accounts and within the figures themselves that make up those accounts.
Confidence is found throughout the various forms of material value, including the financial value of credit and debt. Those with money can lend it to others; in short, it is invested. Money as investment reveals the centrality of credit as the workhorse of money; money and credit are inextricably linked (Carruthers, 2005). Investors, unlike consumers, must wait to be rewarded for parting with their money. Indeed, investors as such as shareholders lend money to a business in expectation of greater quantities of money (dividends or profit from the sale of equity). Credit begets money. Hence, credit and credit markets are critical to many economies (Carruthers, 2005).
Yet the line between money and credit is blurred when confidence is transferred to credit as money. Indeed, in some cases money and credit are interchangeable. For example, credit notes (what might be termed a debtor’s promise) long have been used as currency in their own right (Ferguson, 2008). Paper money historically constituted a promise by government to pay, a fiction originally tied to the gold standard (Ingham, 2001), it was literally a ‘credit note’ from government in exchange for gold, gold that could then be used to fund wars, in the case of the British against the French (Levenson, 2009). What was surprising was the alacrity with which government credit notes became seen of as intrinsically valuable, that is as money (a store of value), merely in a different form (Levenson, 2009). Credit can be, in a practical sense, synonymous with money. This phenomenon persists with confidence invested in multiple money forms, most recently those associated with mobile phones (Maurer, 2012).
Confidence and the role of government
Yet, when value is deferred the need for a system of assurance arises. When credit remains a debtor’s promise with a time lapse between a loan of money and the receipt of goods (or the original sum of money plus interest) conditions around these relationships develop. It is here governments often become important. Trust may be involved, but just as often it is trust in the plethora of laws and regulations that stipulate the conditions under which credit may be obtained and, in the case of bankruptcy and default, who has greatest claim to the remaining money and which creditors remain ‘unsecured’ and hence the last to receive money—if there is any—in the case of a corporate collapse. The trust is in the laws and institutions that surround the figure or the representation. Hence, as Carruthers (2005: 370) notes, ‘Instead of wondering whether to trust the debtor, the seller must decide whether to trust the law and credit-raters.’ In the case of companies, a common rule is that shareholders as ‘owners’ of the company are considered as unsecured, while bondholders are secured—as are bank lenders—so it is the shareholder at most risk when companies go under. Certainly, the rules around secured and unsecured creditors provide plenty of room for ambiguity and for those with resources more able to place themselves within the category of ‘secured creditor’ and hence less at risk.
Discussion of a system of assurance brings a further tension into view, that between government, money and markets. Conceptions of markets can be used to emphasize a two-way relationship between buyer and seller or business and investor. Indeed, the frame of money as a ‘price signal’ and credit involving trust between creditor and debtor brings with it an assumption that there are primarily two parties to the transaction. Economic regulation, too, can continue this myth of two parties where regulation is seen primarily to ‘make markets’ (Kells and Freiberg, 2010: 111), to form an external frame rather than as an intrinsic presence in each transaction.
But this emphasis on money as primarily an exchange relationship between two, a buyer and a seller, can itself be understood as misleading. Money is a social construct and sustaining that construct means that institutions, professions and in particular governments, are almost always involved. As argued above, this can be seen in part as a result of credit transactions requiring confidence in the law, laws promulgated by parliaments. Governments, then, exist in various complex interdependencies with financial industries, such as banking and insurance, and professions, such as accountants and actuaries. Credit rating agencies that value financial instruments for the investment market, for example, often are provided an imprimatur of government even as they act as businesses (Colander et al., 2009; Freidman, 2009).
A second element is important here—namely the need for governments to control the supply or quantum of money. A tension arises here between state and private systems of money/value. Criminological attention to the political contests over what constitutes legal tender, rather than the covert activities of counterfeiters, is important. The historical gradual centralization of the money supply under the control of government was, Ingham (2001) argues, critical as it provided the means for governments to claim revenue namely through taxation. For Ingham (2001) currency is as much a token devised by government to discipline citizens to settle debts owed to government (i.e. through taxation) as it is a store of value for the purpose of facilitating trade. Competing private systems of monetary value are viewed with suspicion. In the United States, the federal government removed farmers’ rights to mint their own coin, an independent currency based on silver. The centralization of currency based on the gold standard developed as part of the tight connection between Wall Street and the Republican elite of the latter half of the 19th century (Fraser, 2005). In this process, then, government and financier were in close collaboration. Private systems of money emerge repeatedly, however, particularly when confidence in banks declines (Dodd, 2012).
The important message here is that money and its multiple forms, and where corporate fraud is found, involves a three-way relationship between a buyer and a seller, or a creditor and debtor, and the government. Clearly, the creditor and/or the debtor can either be an individual, a company or indeed government itself. These relations are mediated by money as a token and a medium of exchange. Further, its quantity (what the figure is) essentially is arbitrary, but must be acted on ‘as if’ it were real. Governments, in conjunction with central banks, together with the technology of the state (police, securities regulators, courts and penal institutions) have an important role in ensuring that debtors, (often those in a position of vulnerability), must be made to pay according to the quantum specified. Criminal prosecution of one debtor provides reassurance of the materiality of money. When a company collapses, large debts remain unpaid and fraud (sometimes involving outright deceit, at others financial misreporting and sharp practice) often discovered. Value, and money, disappears.
When serious questions are asked about the integrity of a particular currency or of the financial system as a whole, however, another set of factors come into play. The recent financial crisis has alerted us to successive rounds of ‘quantitative easing’ (governments selling bonds (more promises to pay)) that allow them to print more money. The control governments have over the money supply and the importance of that control in generating economic growth is a central component of macroeconomics. Through elite arrangements between government and business money can appear and disappear. This has a material effect on the value of existing figures associated with a particular form of money. To take a simple example, it matters for company accounts in which currency assets or debts are held. A Greek asset on company books is affected twice: once by the state of the Greek economy and second, by the state of the currency (here the Euro). Confidence is independently and interdependently implicated in both.
Confidence is an essential component of a financial system and as such critical to capitalist reproduction both at the level of accounts and the materiality of money. It is based on evidence, evidence that comes from past experience, since the future is by definition unknowable (Barbalet, 1998). Yet, confidence as Barbalet argues is not irrational since emotions and rationality are not opposed. Confidence borne of past experience brings a sense of certainty and security. It comes from the experience of a routine undertaken time and time again that produces a predicted result. Confidence provides ontological security in the face of uncertainty. Growth and confidence also appear to be connected. One recent attempt to develop a currency in the absence of government—the bitcoin—is based on a mathematical equation to ensure a steady growth in supply of the currency. A level of inflation, it seems, is needed in currencies independent and dependent on government. Steady growth engenders confidence. What is clear is that a lack of confidence will see a decline in company fortunes. But it is also embedded within the figures themselves to allow the figure to appear as a trustworthy denominator with which to assess value.
Confidence, however, is cyclical and tightly bound to exposing corporate fraud. As recently and graphically demonstrated through the financial crisis this confidence goes through cycles, a constant pattern through the history of the capitalist market (Ferguson, 2008; Fraser, 2005; Kindleberger and Aliber, 2005). A downturn brings to the surface fraud and sharp practice in the market, boiler rooms, pump and dump schemes, wash trade and insider trading all are implicated (Fraser, 2005). But the distinction between well-placed and misplaced confidence often is best understood in hindsight. The ambiguous nature of the credit markets and the capacity of capitalists to predict future trends while at the same time lining their own pockets with dubious schemes was well understood by Marx (1981: 573) who argued that entrepreneurs and financiers that comprised credit markets were endowed with ‘the pleasant character mixture of swindler and prophet’.
Government has a critical role in maintaining confidence not only through tending to economic growth but also by regulating or deregulating in key areas. Keynes (1977 [1936]) emphasized the importance of government in maintaining economic growth and at times injecting money into the economic system to encourage economic activity, the liquidity markets and investors’ need. The presence or absence of regulation itself has a salutary impact on confidence. Barbalet (1998: 97–101) draws on Kalecki to argue that when government supports infrastructure investment business confidence rises but when government intervenes to promote social objectives such as safety or environmental regulation business confidence declines. In order to protect capitalist reproduction, governments therefore mould regulations to ensure they do not shake business confidence, business thus has ‘regulatory authority’ (Reichman, 1998) capable of influencing what regulatory controls it will, and will not be subject to. The most powerful of these rhetorical arguments used by business to ward off tighter control is the impact of government regulation on economic growth and hence jobs.
Discussion and conclusion
The analysis above has pointed to the generation of corporate fraud that arises from the relationship between government, business, the accounting and economic professions and the need to engender confidence in both accounting processes and the materiality of money. This mutual co-dependency on confidence to ensure financial well-being complicates the government’s willingness and capacity to control fraud and rein in sharp practice. The life history of HIH illustrates how both government and company independently generated confidence, the former confidence in investment markets the latter in the value of its own enterprise. These activities were both independent and interdependent. In the case of HIH, profit growth was seen as essential to maintaining confidence, and to that end it employed aggressive accounting practices. Further, the direction of HIH’s profit growth was shaped by government. It eliminated one source of profit (workers’ compensation) while encouraging confidence in investment income as a central source of future profit. The company painted an optimistic view of its value in accounts, the government an optimistic view of the capacity of investment markets to engender revenue.
The relationship between government and business in the production of confidence is extended to include key elites, in particular accountants and auditors. Throughout the time of its existence, HIH was provided with a clean audit sheet. Hence, it was not surprising that reforms to audit and accounting practice followed corporate collapse. Critically, though, this complex relationship between business and government and their mutual dependence on maintaining confidence in capitalist markets can be seen to shape reforms to accounting and auditing practice. Elite professions are brought into play and act to ensure integrity, a quality that replaces the more elusive character of accuracy in a set of accounts. The irony here is that reforms both within Australia (the CLERP 9 reforms) and more broadly (harmonization and the shift to fair value accounting) have placed a higher premium on professional expertise (accountants, auditors and now valuators) even as that expertise was clearly implicated in the lead-up to financial disaster.
The legitimacy of these reforms is bolstered through their drawing on cultural tropes of accountability, transparency and independence. These qualities obscure the interdependencies between business, government and professional elites. Transparency obscures the impossibility of accuracy, for example. Accountability, in particular criminal liability of directors, obscures the umbilical conflict of interest between auditors and their clients; auditors are paid directly by the board from company profits. Reforms to increase accuracy and to sever a conflict of interest militate against the powerful myth that it is market discipline not government control that ensures corporate virtue. Calls to reduce radically the content of the accounts to remove probabilistic and futuristic predictions are ignored. The uncertain quest to secure confidence replaces the pursuit of accuracy. Accounts remain firmly oriented as a decision aide for shareholders and investors, a function impossible under a narrow purview of accuracy. In terms of the audit, nationalization of the audit process would remove the financial conflict entirely yet fails to be mentioned in reform proposals. Certainly, such a move would signal a significant blow to the myth of market discipline as a bulwark against corporate fraud.
Hence, government always is implicated in such fraud because of their role in engendering business confidence while also promoting the myth of market discipline. This creates problems. Together with their regulators they are vulnerable to criticisms for doing both too much and too little. They may be judged as interfering too soon in troubled businesses since ‘heavy handed’ regulation signals lack of confidence and engenders investment flight. However, in the wake of a collapse the opposite criticism, of regulators acting too late, becomes prominent.
Ambiguities around the accounting and auditing process are amplified when an examination of the value of money is included in the analysis. The (im)possibility of accuracy in accounts still assumes a fixed value associated with a particular figure representing some form of monetary value. Yet, an analogous ambiguity exists at this level also. A monetary unit is a constructed metric with and uncertain link to value. Value enters the figure in complex ways. In the first instance figures bring with them functionality. Figures allow calculation. Second, confidence provides the assurance that the figures have value. In turn, governments are involved in that system of assurance.
Both are of criminological importance. There is a rich literature on the interaction between the integrity of character and the integrity of the ledger. Calculability requires integrity of the ledger. Calculability, though, can be seen as both a moral and immoral trait. Within criminology at least calculability has been associated with the perceived vulnerability of white collar and corporate criminals to deterrence by criminal prosecution. The role of assurance and confidence brings back into view the relationship between government, business and the professions (notably accountants, auditors, actuaries and valuators). Again, the relationship between them necessarily must engender confidence not only in accounts but also the value of money as a unit of enduring worth.
Corporate fraud, then, is an unwanted corollary to a complex web of relationships designed to maintain confidence in the integrity of finance and investment. Arguably, fraudulent activity might be helpfully understood as an iatrogenic property of the financial system, one where serious attempts at its removal can threaten the host system comprised of both government and business well-being. Further, the presence or absence of corporate fraud is itself subject to interpretation and reinterpretation depending on the broader economic conditions. Criminalization of one instance of corporate fraud in the wake of a collapse and ensuing downturn deflects attention on to the business and its directors yet without clear recognition of the role played by government itself.