On
the ideal perverse incentives for accounting fraud: Accounting fraud thrives
most with really high pay based on short-term reported income with no way to
claw it back -even when it proves to be a lie. Also helpful is for assets to
not have a readily verifiable market-value; this makes it easy to inflate the
asset prices and easy to hide real losses. For a true epidemic of fraud, it is
also helpful to have easy entry into the industry.
Bill Black's Recipe for Bankers to become
Billionaires: 1. Grow massively, 2.
By making very poor quality loans at high rates of interest, 3. Use extreme
leverage (high corporate debt), and 4. Set aside virtually no loss reserves for
the massive losses that will be coming. If you do these four things, you are
mathematically guaranteed to report record short-term income. Akerlof and Romer referred to it as a sure thing - it is
guaranteed.
What the Recipe for Fraud will Guarantee:
1. The bank will report record profits (fictional profits), 2. The CEO will
promptly become wealthy, and 3. Down the road, the bank will suffer catastrophic
losses. As a bonus, if many banks do this simultaneously, a bubble will be
hyperinflated.
(from the previously linked article)
