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Accounting control fraud: Not just "Mitch and Murray," but "Blake," too

"[BLAKE:] I'm here from downtown. I'm here from Mitch and Murray. ... 'Cause only one thing counts in this world: get them to sign on the line which is dotted. ... They're sitting out there waiting to give you their money. Are you gonna take it?"* -- David Mamet, Glengarry Glen Ross

Yves buries this idea but I think it's important:

[P]roducer level employees (heads of profit centers) at all save well run firms (that list probably stops at Goldman**) are seeking to maximize their returns, and that often includes gaming the firm’s systems and pay policies. This is why Bill Black’s accounting control fraud idea is inadequate when dealing with a financial firm that has large trading operations. The looting occurs not just at the executive level, but also at the profit center level. Hence the expression, “IBG, YBG” for “I’ll be gone, you’ll be gone.” That refers to the widespread practice of doing business or putting on trades that show profits this year but have good odds of blowing up down the road.

Meaning: The rot in the financial system isn't only at the executive level*, with Mitch and Murray. It's not only downtown.

It's also at the profit centers, and all down the line, wherever the Blakes of this world are making their motivational speeches:

"[BLAKE:] These are the new leads. These are the Glengarry leads. And to you they're gold, and you don't get them. Why? Because to give them to you is just throwing them away. They're for closers. "

And of course, speeches like this were being made in mortgage origination operations all over the country.

By definition, accounting control fraud is perpetrated at the executive level, by those who control the accounting systems ("The best way to rob a bank is to own one.") A more complex model may be needed, since the profit centers have relative autonomy, and are fully capable of perpetrating frauds on their own.*

NOTE * I realize that "executives" is a fluid term, and could apply to the "heads of profit centers." But that would make "accounting control fraud" a sort of fractal structure -- the same shape at all levels -- and if such a metaphor has been used in the accounting control fraud discussion so far, I haven't heard it.

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I think the fractal metaphor is a good one. When auditors talk about internal controls, they start with "tone at the top." I suspect that in essentially corrupt organizations -- for example a credit rating agency that has decided to prioritize market share concerns over ratings accuracy -- the corrupt culture at the top is mirrored in the key divisions (e.g., the structured finance division) like one giant Mandelbrot set. The corrupt executive at the top doesn't have to be directly involved in a particular decision, such as jiggering the ratings criteria for a particular class of RMBS or CDOs over concerns about market share, to have planted the seed. The divisions are just mirroring the culture of the corporation as a whole. The larger the corporation, the more likely that individual divisions can operate semi-autonomously -- think AIG's Financial Products unit or J.P. Morgan's "London Whale." When things blow up, upper executives can claim that their hands are clean while still having created the culture that made such reckless or dishonest practices acceptable or valued in the firm.

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Lambert, that struck me as an outstanding factor in the whole kaboodle of fraud that is being examined.... market makers/trading desks have always pocketed the vig from the spread in their stocks/bonds/gold bars, etc...understood and allowed, as usually there are many competing market makers (think of the gold ring)..from NC:".Key to this strategy was having large, busy, but politically weak risk management departments".
Read more at all they had to worry about were margin calls, as long as the profit centers were raking it in....and consider this, that these derivatives were thinly traded compared to bullion or shares in Apple...I went thru some instances of looting at a couple of firms,...(NOT ME!).... speaking to compliance was a guarantee that you would be out of a job shortly!! Much less get promoted...