Tackling Corporate Fraud: Mills' Call for Investor Empowerment

Fraud and corruption are a menace not only in the poverty stricken countries, but also in the developed world. The worldwide menace of malpractice attempts to defeat the value to globalization. In the globalized world of investors of the 21st century with its first transatlantic stock exchange, it is necessary to continue reforms to shake off abuses of power at the level of their roots.

So, Daniel Quinn Mills, a professor at the Harvard Business School, writes Wheel, Deal, and Steal (2003) to express his belief that CEOs of imperial nature are continuing their practice of stealing from investors despite the hue and cry over the financial scandals of Worldcom, Tyco, and of course, Enron.

The author claims that the rules that have been designed to protect the investors are failing time after time. Hence, Mills details wide-ranging reforms that are possible and should be designed in order to encourage transparency in financial work.

Additionally, the author shows how investors should, after perusing his book, try to protect the leftovers from corrupt financial practices.

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Investors may even be able to use Mills’ advice in recovering their lost moneys. Wheel, Deal, and Steal claims that investors are being cheated at many different levels. The auditors and the CEOs may all be involved in financial fraud for a variety of reasons, the main one being that they all want to pocket greater earnings without sharing them with investors.

Moreover, the rules of law and ethics do not seem to be doing a great job in controlling accounting fraud.

There is a basic clash of interests between the investors and the corporations that the investors were meant to fundamentally trust for the protection of their particular interests, that is, to create more earnings for themselves through their investments. These conflict of is the concept of alienation put forth by Karl Marx. According to Mills, even the stock market crash had this conflict of interests at its core.

It is not about the accounting scandals of recent times alone. Rather, the problem is deep rooted as it is a conflict of power and money. The CEOs try to pocket as much money as possible sometimes at the expense of the investors. Originally, however, shareholders were meant to be the owners of American enterprises, and the executives were to act as the agents of the investors. But now, executives are the only ones making fortunes for themselves and expanding their own power in the corporation.

Investors, on the other hand, are left far behind in the process of business. Mills offers plenty of accounting information in his book that investors should want to understand in order to gain mastery over the accounting malpractice techniques that are used to give them losses in stead of the gains of ownership. While power had been shifted from the hands of the investors to the households of the executives, the executives and their auditors had been using “creative accounting” to defraud the investors.

The techniques of “creative accounting” should be learned by the ordinary investor who may from now want to replace the all-powerful executive in favor of a team of managers that should work on behalf of the investors alone. Mills advises investors to take charge through his book by informing them that only they are the ones that seem to be staying behind. The attorneys, the auditors, and the investment banks are all involved in corporate fraud that is deliberately designed to give less to investors (who are generally greater in number).

The parties sharing the greater profits by defrauding investors mainly seem to be the executives of investment banks, law firms, accounting firms, and the corporation itself. The author explains that the executives of big corporations have established compliance in their systems wherewith they do not only defraud their gullible and valuable investors without a sound from the latter; but they have also developed compliant teams of accountants and boards of directors.

After devising financial malpractice, the executives “had to do deals that would look good in their financials and get approval from auditors and boards for misleading financial reports. Finally, they had to cash in their options before the frauds and other misrepresentations were discovered” (8). Mills reminds us that the CFO of WorldCom, Mr. Scot Sullivan; the CFO of Enron, Mr. Andrew Fastow; and the CFO of Tyco, Mark Swartz—all were smooth operators who had been given excellence awards by the CFO Magazine.

Furthermore, Fortune Magazine had given awards to Enron for being the most admired company along with Citigroup. In addition, Enron had been lauded every year from 1996-2001 for high achievement in innovation. The executives seem to be fooling everybody. What is more, the author of Wheel, Deal, and Steal blames the Federal Reserve for harnessing Mr. Brooksley Born, the chief executive of the CFTO, by telling him to stay out of the business of derivates. Thus, everybody seems to have been involved in the creation of a financial scandal whenever it has happened.

While some may formulate deficient laws and others may unwisely supervise the financial practices of a corporation, the entire system appears to be flawed. A comprehensive effort to eliminate the problem of corporate fraud is therefore needed on the part of the financial system as a whole, including the supervisors. Mills provides good insights into the functioning of both the Commodities Futures Trading Corporation and the Federal Reserve while offering his advice on the reform of the system. This book also is a reminder that the Internet bubble is over and the next bubble might be of hedge funds or the funds of hedge funds.

Investors must be prepared for the next bubble with an increase in consciousness with respect to their precious moneys invested for greater earnings. Thus, the book is an essential read for investors who are ready to work for change. Mills advises that the government must be held responsible for punishing corrupt executives of various corporations. Besides, the good work of eliminating fraud must be continued given that democracies also accompany corruption at several levels, mostly having to do with the cream of supervisors or top management at accounting firms as well as regulatory agencies.

The latter are responsible for making good regulations to check corporate fraud. However, investors must take charge to get regulatory agencies and the government as a whole involved in the process wherever the regulations and policies appear impotent. To increase the awareness of the investors and hopefully to push them to take action with regards to the regulation of their investments, Mill’s book answers the following question:

There are many Americans now in the stock market, and if we are sufficiently upset about our losses, politicians and courts may act. Estimates are that the proportion of U. S. households that owned stocks or mutual funds has grown from 19% in 1983 to 49. 5% in 2002; and the proportion of single individuals who own stocks or mutual funds has grown from 42% in 1983 to 84% in 2002. If investors exert their potential influence, can we create a safer, more reliable, more honest America? (10).