Regulating securities fraud: Evidence from unauthorised trading cases
| Published date | 01 February 2001 |
| DOI | https://doi.org/10.1108/eb025070 |
| Pages | 151-160 |
| Date | 01 February 2001 |
| Author | Michael Bowe,Gregory Jobome |
| Subject Matter | Accounting & finance |
Regulating securities fraud: Evidence from
unauthorised trading cases
Michael Bowe* and Gregory Jobome
Received: 11th December, 2000
*Manchester
School
of
Management,
UMIST,
Sackville
Street,
P.O. Box 88,
Manchester,
M60 1QD;
tel:
+44 161 200 3407; fax: +44 161 200 3505; e-mail:
Mike.Bowe@umist.ac.uk
Journal
of
Financial Regulation
and
Compliance
Volume
9
Number
2
Michael Bowe is Senior Lecturer in Finan-
cial Economics at the Manchester School
of Management,
UMIST,
and also acts as a
consultant to major supranational organi-
sations. He has published extensively in
the area of financial risk management with
grants from the major research funding
bodies including the ESRC and the
Nuffield Foundation. He has prior and
existing visiting professorial appointments
at several universities, including the
Helsinki School of Economics and Busi-
ness Administration, Emory University, the
University of Malta and Wirtshaftsuniversi-
tat, Vienna.
Gregory Jobome is a Lecturer in Manage-
ment at the University of Liverpool. His
research interests cover the analysis of
the operations, regulation, governance
and performance of financial institutions,
markets and systems. Recently researched
areas include international banking and
securities market fraud, the US Savings
and Loans debacle and financial interme-
diation in the UK.
ABSTRACT
This paper summarises and evaluates the results
of new empirical evidence serving as an input
to the ongoing policy debate whose central
objective is to design an efficient
overall
govern-
ance structure to
reduce
fraud in financial insti-
tutions. While the focus is exclusively upon
unauthorised trading
fraud,
the findings have
more general applicability. Fraud
control
proce-
dures operating within financial institutions can
be divided into two categories. First, internal
operational risk control systems, both those
designed by the institution and those mandated
by third parties. Secondly, the disincentive
effects attributable to the threat of legal sanc-
tions
once
the fraud has been identified.
The paper begins by critically evaluating the
effectiveness of both classes of constraints.
Recent attempts to identify empirically the
degree to which
losses
from fraudulent activity
can be
associated
with the breakdown of indivi-
dual
constraints
are then summarised and evalu-
ated.
The evidence is based on the analysis of
37 case studies of unauthorised trading fraud
drawn from financial institutions in eight coun-
tries. The findings suggest that internal controls
present the primary
defence
against
severe
fraud
losses. They also indicate that
regulatory
penal-
ties imposed on senior supervisory management
are crucial in ensuring
efficient
fraud loss miti-
gation in financial institutions. Finally, the
implications of the
results
for regulatory policy
are highlighted.
INTRODUCTION
This paper provides new empirical evi-
dence as a contribution to the ongoing
policy debate whose central objective is to
design an efficient internal governance and
external regulatory framework aimed at
reducing the level of fraudulent activity in
Journal of Financial Regulation
and Compliance, Vol. 9, No. 2,
2001,
pp. 151-160
© Henry Stewart Publications,
1358-1983
Page
151
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