The economic crisis will expose a decade’s worth of corporate fraud | The Economist

Booms help fraudsters paper over cracks in their accounts, from fictitious investment returns to exaggerated sales. Slowdowns rip the covering off. As Baruch Lev, an accounting professor at New York University, puts it, “In good times everyone looks good, and the market punishes you harshly for not keeping up.” Many big book-cooking scandals of the past 20 years emerged in downturns. A decade before the crisis of 2007-09 the dotcom crash exposed accounting sins at Enron and WorldCom perpetrated in the go-go late 1990s. Both firms went bust soon after. As Warren Buffett, a revered investor, once put it: “You only find out who is swimming naked when the tide goes out.” This time, thanks to a pandemic, the water has whooshed away at record speed….These revelations have revived fears over the flaky corporate governance of Chinese firms listed on foreign exchanges, whose audits, conducted at home, China’s government makes it hard for outsiders to inspect. A gaggle of fraud-hunters like Citron and Muddy Waters, which outed Luckin, claimed numerous scalps after the first wave of such listings a decade ago. This time they are looking beyond China.

Who’s lost their trunks? – The economic crisis will expose a decade’s worth of corporate fraud | Business | The Economist

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