A Guide to Forensic Accounting Investigation, 2nd Edition

Chapter 21

Financial Reporting Fraud and the Capital Markets

Daniel V. Dooley and Steven L. Skalak

The world's major capital markets are informed and fueled by accurate, complete, and timely financial information of all types. While other types of information—commercial, scientific, political, weather, and demographic data—are also relevant to capital market activity, no other kind of information is as sought or as relied on in the normal course of the capital markets’ operations as is financial information. This is so whether you define capital market as individual investors trading a company's shares on a stock exchange or as sophisticated private equity firms investing in emerging companies. In fact, to discuss fraud comprehensively, a relatively broad definition of capital markets should include all forums in which consumers of capital contract with suppliers of capital to fulfill their requirements. Wherever money is involved, that is where you will likely find the fraudsters.

There are many types of capital markets. They include both debt and equity markets for the issuance of publicly traded securities, implemented by organized exchanges and also by special types of markets, as in the case of certain debt instruments such as U.S. Treasury securities. Similarly important are credit markets, in which companies, governments, and individuals can borrow funds for both short- and long-term use from lenders ranging from traditional banks and commercial paper markets to credit ...