Even with the apparent abundance that we enjoy in the United States, many people find themselves with financial problems beyond what they ever imagined they would have. Credit is wrecked, houses are lost, families are destroyed... all in a country that brands itself as the world's prosperity hub. Phrases like “the land of opportunity” and “the American dream” are common here. The truth is, things like bankruptcy, poverty, excessive debt, and “barely making it” while living paycheck to paycheck are becoming far more common in this land of prosperity. What are we missing?
The problem, as it turns out, usually isn't that we have a lack of anything material. We are rich with “buying power” but poor in the knowledge and financial intelligence that tell us how to use it. This might be why over half a million people (597,965) filed for Bankruptcy in 2006.
Before the credit crunch of 2007, the interest rates quoted in the market showed typical consistencies that we learned on books. We knew that a floating rate bond, where rates are set at the beginning of their application period and paid at the end, is always worth par at inception, irrespectively of the length of the underlying rate (as soon as the payment schedule is re-adjusted accordingly). For instance, Hull (2002) recites: “The floating-rate bond underlying the swap pays LIBOR. As a result, the value of this bond equals the swap principal.” We also knew that a forward rate agreement (FRA) could be replicated by going long a deposit and selling short another with maturities equal to the FRA’s maturity and reset time.
These consistencies between rates allowed the construction of a well-defined zero-coupon curve, typically using bootstrapping techniques in conjunction with interpolation methods. Differences between similar rates were present in the market, but generally regarded as negligible. For instance, deposit rates and OIS (EONIA) rates for the same maturity would chase each other, but keeping a safety distance (the basis) of a few basis points. Similarly, swap rates with the same maturity, but based on different lengths for the underlying floating rates, would be quoted at a non-zero (but again negligible) spread.
From the time of Hammurabi through the modern day scandals of Enron’s collapse and the Fannie Mae/Freddie Mac takeovers, fraud has been a concern. Broadly conceived, fraud is the misappropriation of assets as well as financial statement fraud (Golden, Skalak, & Clayton, 2005). The first of these – the misappropriation of assets – includes the unauthorized consumption, or theft, of an organization’s resources. In contrast, financial statement fraud is the presentation of knowingly false financial reports wherein financial damage results from reliance on those reports (Skalak, Alas & Sellitto, 2005). Accordingly, this issue has broad appeal to managerial accountants who are concerned with fraud from the perspective of control system design, to auditorswho are interested in fraud from a detection viewpoint, and to financial
accountants who are concerned with the quality of the financial reporting on which organizational and investor decisions are based.
A recent survey by the Association of Certified Fraud Examiners (ACFE, 2008) estimates losses due to all frauds at $994 billion annually.2 In addition to being costly, we know that the manipulation of financial reports also is common (Merchant & Van der Stede, 2007).
