Until the next time. In examining these theories, this report focuses on the internal controls on American corporations (including corporate governance, business ethics, managerial structure and compensation, internal counsel, and whistleblowers), as well as external controls (government regulation, external auditors and accountants, and the judicial process). This report surveys the barriers to corporate fraud within the context of the competing explanations: the cycle vs. the perfect storm. If the series of corporate scandals that began with Enron represents an unfortunate result of a unique set of market conditions, one might conclude that the restraints now in place are sufficient to prevent outbreaks of fraud under normal circumstances. On the other hand, if fraud is cyclical and can be expected to reappear once stock prices begin to climb again, one might conclude that the post-Enron scandals have revealed fundamental weaknesses in law and regulation. This report provides a broad perspective for considering major issues in antifraud law and regulation. To protect shareholders from managerial abuse, corporate governance practice and securities law, respectively, take a carrot-and-stick approach. In the case of Enron, directors were paid up to $380,000 annually. Pursuant to Sarbanes-Oxley, on August 29, 2002, the SEC adopted new rules 13a-14 and 15d-14 under the Securities Exchange Act, which require a company's CEO and CFO to certify in each quarterly and annual report that
he or she has reviewed the report; based on his or her knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; based on his or her knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in the report; he or she and the other certifying officers: (1) are responsible for establishing and maintaining disclosure controls and procedures; (2) have designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which the periodic report is being prepared; (3) have evaluated the effectiveness of the issuer's disclosure controls and procedures as of a date within 90 days prior to the filing date of the report; and (4) have presented in the report their conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of that date; he or she and the other certifying officers have disclosed to the issuer's auditors and to the audit committee of the board of directors (or persons fulfilling the equivalent function): (1) all significant deficiencies in the design or operation of internal controls (a pre-existing term relating to internal controls regarding financial reporting) which could adversely affect the issuer's ability to record, process, summarize and report financial data and have identified for the issuer's auditors any material weaknesses in internal controls; and (2) any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal controls; and he or she and the other certifying officers have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. An assertion of ignorance may now carry criminal penalties. The legal entity that is the corporation? It is a great advantage to anti-fraud efforts if employees feel a responsibility to report fraud within a corporation. The DOJ also failed to identify corporate fraud as a high-priority problem. In the wake of the collapse of Internet and other technology stocks, and the discoveries of control fraud at Enron and other prominent companies in 2001, serious questions were raised about analyst objectivity. Economic Implications

By all accounts, the cost impact of white-collar crime is large. It remains to be seen whether recent corporate scandals like Enron will reverse this protectionist trend.
The collapse of Enron Corp. in the fall of 2001 had a peculiar side effect: accounting became front page news. For the next year, accounting fraud at a long series of Fortune 500 companies made headlines. The worst cases led to spectacular bankruptcies, mass layoffs, and criminal prosecutions. Many other companies remained intact, but paid millions of dollars to settle charges that their books did not correspond to financial reality.
The economic costs of the corporate scandals were substantial: trillions of dollars in shareholder wealth lost and a climate of uncertainty that may have suppressed business investment and hiring after the 2001 recession ended. The barriers to corporate fraud set in place after the Great Depression had clearly failed to protect public investors and were put under close scrutiny. Congress responded by passing the Sarbanes-Oxley Act of 2002, strengthening regulation of auditors, directors, and corporate executives and increasing criminal penalties for fraud.
During the 2003-2004 school year, Professor William Black's class at the Lyndon B. Johnson School of Public Affairs of the University of Texas examined corporate fraud from a multi-disciplinary perspective. Rather than viewing fraud as simply a securities law matter, the class considered the insights of criminology, sociology, management science, business ethics, behavioral economics, complex systems theory, and other fields. This report is the result of their investigations.
The report focuses on the internal controls on American corporations (including corporate governance, business ethics, managerial structure and compensation, internal counsel, and whistleblowers), as well as external controls (government regulation, external auditors and accountants, and the judicial process). A recurring theme is the limited efficacy of many safeguards and watchdogs in cases of "control fraud," where fraud is directed or abetted by top management, and where unethical or abusive practices may become the organizational norm. It may then be easier for employees, directors, auditors, and even government regulators to go along with the prevailing trends, rather than take a stand which might disrupt the smooth functioning of the business, and could bring on devastating personal and organizational consequences.
Another broad question raised by the report is whether the post-Enron scandals were a one-time event, made possible by the stock market bubble of the 1990s and several other unique historical developments which together constituted a "perfect storm," or whether fraud is a cyclical phenomenon associated with the end of long bull markets. The question has policy implications: if recent corporate scandals represent an unfortunate result of a unique set of conditions, one might conclude that the restraints now in place are sufficient to prevent outbreaks of fraud under normal circumstances. On the other hand, if fraud is cyclical and can be expected to reappear once stock prices begin to soar again, one might conclude that the post-Enron scandals have revealed fundamental weaknesses in law and regulation. This report provides an overview of anti-fraud barriers and will not be updated.