The purpose of corporate governance structures and practices is not only to reduce the incidence of financial fraud and scandal. However, this typically becomes the single-minded focus of corporate reforms in the period after a boom has turned to bust; this pattern has repeated in our own time. It is not an excuse, but what came to light in the wake of the popping of the most recent stock market bubble was typical. History is clear that as an empirical matter, booms induce fraud and swindling.
Then comes the bust. In the psychology and behavior of the aftermath of the bust, all changes. The focus is then on punishment and humiliation of the swindlers. In reaction to the scandals, many new controls are imposed. The Sarbanes-Oxley Act is a current legislative example, but its predecessors go back to the Bubble Act of 1720. New regulations, rules, accounting procedures, and reports of Blue Ribbon committees and commissions try to guarantee good financial behavior will follow, all with the theme of ensuring that “this will never happen again.” Of course, when the next boom comes, it happens again anyway. Will Sarbanes-Oxley controls prevent fraud and scandal during that next boom? History suggests they will not.
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