Business History

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Financial fraud, scandals, and regulation: A

conceptual framework and literature review

Hugo van Driel

To cite this article: Hugo van Driel (2018): Financial fraud, scandals, and regulation: A conceptual
framework and literature review, Business History, DOI: 10.1080/00076791.2018.1519026

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Business History
https://doi.org/10.1080/00076791.2018.1519026

Financial fraud, scandals, and regulation:

A conceptual framework and literature review
Hugo van Driel
Rotterdam School of Management, Erasmus University, the Netherlands

ABSTRACT KEYWORDS
This perspectives article surveys publications in business history and Fraud; scandals; narratives;
regulation; US; UK
constructs a conceptual framework for researching fraud and other
dubious financial practices, their determinants and their consequences.
The prevalence and nature of the practices studied are mainly deter-
mined by individual traits, firm governance and control, the economic
environment, and regulation. Contemporaries make sense of dubious
practices by constructing narratives, possibly framing them as scandals,
which are likely to lead to attempts at regulatory change. It is primarily
the socio-economic impact of dubious practices that determines
whether regulation becomes fundamentally stricter. Existing agendas
for reform strongly influence the substance of regulatory responses.

Since the emergence of the Enron affair in 2001 and the WorldCom debacle in the following
year, scholarly interest in business scandals has grown substantially. Gray, Frieder, and Clark
(2005, p. 3) start their book on business scandals with the Oxford English Dictionary’s defini-
tion of a scandal: ‘an action or event regarded as morally or legally wrong and causing general
public outrage’. Business scandals are likely to call into doubt existing business practices and
may be turning points in the way these practices are regulated. Business scandals often – but
not always – imply some kind of fraud. In its turn, fraud, which the same dictionary briefly
defines as ‘criminal deception’, is not necessarily subject to public outcry. In practice, fraud
and scandals will often coincide, and this perspectives article therefore covers both scandals
and fraud, acknowledging that public outcry may also be caused by dubious practices which
are not unmistakably fraudulent. To keep the number of aspects to be discussed within
manageable boundaries, this article focuses exclusively on financial fraud involving asset
misappropriation or provision of false or misleading financial information (see Section 3 for
details), and allied scandals.
Recent reviews of the relevant literature acknowledge that fraud is a social construction
(Cooper, Dacin, & Palmer, 2013; Greve, Palmer, & Posner, 2010). What is labelled fraud differs
from time to time and from place to place. Historical case studies of fraud would seem to be
of special merit in investigating this further. Cooper et al. (2013) refer to two of them, con-
cluding that they ‘do not articulate a theory to explain fraud or offer much guidance about
combatting it’ (Cooper et al., 2013, p. 444). Their criticism is in line with the general impression

CONTACT Hugo van Driel [email protected]

© 2018 Informa UK Limited, trading as Taylor & Francis Group
2 H. VAN DRIEL

that historians, including business historians, tend to write isolated case studies with little
eye for the bigger picture. This common wisdom is not entirely accurate, as currently at least
a substantial minority of authors publishing in the leading business history journals do try
to embed their research in existing theoretical and empirical literature and to generalise
their findings (de Jong, Higgins, & van Driel, 2015). Still, we may safely assume that historians
are often inclined to regard an extensive empirical description as an end in itself.
This perspectives article aims to derive general insights from the available set of (business)
historical studies about business scandals and fraud, even when the individual studies do
not follow a quantitative approach as favoured by Cooper et al. (2013) or do not otherwise
attempt to generalise their findings. Below, a conceptual framework will be developed to
structure an analysis aimed at generalisation.

1. A conceptual framework for the historical study of fraud and scandals

The classic framework for studying fraud is the so-called ‘fraud triangle’, consisting of the
incentive (or pressure) to commit fraud, the opportunity for fraud, and its rationalisation by
perpetrators (for a brief explanation, see Hollow, 2015). In their synthesis, Trompeter et al.
(2013) adopt an expanded understanding of (accountancy) fraud by adding three elements
to the triangle: the act of fraud, its concealment, and the resulting ‘conversion’ (the benefit
to the fraudsters). In their editorial in a journal special issue on fraud, Cooper et al. (2013)
take a broad perspective, too. They distinguish four domains of fraudulent behaviour: indi-
vidual, firm, organisational field, and society at large. Such a multi-layered perspective can
direct the search for general insights to be obtained from business historical studies on fraud
and scandals.
In the past decade, scholars mainly from outside business history have published collec-
tions of historical case studies on business scandals and fraud with generalisation in mind
(Gray et al., 2005; Jones [ed.], 2011; Skeel, 2005). Gray et al. (2005), (associate) professors in
management, financial services, and organisational behaviour respectively, go back as far
as the early eighteenth century in their presentation of corporate scandals. They draw par-
allels between the ‘financial world’ that existed at the time of well-known bubbles and scan-
dals, starting with the Mississippi Company of France Bubble and the South Sea Bubble
(1720) and ending with the recent series of scandals in the US economy during the 2000s.
From this comparison, several factors can be identified as being conducive to bubbles and
scandals, and these suggest an important role for the economic environment in particular.
Factors shown to be significant in this regard include rapid economic and monetary expan-
sion, the presence of ‘first-time and/or unsophisticated investors’, and economic slowdown
revealing and aggravating the problems of the companies involved (Gray et al., 2005, p. 41).
In terms of the four domains identified by Cooper et al. (2013), this interpretation focusses
on the organisational field.
Another multi-case study of scandals was written by Skeel (2005), a legal scholar. Skeel
discusses prominent business failures and scandals in the US since the Panic of 1873. He
identifies three main factors that lead to scandals and company breakdowns; these cover
the first three of the four domains distinguished by Cooper et al. (2013) and can be translated
into a number of further general categories. The first factor, excessive risk-taking, belongs
primarily to the individual domain and is an example of behaviour that can be attributed to
individual traits (Allport, 1966). Greed is the most obvious incentive for fraud at the individual
 Business History 3

level, while hubris (the Icarus effect in Skeel’s terms) is likely to result in excessive risk-taking,
whether fraudulent or not. The second factor, the increasing size and complexity of compa-
nies, is located in the firm domain, and as part of the governance and control system it
represents an opportunity for fraud; inadequate oversight by directors or deficient control
by accountants also belong to this domain. The third factor, competitive pressure, refers to
the domain of the organisational field and is an important element of the economic envi-
ronment. Skeel emphasises that innovation tends to intensify competition, acting as a pres-
sure for dubious practices. Drawing upon examples from British business history, business
historian Toms (2017) shows how (clustered) technological changes enlarge the opportuni-
ties for fraud by increasing uncertainty and information asymmetry, with the asymmetry
making it harder both for investors and regulators to monitor fraud (see also Hollow, 2015).
In sum, incentives and opportunities for fraud and other dubious behaviour can be linked
in various ways to individual traits such as greed and hubris, to inadequate firm governance
and control, and to an economic environment characterised by strong competition and/or
high information asymmetry. Conversely, from a logical point of view, the presence of respon-
sible, ethically conscious individuals, adequate governance and control, and limited com-
petitive pressure and information asymmetry are likely to reduce the chances of dubious
practices occurring.
Moving on from the incentives and opportunities for fraud, it is now time to turn to the
third element in the fraud triangle, that is, rationalisation. Common examples of rationalisations
by perpetrators are to picture themselves as ‘victims of circumstance’ or to claim that ‘their
actions are no worse than those of most other people in their position’ (Hollow, 2015, p. 16).
In their turn, contemporaries often make sense of dubious practices by framing them as deviant
and unacceptable. Historian Safley (2009, p. 43) eloquently describes how by sense-making
‘Scandal helps a community … to maintain the limits of acceptable behaviour – in essence, to
define itself in moral or ideological terms – and to mark transgressions as deviant’. The question
then is how communities learn from scandals, and in particular how this then translates into
regulatory change. According to Gray et al. (2005, p. 40), the common result of bubbles and
scandals is ‘a general lack of trust in commercial activities and/or confidence in the integrity
of business leaders’. Major scandals that generate a public outcry provide a unique opportunity
for governments to address unwanted business behaviour and introduce ‘tit-for-tat’ regulatory
measures (Skeel, 2005). Similarly, an editor of a book concludes from the contributions, which
are written mainly by accountants, that the government and/or the accounting associations
typically introduce new laws and regulation as a ‘knee-jerk’ reaction to scandals (Jones, 2011b,
p. 409). In an article about ‘cycles of crisis and regulation’, two accounting specialists show that
each cluster of business failures and scandals that occurred in four distinct periods in Australia
between the early 1890s and early 2000s generated regulatory change (Carnegie & O’Connell,
2014). They doubt the effectiveness of these adaptations in preventing new scandals, however,
and refer to the concept of ‘random agenda selection’ (Breyer, 1993), which is described in a
textbook on regulation as a process in which ‘regulatory priorities are driven by issues coming
to the public’s attention rather than by rational appraisals of risks’ (Baldwin, Cave, & Lodge,
2012, p. 98).1 This suggests that scandals might cause policymakers to focus on the wrong
issues when drafting new regulation. Legal scholar Markham (2006, p. 662) even concludes
his lengthy history of US corporate scandals by stating that the habitual knee-jerk responses
to scandals, mainly originating from law professors who lack business experience, have resulted
in ‘a pile of regulations with little rhyme and no reason’.
4 H. VAN DRIEL

In law professor Romano’s more elaborate account (2005), a knee-jerk regulatory response
is said to be not a random, hastily arranged remedy for abuses revealed by a scandal. Instead,
her view is that ‘policy entrepreneurs’ tend to use the sense of urgency generated by a scandal
to implement their existing agenda for regulatory change. She adopts a contextual approach
and identifies ‘shifts in national mood and turnover of elected officials, coupled with focusing
events, as key determinants that open “policy windows” for policy entrepreneurs to link their
proposed solutions to a problem’ (Romano, 2005, p. 1524). Her view implies that the intrinsic
quality of the competing narratives is not decisive for the regulatory outcome.
Like Markham, Romano takes a pro-free-market stance. More neutrally, business historian
Hansen (2012) also acknowledges the impact of the societal context by noting that
sense-making of crises and scandals may bring pre-existing or new agendas for reform to
the forefront. Contemporaries construct several competing narratives to make sense of
financial crises and scandals. According to a useful definition provided by Hansen (2012, p.
675), a narrative ‘explains what went wrong, who is to blame and how to avoid a repetition’.
Of these various competing narratives, whichever one emerges as the winner will determine
the consequences of the scandals, both for the companies and individuals involved and for
the regulation of business.
Thus far, to the best of my knowledge, scholars have not systematically linked sense-mak-
ing by means of narratives (including rationalisations) to the nature of contested practices,
their determinants, their consequences, and the regulatory responses to them. Providing a
novel combination of the insights from the literature discussed above, the conceptual frame-
work presented in Figure 1 formalises such a systematic analysis, which forms the core of
this perspectives article. Within the domains of the individual, firm, and organisational field,
incentives and opportunities for fraud or other contested practices are determined by indi-
vidual traits, governance and control, and the economic environment respectively. A fourth
determinant is the degree of regulation. Regulation can both directly affect the contested
practices and influence these practices via the other three determinants of fraud. As a general
factor, regulation can be considered to belong to society at large, Cooper et al.’s (2013) fourth
domain. Another aspect of the framework concerns the consequences of contested practices
– that is, the direct gains and losses for economic actors (individual domain) and the (per-
ceived) impact on the domain of society at large (including the economy). Regulation may
also be the result of a scandal, depending on the way people make sense of the scandal. The
perpetrators and their sympathisers can try to ward off sanctions and stricter regulation by
formulating narratives that rationalise the contested practices, their determinants, and their
consequences. Public opinion (and here the press plays a major role) and regulators are also
involved in this process of sense-making, as they potentially generate public outcry by con-
structing narratives which place the blame on other factors than those indicated by the
perpetrators. To prevent similar events from happening in the future, these narratives may
legitimise stricter enforcement of existing regulation and/or the drafting of new regulation.
In this article, regulation refers to governmental laws and rules, self-regulation by industries,
and monitoring by the press (see Miller, 2006) and other watchdogs.
There is a feedback-loop from regulation to the box at the left side of Figure 1 to indicate
that regulation can focus both on the practices themselves and on one or more of the other
three determinants (individual traits, governance and control, and economic environment).
Competing narratives will blame different (sets of ) factors and the outcome of this battle of
the narratives is expected to affect the nature of the regulatory response (Hansen, 2012). To
 Business History 5

Governance and
Control

Economic Contested
Consequences Narraves
environment pracces

Individual traits Regulaon

Figure 1.  Conceptual framework for the study of fraud and scandals.

give an idea of possible outcomes: following a basic logic, Skeel (2005, p. 7) lists the count-
er-measures that target each of his three specific factors. First, penalising individuals for
misbehaviour and empowering market watchdogs counters excessive risk-taking; in partic-
ular, penalising individuals can be seen as an attempt to get unwanted individual traits under
control. Second, reducing the size and complexity of businesses tackles firm complexity.
One could add that requirements for financial disclosure are a logical part of this, while other
measures regarding corporate governance and control are also imaginable. Third, regulating
competition within industries eases competitive pressure. Arguably, disclosure requirements
can also be a way to directly regulate dubious practices. The most drastic measure in this
respect is an outright ban on certain practices. Thus deductively linking the countermeasures
to the other parts of the framework will help to determine how contemporaries used their
narratives to construct the logic of the relation between the scandal and the regulatory
response. It enhances the analysis beyond a simple dichotomy of ‘blaming flawed individuals’
versus ‘blaming circumstances’, however valuable it is to keep this basic distinction in mind.

2. Reviewed historical studies, method, and design

The publications reviewed in this article were selected by means of a query in Proquest,
which is the most comprehensive database of publications in English language business
history journals.2 The query included both articles and – in order to trace book publications
– book reviews. The search keys used were ‘scandal*’, ‘fraud*’, or ‘swindle*’ in the title or
abstract in combination with ‘histor*’ in the journal title (supplemented by Enterprise and
Society). Articles and book reviews published up to and including the calendar year 2017
were covered as well as several contributions to a special issue on white-collar crime pub-
lished in Business History in 2018. Publications generated by the query about non-financial
fraud (e.g. environmental pollution and product quality), studies on bribery and other forms
of corruption, and books and articles in which scandals and fraud play only a minor role (e.g.
studies on accountancy practices and their regulation) were omitted from the selection. In
this way, the selection was reduced to 46 titles (25 articles and 21 books, see Table 1).
Inevitably not all relevant publications were traced in this way (in the empirical part a few
other titles are cited too). Furthermore, because of the decision to include only English
6 H. VAN DRIEL

Table 1.  Characteristics of the surveyed publications

Article
(A) or
book 1800s to post
(B) Reference Discipline/Affiliation Country Focus 1930s 1945-1980 1980
A Balleisen (2009) HI US X
B Balleisen (2017) HI US X X X
B Brewster (2003) IJ US X X X
B Calavita et al. (1997) SO US     X
A Cheffins (2015) LA US   X X
B Dyer (2013) IJ US X    
A Govekar (2008) EB US X   X
A Hausman (2018) EB US X
A Hilt (2009) EB US X    
A Keep & Vander Nat (2014) EB US X X X
B Mihm (2007) HI US X    
B Olien & Olien (1990) HI US X    
B Osthaus (1976) HI US X    
A Petrik (2009) HI US X    
B Salter (2008) LA US     X
B Skeel (2005) LA US X X X
A Solsma & Flesher (2013) EB US X    
B Squires et al. (2003) PR US    X X
B Tygiel (1994) HI US X    
A Woloson (2012) IJ US X    
B Zuckoff (2005) IJ US X    
A Schell (1990) HI US/ Mexico X    
A Chandler & Macniven (2014) EB UK X
A Cox (2007) HI UK X    
A Hollow (2014) HI UK X    
B Hollow (2015) HI UK X    
B Klaus (2014) CS UK X    
A McCartney & Arnold (2001) BE UK X    
A McKinstry et al. (2002) BE UK X    
A Pettigrew (2018) HI UK X (17 th C.)    
B Robb (1992) HI UK X    
A Taylor (2007) HI UK X    
B Taylor (2013a) HI UK X    
A Taylor (2013b) HI UK X    
A Taylor (2018) HI UK X    
A Schenk (2017) HI UK/Switzerland X
B Wilson (2013) BE UK/US    X X
A Keneley (2008) BE Australia X X X
B Armstrong (1997) HI Canada X  
B Armstrong (2001) HI Canada   X  
A Hansen (2012) HI Denmark X    
B Jankowski (2002) HI France X    
A Safley (2009) HI Germany X (16th C.)    
A Lindgren (1982) HI Sweden X    
A Öhman & Wallerstedt (2012) BE Sweden X X X
B Jones (ed., 2011) BE Multiple X X X
Notes: BE = Business and Economics (including Accountancy); CS = Civil Service; HI = History; LA = Law; IJ = Independent
Writers, Journalists; PR = Practitioners; and SO = Sociology. The categorisation is based on job titles (primary criterion if
available) and affiliations mentioned in the publications reviewed. Job titles and affiliations are not sufficiently
differentiated to make a distinction between business historians and other historians.

language publications, the selection is biased towards the US and – to a lesser extent – the
UK (see Table 1), with a limited number of other countries represented by one or two studies.
This bias is obviously a main limitation of this review, although it also gives some coherence
to the literature survey as far as the legal-institutional context is involved. Another important
limitation is that this perspectives article only discusses fraud and scandals that have occurred
since the nineteenth century, which is in line with the periods covered by almost all of the
 Business History 7

selected publications. The collection of publications is skewed to the first (long) period pre-
1940; here, the liberal doctrine of caveat emptor (‘buyer beware’) was dominant until the
late nineteenth century, leading to many scandals, and this was followed by an increase in
regulation, culminating in the far-reaching measures introduced as part of the New Deal of
the 1930s. Over 80% of the titles cover this period, and most of them do not deal with later
periods. Approximately a quarter of the publications pay attention to the decades immedi-
ately following the Second World War (but only a few of them exclusively), forming the
second period which can be typified as the regulated era with relatively few scandals. An
equal share deal with the third period (again mostly not exclusively), ranging from the late
1970s until the early 2000s, which is characterised by processes of deregulation, an increasing
number of high-profile scandals, and selective new regulation. Although the Enron and
WorldCom affairs of 2001/2002 stimulated research into fraud and scandals, in terms of the
periods covered there is no big difference in distribution in the studies published since 2003.
The credit crunch that erupted in 2007/2008 has not been followed by a major change in
time focus either (it should be noted that about half of the studies were published after 2008).
The studied practices vary from what was generally petty fraud (e.g. counterfeiting) and
dubious activities by brokers and promoters to major corporate scandals. Several of the
selected publications are focussed on individual scandals and/or fraudsters, while others
cover specific industries or countries during certain periods. Around 40% of the academics
involved were located outside history faculties or units at the time of writing the selected
publications (some authors are counted more than once in this calculation, which is based
on Table 1). Still, in line with what was stated in the introduction, the articles and books in
this review are predominantly stand-alone studies which deal with their subject in an idio-
syncratic way. Although some authors make useful comparisons based upon their own
research of primary sources (see the final section), generally, the publications centred on
specific fraudsters or scandals generally discuss the findings of earlier empirical studies of
other fraud cases and scandals only to a very limited extent. Even in his general history of
US scandals, Skeel (2005) does not refer to any of the other studies featured in this review
that were published prior to his work. In particular, for the US, it is hard to identify central
debates or major shifts in perspectives or themes between the year the first selected study
was published (1976) and the present. Some basic connections are made in the UK literature.
Taylor positions his major work (2013a) as a revisionist account, contradicting – among other
publications – Robb (1992) to posit that the British authorities increasingly clamped down
on white-collar crime through criminal prosecution during the nineteenth century. Hollow
(2015) refers to Robb (1992) and Taylor (2013a) to show that his own study fills a research
gap by focussing on British business fraud and scandals during the interwar years.
Except for Skeel (2005) and Hollow (2015), none of the publications analyses the empirical
data with the help of a comprehensive framework. Besides these two publications, only
Balleisen (2017), Calavita, Pontell, and Tillman (1997), Keneley (2008), Hansen (2012), and
Hollow (2014) make substantial use of theoretical concepts in their empirical analyses. Given
this fact, rather than discussing competing theories or central debates concerning fraud and
scandals, this perspectives article fits the empirical findings of the reviewed publications
intro the conceptual framework presented in Figure 1 – giving a prominent place for
sense-making by narratives, following Hansen’s (2012) pioneering article.
The design of the empirical overview is aligned to the conceptual framework. The over-
view starts with a general description of fraudulent and other dubious practices and their
8 H. VAN DRIEL

social construction. The insights from the studies regarding the four determinants of fraud
(economic environment, governance and control, individual traits, and regulation) are then
discussed, with subsections organised largely in chronological order; this is then followed
by a brief sketch of the socio-economic consequences of fraud and scandals. Next, an over-
view is provided of common rationalisations of contested practices, their determinants and
their consequences, as well as counter-narratives constructed to legitimise regulation of
these practices and their determinants. Since the aim is to trace potentially appealing nar-
ratives in connection to other parts of the framework, salient narratives which are infre-
quently identified by the surveyed publications will also be included in the overview (it
should be noted that many of these publications did not deliberately try to trace narratives).
Finally, a number of ‘battles’ of narratives about distinct scandals are discussed more exten-
sively to illustrate the various ways in which sense-making may shape regulatory responses,
which may be to implement an existing agenda for reform. The article concludes with an
overview and discussion of the findings, together with a classification in which practices,
determinants, and their consequences are linked to the narratives that rationalise or contest
them, while the contesting narratives are then linked to the foci of regulatory responses.
These are then followed by comments and suggestions for further research.

3. Contested financial practices and their social construction

It is impossible to discuss here in detail all the types of fraud presented in the reviewed
studies. Many fall into the two main general categories of fraud distinguished in the literature
(e.g. Coffee Jr., 2005): asset misappropriation (1) and providing false or misleading financial
information (2). These main types may go together, as, for instance, when managers siphon
off company money to their own purses or to those of accomplices on the pretext of deliv-
ering certain goods or services to the company. However, the reviewed publications also
deal with a broader category of providing (potentially) misleading information to investors;
for instance, when promoters sell shares to the public based upon an unrealistic represen-
tation of the prospects and the risks of certain (new) business ventures (e.g. mining). This
practice may sometimes go as far as selling shares in non-existing companies, that is, outright
forgery. Furthermore, the studies describe certain practices which may be contested to some
extent but are not necessarily illegal, including ‘skimming’ profits by managers receiving
(hidden) remunerations and fees, paying dividends out of capital to suggest profitable oper-
ations (which may amount to a Ponzi scheme), transferring assets from and to affiliated
companies, transactions among business relations, family and friends at non-market prices,
other forms of insider trading, and share price manipulation by ‘wash trading’ (share trans-
actions between colluding parties solely to influence share prices) or other similar practices.
Bribery and regulatory capture, which are not the subject of this article, can enable the types
of fraud described.
Calavita et  al. (1997, p. 5) point to the fundamental fact that, unlike ‘ordinary crime’,
white-collar crime is not clearly separate from regularly operating a business. This basic
insight not only makes us understand the inherently socially constructed nature of fraud,
but also explains why it is often so easy to conceal (see also Berghoff & Spiekermann, 2018).
Consider, for instance, the practices of the ‘bucket shops’ which prospered in Canada at the
beginning of the twentieth century:
 Business History 9

These undertakings preyed upon the less-well-to-do, encouraging them to buy stocks listed
on the exchanges by putting down only a small percentage of the purchase price. Instead of
acquiring the shares, however, these operators simply held onto, or bucketed, the orders. If the
share price rose, the buyer could claim a small profit. In the event that a client actually paid the
full cost of the stock and demanded delivery of his certificates, the bucketers were confident
that they could acquire the shares at a lower price through market manipulation. Meanwhile,
the investors were charged interest on the money ‘lent’ to them, and the bucket shops had the
use of the deposits. (Armstrong, 1997, p. 37)

These practices were so inextricably interwoven with daily operations that bucketing
could very easily be concealed (Armstrong, 1997, p. 126). A more recent example illustrating
sustained concealment of fraud is the Ferranti ISC scandal which was exposed in 1989
(Wilson, 2013). In addition to other illegal or fraudulent practices, over the years the American
entrepreneur James Guerin inflated the reported sales, profits, and assets of his firm
International Signals & Controls (ISC), founded in 1971, by pretending that contracts existed
for sales of arms equipment to foreign countries. He hid the fraud with all kinds of financial
manipulations, using scores of separate front companies and bank accounts, which also
served to fill his own pockets. Although a later audit assessed the company’s net worth as
having been nil at the time, in 1987 Guerin was thus able to sell ISC for 700 million dollars
to the British (defence) electronics firm Ferranti.
Detection of fraud is part of its social construction which evolves over time. For instance,
in the course of the seventeenth century, British private overseas trade lost its previous
connotation of fraud, while the East India Company as a corporation came to be criticised
as being a vehicle for fraudulent practices (Pettigrew, 2018). It is crucial to acknowledge here
that we are seeing the contested practices through the eyes of the authors of the studies
and that they themselves socially construct fraud. Typically, Robb (1992, p. 4–5) extends the
definition of white-collar crime to ‘breaches of trust’, that is, acts which are not necessarily
illegal but are ethically wrong.
To evaluate the social construction of contested financial practices, a certain level of
precision is required in how those practices are described – a requirement which not all of
the surveyed publications always meet. For example, Dyer (2013, p. 126) suggests that the
business failure in 1923 of L.R. Steel’s US retail chain, which duped 60,000 investors, was not
due to fraudulent intent: ‘There is nothing illegal about losing money’. But in his very sparsely
annotated book, this author does not inform us what the stock salesmen told the (mainly
unsophisticated) investors about the financial prospects of the company, whose stores –
rapidly expanding in number since its founding in 1919 – never became profitable. The
analytical relevance of an eye for the vital details is also illustrated by the following example
of how contemporaries in the German city of Augsburg (probably) differed in their moral
evaluation of the practices of the merchant banker Ambrosius Höchstetter in the 1520s and
1530s (Safley, 2009). The cited study suggests that fellow Augsburg merchants might have
considered Höchstetter’s ‘sharp practices’ as ‘good business’, while the civic authorities
branded his behaviour a violation of ‘due order’. However, the label ‘good business’ was
probably applied to Höchstetter’s attempt to corner the mercury and cinnabar markets (a
typical ‘sharp practice’), while the city fathers were indignant about Höchstetter hiding his
financial problems and – after his business had failed – transferring assets to settle obliga-
tions to some of his creditors, leaving others empty-handed (a much more obvious case
of fraud).
10 H. VAN DRIEL

Several of the reviewed publications discuss extensively and carefully the social construc-
tion of scandals by the media (Armstrong, 1997; Calavita et al, 1997; Hollow, 2015; Jankowski,
2002; Klaus, 2014; Osthaus, 1976; Taylor, 2013a, 2013b; Tygiel, 1994; Zuckoff, 2005) and thus
provide important added value compared to the general studies of fraud and scandals dis-
cussed at the beginning of this article. In short, government officials and news media could
and did construct fraud and scandal, often in tandem. There was room for different evalua-
tions of dubious practices, particularly when objective standards for proper behaviour were
lacking. In 1849, after the British railway mania bust, George Hudson was blackened in several
papers when it became known that he had falsified the profits of railway companies to
legitimise unwarranted dividend payments and had enriched himself with company funds.
However, the concept of ‘profits’ was not legally defined at the time, while directors’ salaries
were so minimal that the appropriation of company money by Hudson was accepted, at
least by some observers, as legitimate compensation for his services; he was not prosecuted
(Taylor, 2013a, pp. 84–89).

4. Determinants and consequences of contested financial practices

4.1. Economic environment
Several studies consider industrialisation and the rise of a national market economy as basi-
cally underlying an increase in dubious business practices. This economic transformation
was enabled by a range of innovations in transport and communication, the latter including
not only the telegraph, the telephone, and the radio, but also technologies such as address
machines which offered promoters the possibility of sending out mass mailings to the public
(Tygiel, 1994). In the emerging new economic setting, norms for proper business behaviour
were lacking and economic relations became more impersonal. Transactions increasingly
occurred between distant parties, so that assessing the counterparty’s trustworthiness
became more difficult (Balleisen, 2017; Hollow, 2015; Klaus, 2014; Mihm, 2007; Robb, 1992;
Woloson, 2012). Economic actors could capitalise on this increased information asymmetry
in their dubious dealings, but at the same time were confronted with rising competitive
pressure.
Innovations bred excessive risk-taking as they tended to fuel booms, which were inevi-
tably followed by busts. Not surprisingly, the reviewed literature considers this phenomenon
as a major underlying cause of fraud and scandals. A boom is a classic prelude to scandals.
In the upswing phase, euphoria leads to recklessness and neglect, while opportunities to
commit fraud without getting caught expand, too. When the boom is followed by a depres-
sion or even a panic, investments result in (sometimes heavy) losses and businessmen often
then try to conceal their excessive risk-taking by engaging in dubious practices or outright
fraud. Many of the publications reviewed here refer to boom-and-bust scenarios of this kind
(e.g. Hollow, 2015, pp. 42–43; Lindgren, 1982).
Well-known examples of investment manias leading to booms and subsequent busts
occurred in railways, oil extraction, mining, and banking. The typical stories of new industries
and technologies reveal the importance of innovation as the context for fraud and scandals
in a broader sense. By definition, the outcome of innovation is highly uncertain, which may
indirectly lead to dubious financial practices. For instance, promoters had promised yields
from new Ule rubber trees introduced in Mexico that were 15 times higher than those actually
 Business History 11

achieved under the prevailing climatic conditions. When these disappointing results became
evident around 1900, some planters continued to pay dividends from capital to conceal the
failure of their business (Schell, 1990, pp. 232–234).
Both promoters and investors suffered from a liability of newness. In the first decades of
the twentieth century, oil booms in the US attracted many promoters with no prior experi-
ence and without enough capital, who entered the industry in such large numbers that
building a profitable operation became difficult. Fixed on the future, they had little eye for
how their financial situation was developing and were tempted to commit fraud when they
were not able to attract capital in an honest way (Olien and Olien, 1990; Armstrong, 1997
and Robb, 1992 sketch similar scenarios). In particular, inexperienced investors suffered from
the information asymmetry associated with new investment opportunities: ‘hopeful investors
outside the oil industry often did not understand what they were getting when they bought
royalties’ (Olien & Olien, 1990, p. 156).
An explanation of how an innovation created large information asymmetry dating from
more recent times is also instructive. US investors could hardly assess the risks involved in
joining the opaque multi-level marketing (MLM) schemes, which boomed after the Second
World War (Keep & Vander Nat, 2014). In a typical MLM, independent distributors of products
receive entry fees (lump-sum payments) and/or a share in sales from distributors recruited
lower down the line. Although the authors do not specify when what they consider to be
fraudulent use of MLMs became widespread, one study considers most of them to be inher-
ently fraudulent: ‘For participants to recoup their own investment – and ostensibly much
more, as expected by the participants – they all need to generate further downline enrolment
… Thereby, a situation is created in which the desired recoupment will not, and cannot, come
true for the vast majority of the participants’ (Keep & Vander Nat, 2014, p. 196, italics in
original). These authors thus claim that a fair share of the MLMs were and are in fact pyramid
schemes. By the 1970s, victims of MLM/pyramid schemes had lost ‘hundreds of millions of
dollars’ (Keep & Vander Nat, 2014, p. 189).
New financial instruments and products were a major type of innovation that facilitated
or triggered dubious business practices. One of the most basic examples of this was the use
of bank notes, a practice that proliferated after American independence and that ‘enabled
a far greater level of economic anonymity than any other forms of money in use at this time’
(Mihm, 2007, p. 11) and thus, ironically, prepared the ground for a massive distribution of
counterfeit money. In another example, a new type of bond introduced to get round New
York banking restrictions indirectly led to a scandal in the 1820s (Hilt, 2009). These ‘post-notes’
(a term coined by the cited author) bore a total interest rate of 6% rather than the usual 3%,
since to obtain cash borrowers had to sell their post-note on the financial market at a dis-
count. The in-built effect was that post-notes attracted risky borrowers, that is, persons who
could not get a regular bank loan (adverse selection), while the lending insurance company
did not receive a corresponding interest rate. The expansive lending of the Life and Fire
Insurance Company, founded in 1822, which started in August 1824 during a boom, was
followed by a crash the next year, so that many borrowers could not repay their loans. Despite
all kinds of financial manipulations, including borrowing money by selling its own post-notes
without informing the market of its weak financial situation and loading the directors’ other
companies with bad debts, the bank collapsed in July 1826.
Govekar (2008) recounts another financial innovation which led indirectly to excessive
risk-taking and fraud. The introduction in 1867 of a new type of tontine which entitled
12 H. VAN DRIEL

policyholders to deferred dividends boosted the sales of the US life insurance industry in
the following decades. The combination of paying deferred dividends and frequent policy
lapses swelled the coffers of the insurance companies, and their managers used these funds
for reckless diversification, lavish spending, and self-enrichment. After widespread abuses
were publicly reported by 1904, the New York state banned the tontines – and similar steps
were then taken by other states.
A peculiar example of novelty facilitating deceit is provided by the International Reply
Coupons (IRCs) introduced in 1906, which senders could use to provide foreign recipients
with a free return mail (Zuckoff, 2005). By coincidence, in 1919, Charles Ponzi, an Italian
immigrant to the US, found out that – due to currency devaluations after the First World War
– one dollar could buy more than three times as many IRCs in Italy as in the US. By exchanging
foreign-bought IRCs for US stamps and selling these at a discount, Ponzi thought he could
generate such a huge profit that he offered his investors an incredible return of 50% in 45
days. By pretending that earnings were gained by dealing in an obscure financial product,
Ponzi was able to fool the public: he actually never traded any substantial number of IRCs,
but proceeded to pay the returns out of the inlay of new investors – a classic pyramid game
which he was forced to discontinue in August 1920. Ponzi’s 20,000 creditors received only
37.5% of their claims, and four Boston banks failed due to Ponzi’s other financial manipula-
tions and the effect of the scandal.
In more recent times, in the late 1970s, deregulation in the US allowed the spread of
financial techniques that invited excessive risk-taking, including a new type of unsecured
loan, off-balance sheet constructions, and mark-to-market accounting. These financial inno-
vations were a major part of the savings and loan debacle of the 1980s and the Enron affair
which erupted in 2001, both discussed extensively later on (see Sections 7.4 and 7.5).
In conclusion, booms in certain (new) industries increased information asymmetry so
that investors often remained unaware of the magnitude of the risks they were taking and
could be easily deceived under these circumstances. As booms and innovations increased
competitive pressure, newness was also a liability for business promoters and corporate
managers. Innovative financial instruments in particular seduced them into excessive
risk-taking, often culminating in fraud.

4.2. Governance and control

During the nineteenth century, similar to economic innovations, innovations in firm organ-
isation increased the possibilities for fraud as: ‘… the very novelty of big business and cor-
porate organization meant that codes of behaviour and standards of business ethics were
poorly articulated’ (Robb, 1992, p. 169; see also Govekar, 2008; Hollow, 2015; Taylor, 2013a).
Very few of the historical studies reviewed show that governance structures succeeded in
preventing corporate fraud. By way of exception, McCartney and Arnold (2001) conclude
that in mid-nineteenth century England the extent of ‘Railway King’ George Hudson’s financial
malpractice depended on the effectiveness of the governance regime. Unlike what hap-
pened at three other railway companies with which he was involved, at the Midland company
Hudson was not given scope by the directors to commit substantive fraud. Much more
frequently, managers of firms were able to manipulate governance quite easily. A common
trick was to achieve credibility by appointing to a board renowned businessmen and other
reputable individuals who did not perform any effective overseeing function but served as
 Business History 13

‘decoy ducks’ or ‘puppets’ (Chandler & Macniven, 2014; Hollow, 2014; Hollow, 2015; Jankowski,
2002; Robb, 1992).
The growing complexity of business structures provided more opportunities for both
committing and hiding fraud during the nineteenth and twentieth century, for instance, by
moving assets around within a group of affiliated corporations or by presenting misleading
information about the corporations’ financial state (Brewster, 2003, p. 235; Skeel, 2005).
Notable examples of such complex structures serving these ends are the British Balfour
Group, which failed in 1892, Ivar Kreuger’s match empire, and Samuel Insull’s pyramid of
utility companies, which both collapsed in 1932, as well as Enron in 2001 (see Section 7.5).
Jabez Spencer Balfour and his collaborators used funds on a massive scale from the Liberator
Building Society, which Balfour had developed from its initiation in 1868 into Britain’s largest
building society, to finance speculative building projects by allied companies, while pre-
tending that Liberator was mainly supplying mortgages to small home-buyers (Chandler &
Macniven, 2014; Robb, 1992; Taylor, 2013a). Bookkeeping fraud, including creating paper
profits through fictitious transactions between member companies of the Balfour group,
was used to hide the insolvency of the group from the public eye. As the manager and main
owner of a large international empire of businesses, the Swedish ‘match king’ Ivar Kreuger
‘… was essentially operating a giant pyramid scheme’ (Öhman & Wallerstedt, 2012, p. 247).
Accountants from IT&T, which Kreuger tried to acquire, finally discovered fraud and thus
initiated the fall of the Kreuger conglomerate in 1932 (Lindgren, 1982, p. 200; Skeel, 2005,
pp. 79–80). Arthur Andersen achieved fame when it was asked by the banks to investigate
the records of the Insull pyramid of firms in 1932 and revealed dubious intercorporate loans
(Skeel, 2005, pp. 88–89).
There were also other cases in which accountants detected fraud, both in Britain from
the 1850s onwards (Hollow, 2014, pp. 170–171; Hollow, 2015, pp. 23, 36, 60; McKinstry,
Wallace, & Fleming, 2002; Robb, 1992) and in the US in the early twentieth century (Solsma
and Flesher, 2013). Despite these auditor successes, the reviewed studies suggest that in
general auditing was a not a very adequate safeguard against fraud. Both in the Balfour and
the Kreuger fraud, auditors were convicted for their complicity (Chandler & Macniven, 2014;
Öhman & Wallerstedt, 2012) and many accountants acted as accomplices in the massive US
savings and loan fraud of the 1980s (see Section 7.4 below). Corporate governance has not
significantly prevented dubious practices in more recent times either. Cheffins (2015) argues
that the US remained largely free of big scandals in the 1950s and 1960s, despite there being
almost no effective oversight of executives by boards or shareholders in this ‘managerial
capitalism era’ (instead, according to him, both the prevailing sense of responsibility among
executives and regulation generally prevented scandals from occurring during this period,
see Sections 4.3 and 4.4 below). Later regulatory measures to strengthen governance and
control could not prevent major scandals like the Enron debacle in 2001 (see Sections 6.2
and 7.5 below).

4.3. Individual traits

In the public mind, fraud is often attributed to the greed of individual actors. Not all authors
dwell upon individual traits as a fraud determinant: they may take malign intentions for
granted or are perhaps reluctant to psychologise about the motives of the fraudsters.
Govekar (2008, p. 291) is uncommonly explicit about the main cause of the waves of big
14 H. VAN DRIEL

scandals that occurred in the US around 1900 and 2000: ‘Both meltdowns were motivated
by greed’. Equally firmly, but in their case substantiated by argument, Calavita et al. (1997)
conclude that many owners of US savings and loan banks that failed massively in the 1980s
acted with fraudulent intent (see Section 7.4 below). Robb, who does not spare the fraudsters
in his descriptions, provides a more nuanced, sociological explanation of fraud when exam-
ining nineteenth century practices: ‘The entrepreneurial culture of Victorian England bred
aggressive businessmen who were impatient with ethical codes and whose preoccupation
with material success led them to fear failure more than fraud’ (Robb, 1992, p. 181). Several
other authors cast even more doubt on the greed of individuals being the primary incentive
for fraud. They ascribe cases of dubious behaviour mainly to hubris (Balleisen, 2017, p. 152;
Hollow, 2014; Salter, 2008; Skeel, 2005), desire to achieve recognition (Hollow, 2015, p. 89),
naïve optimism or incompetence (Osthaus, 1976; Schell, 1990), and to efforts to keep a
struggling business afloat or to hide or recover earlier losses (Robb, 1992, p. 27; Schell, 1990,
p. 229; Schenk, 2017). Further severing the link between individual traits and motives, two
studies suggest that, for many petty fraudsters, bare economic necessity was the main incen-
tive. Mihm (2007, p. 215) echoes an apologetic narrative commonly heard from counterfeiters
when he says: ‘most people passed counterfeits because they needed the money to survive’.
Similarly, Woloson (2012, p. 821) refers to a nineteenth century source when attributing the
widespread use of retail premium schemes (seducing consumers to buy an overpriced article
by adding a low-value ‘gift’ which was sometimes nothing more than a lottery ticket) to
‘economic necessity’.
Some authors suggest that, in the post-war period, certain individual traits of US corporate
managers have had a strong effect on the occurrence of fraud and scandals. Cheffins (2015,
p. 723) sees part of the explanation for the low incidence of corporate scandals in the imme-
diate post-war decades as coming from the typical mentality of the then reigning generation
of managers: ‘Values such as duty, honesty, service, and responsibility that were fostered
under the testing conditions of the Great Depression and World War II likely contributed to
a sense of moral restraint among mid-twentieth-century executives’. Later generations, which
were responsible for many more scandals, had not shared this historical experience and
acted according to a general business mood in the US that ‘lionized risk-taking, innovation,
short-term monetary incentives, and market discipline’ (Balleisen, 2017, p. 362). In turn,
Cheffins suspects that the big scandals of the early 2000s caused a sobering process among
executives, which reduced the inclination to engage in scandalous behaviour:
A dearth of corporate scandals despite a stress test in the form of a sharp decline in share prices
prompted by the financial crisis of 2008–2009 … confirmed that executives of public compa-
nies were more boring than they had been pre-Enron. (Cheffins, 2015, p. 740)

Cheffins adds that this observation does not apply to executives in the financial world,
whose hubris is held responsible for the financial crisis of 2007/2008 (see literature cited by
Hollow, 2014, p. 161).

4.4. Regulation
The publications reviewed agree that, after the more regulated economy of the early modern
period, a free market ideology or a doctrine of caveat emptor (‘buyer beware’) ruled economic
life in countries like the US, Canada, and Great Britain during most of the nineteenth century.
 Business History 15

Existing laws and regulations were certainly used to combat fraud from early on. Yet lack of
funds and manpower could seriously inhibit the detection and suppression of fraud by
authorities, which was also hindered by gaps in supervision or, the opposite, by overlapping
jurisdictions. Enforcement of law and other rules was often lax or not consistent (Armstrong,
1997; Jankowski, 2002; Mihm, 2007; Olien & Olien, 1990; Petrik, 2009; Schell, 1990; Skeel,
2005; Taylor, 2013a; Tygiel, 1994; Zuckoff, 2005). Perpetrators of dubious practices sometimes
courted or bribed regulators and newspaper editors to enable or hide fraud (Jankowski,
2002; Olien & Olien, 1990; Tygiel, 1994; Zuckoff, 2005). Newspaper editors repeatedly accepted
payments from company promoters, bucketers, and sellers of retail premium schemes to
write favourable reports about their ventures (Armstrong, 1997, p. 39; Balleisen, 2017, pp.
78, 94; Schell, 1990, p. 223; Taylor, 2013b; Woloson, 2012, pp. 819–820).
Overall, however, the press (including some of the editors complicit in dubious practices)
played an important role in exposing dubious financial practices and functioned as a comple-
ment to or even a substitute for the authorities in combating fraud (Klaus, 2014). In Britain,
particularly from the 1840s onwards, ‘watchdog journalism’ filled the ‘regulatory vacuum that
the inadequacy of legislative safeguards against fraud had caused’ (Taylor, 2013b, p. 693).
Journals exposed the fraudulent or unduly risky nature of several businesses, contributing to
their subsequent collapse. Furthermore, under pressure from the press for more openness,
the majority of joint-stock companies disclosed more financial information than prescribed
by the successive company laws from 1844, so the press also indirectly forced financial disci-
pline on these companies. It was, however, particularly a change to more consistent imposition
of penalties on fraudulent directors and managers from the late nineteenth century which
managed to ‘improve commercial morality’ in the established British corporate sector (Taylor,
2013a, citation on p. 247). Subsequently, several interwar scandals on the unregulated fringes
of the British financial sector triggered stricter regulation of brokers (Hollow, 2015).
In the US, too, ‘The urban press provided a fraud blotter’ (Balleisen, 2017, p. 76).
According to this author, the most effective antifraud techniques were ‘moral suasion and
swift mechanisms of regulatory redress’ (Balleisen, 2017, p. 9). Swift regulatory redress was
provided particularly by the Post Office. From 1872, the postmaster general could issue a
so-called fraud order against a firm, so that all mail sent to this company was returned to
sender with ‘fraudulent’ stamped on the envelope. Balleisen’s favourite example of moral
suasion are the activities of the Better Business Bureaus in the 1920s and 1930s, whose
officials tried to convince (mainly small) enterprises to give up their deceitful marketing
practices. In comparison, the various ‘blue sky’ laws introduced by many US states from
1911, which subjected proposed securities issues to governmental scrutiny, were much
less effective. Only the scandal-inspired comprehensive New Deal measures at the federal
level in the 1930s (see Section 7.3 below for more details) were a turning point and pro-
duced a substantial business regulation.
The regulated era between 1945 and 1980 saw relatively few big and widely publicised
scandals. Regulation should be understood in a broad sense here. In the US, in the decades
immediately following World War II, tight banking regulations and union strength reined in
executives inclined to questionable behaviour, while the oligopolistic situation as well as
governmental regulation in many industries also lowered the competitive pressures on
established firms to engage in risky business ventures (Cheffins, 2015, pp. 723–724). From
the late 1970s, deregulation turned back the clock, and this is now seen by many as respon-
sible for the big scandals that surfaced in the following decades.
16 H. VAN DRIEL

In sum, an economic environment characterised by high competitive pressure and inno-

vation which increased information asymmetry was the determinant that most consistently
influenced the extent of dubious practices. Governance and control proved largely inade-
quate for preventing fraud. Individual traits conducive to malpractice were more diverse
than greed and hubris, although the relative prevalence of these two traits may to a sub-
stantial degree explain the frequency of scandals after the Second World War. Finally, regu-
lation became more effective from the late-nineteenth century onwards and reached its
heyday between the 1930s and the 1970s.

4.5. Consequences
From the literature surveyed, it is impossible to gauge the prevalence of fraud in the different
periods covered. One cautious conclusion can be drawn. There seems comparatively little
doubt that relative few big scandals occurred in the US from the mid-1930s until the dereg-
ulation era began in the late 1970s. What is certain is that the losses of business failure might
be significant. To provide some examples in chronological order: investors and depositors
lost £250,000 due to the failure, due to fraud, of the Independent West Middlesex Life and
Fire Insurance Company in 1841 (Robb, 1992, p. 16), £8 million due to the collapse of the
Balfour Group in 1892 (Chandler & Macniven, 2014), and no less than $60 billion dollars due
to the Enron debacle in 2001 (Salter, 2008).
In a general sense, fraud and scandals have had a potentially large impact on economic
circumstances. Several studies state that (waves of ) scandals caused a deterioration of the
business climate and a prolonged loss of trust, particularly on the part of investors, in the
institutions and industries involved or even in the economy at large (Chandler & Macniven,
2014; Olien & Olien, 1990; Robb, 1992; Skeel, 2005; Taylor, 2013a; Tygiel, 1994;). On the other
hand, scandals certainly did not always depress investor enthusiasm (Olien & Olien, 1990;
Schell, 1990). Several authors suggest that, in retrospect, dubious schemes actually helped
to develop the economy involved (see Olien and Olien, 1990, on Florida; Schell, 1990 on
Mexico; and Mihm 2007, and Woloson, 2012 on the effect of counterfeit money and retail
premium schemes respectively on the US economy). Below, it will be shown that the impact
of dubious practices figured prominently in the sense-making of fraud and scandals.

5. Rationalisations of practices, determinants, and consequences

Perpetrators and their sympathisers have constructed various rationalisations not only of the
practices themselves, but also of their determinants (including regulation) and their conse-
quences. In the discussion that follows, the rationalisations will be arranged accordingly, finishing
with consequences and regulation. This final part of the section functions as a bridge to the next
section on narratives contesting dubious practices since it was only when the negative socio-eco-
nomic consequences of dubious practices increased that commentators and policymakers began
to challenge the range of rationalisations and calls for stricter regulation became louder.

5.1. Practices: business as usual

It was a popular line of defence for businessmen, in particular in the absence of formal stan-
dards, to depict their contested acts as ‘business as usual’ or ‘common practice’. Robb (1992, p.
 Business History 17

171) found an abundant use of this type of narrative in Britain during the nineteenth century:
‘Businessmen often justified sharp practice by arguing that they were only doing what thou-
sands of others did’. In several contemporary cases of disputed practices, press commentators
endorsed this ‘business as usual’ frame (Taylor, 2013a). Most intriguingly perhaps is the ratio-
nalisation commonly used in antebellum America that counterfeiting was no worse than ‘Banks
suspending specie payments, or going out of business without honouring their paper promises’
(Mihm, 2007, pp. 234–235). Other rationalisations of this kind were more straightforward. In a
libel trial in 1891, when accused of masking his large stake in shares in a South African mine
by using a nominee shareholder, British newspaper editor and promoter Harry Marks simply
declared: ‘It takes place every day’; and in the same way the clerk who facilitated Marks’s prac-
tices by figuring as a nominee vendor of farm land to the mine commented: ‘Whether the
practice be recommended or not … it is usual for a property such as this to be sold through a
nominee’ (Klaus, 2014, p. 196). Similarly, George Graham Rice – who from 1905 was active as
a mining promoter, a broker in oil and mining stocks, and a publisher of several successive
much-read financial sheets – was convicted three times for fraud, but in a ‘confessional 1911
memoir … vigorously maintained that his tactics of manipulating share prices, whether
through the dissemination of news stories or market operations, did not differ a whit from the
typical methods of Wall Street’ (Balleisen, 2017, p. 164). The ‘common practice’ frame could be
surprisingly effective. In December 1922, Charles Ponzi was cleared of his first state indictment,
using ‘a promise of profits is not larceny’ as the core of his defence (Zuckoff, 2005, p. 303). The
business-as-usual rationalisation remained in vogue in more recent times. A Swiss dealer
accused of rogue trading at Lloyds Bank International testified in 1974 that ‘it is clear that I lack
the genius to have been the inventor of such refined methods of camouflage all on my own’
(testimony of Marc Colombo as cited in Schenk, 2017, p. 112). Similarly, Salter (2008, p. 318)
describes how Enron executives rationalised their way of doing business: ‘One kind of financial
ruse led to another, although many were not blatantly illegal. Such devious moves … soon
became accepted as normal practice’.

5.2. Economic environment: economic circumstances and competitive pressure

It was tempting for businessmen to blame economic circumstances such as economic crises
or ‘panics’ as part of a boom-bust scenario, economic policy, and other macro-economic
circumstances for their failure. Section 7 on the sense-making of specific scandals includes
some examples of such rationalisations.
Economic actors could also bend the popular ‘business as usual’ narrative to a frame in
which dubious practices became a condition for staying in business, thus explicitly blaming
competitive pressure for their behaviour. In illustration, Robb (1992, p. 172, 128) writes that
Victorian businessmen liked to portray themselves as ‘… honest men "compelled by neces-
sity" to pay dividends out of capital or to "borrow" client’s money’ and ‘… often defended
obscurity in accounts as a necessary protection against competitors …’. In a private letter
written in 1894, a Montana banker rationalised the risky practice of tolerating overdrafts in
a similar way: ‘he could not compete effectively if he did not adopt local banking customs’
(Petrik, 2009, p. 736, wording by the quoted author). More recently, in the debate generated
by the Enron and WorldCom scandals of 2001 and 2002, representatives of the accountancy
industry blamed increased competitive pressure for their sharp practices (see further dis-
cussion below, in Section 7.5).3
18 H. VAN DRIEL

As has been seen, inexperienced investors are a characteristic element of an economic

environment conducive to malpractice. It is a most remarkable finding of this literature
survey that for a long time blaming victims for their own losses served as a very effective
way of rationalising dubious practices. Until well into the nineteenth century, the British
authorities and the press repeatedly attributed individual cases of fraud primarily to the
greed and naivety of investors (Taylor, 2013a). Such victims did not deserve protection. The
main argument commentators used against prosecuting the Railway King George Hudson
was the greed of the shareholders he had duped (Taylor, 2013a, p. 88). Although there is less
documentary evidence of how such arguments were used in particular cases, similar senti-
ments were nevertheless common among nineteenth century Americans, who tended to
have contempt for ‘suckers’ who fell victim to their own greed (Balleisen, 2017; Woloson,
2012, p. 809; see also Zuckoff, 2005, p. 194). Below it will be shown that a changing appre-
ciation of the individual responsibility of victims of fraud was a central part of the move
towards stricter regulation from the late-nineteenth century.

5.3. Governance and control: entrepreneurial freedom and lack of information by

auditors
The surveyed literature provides a few examples in which lenient governance and control,
or even no such controls at all, were rationalised as allowing entrepreneurial discretion.
Before his myriad of companies collapsed in 1932, Ivar Kreuger had insisted ‘that the financial
statements not be audited’ and ‘preached a philosophy that secrecy was paramount to cor-
porate success’ (Öhman & Wallerstedt, 2012, p. 247). Similarly, after its acquisition by Ferranti
in 1987(see Section 3), James Guerin’s fraud-ridden ISC continued to be supervised by a
proxy board, in line with a: ‘… long-held feeling within Ferranti that entrepreneurs like Guerin
should be given as much freedom as possible …’ (Wilson, 2013, p. 110). The many other
managers who positioned ‘puppets’ in the board probably shared, but did not voice, a nar-
rative that was based around claiming entrepreneurial discretion.
For their part, on several occasions accountants or their sympathisers rationalised auditor
failures by referring to a lack of inside information. A later investigator legitimised the inad-
equate due diligence of ISC carried out by Ferranti’s auditor in 1987 as follows: ‘Guerin’s fraud
was so cleverly constructed that it would have been extremely difficult to detect without
some prior knowledge of the missile contracts and customers’ (Wilson, 2013, p. 108). In a
similar vein, accountants accused of negligence in the high-profile Enron and WorldCom
scandals of 2001–2002 blamed the lack of information they had received from the client
companies (see Section 7.5 below).

5.4. Individual traits: good intentions and personal merits

A personalising rationalisation frequently employed by perpetrators and their sympathisers,
particularly in court cases, was to shift attention from the deeds of the accused to their
individual traits, claiming good intentions and personal merits (shown, for example, by phil-
anthropic activities). In most reported cases this rationalisation did not help the perpetrator
escape sanctions. Lawyers, relatives, friends, and other sympathisers who praised his per-
sonality were countered by victims, the media, and prosecutors positioning him as a wicked
character (Balleisen, 2017, pp. 66, 171; Chandler & Macniven, 2014, pp. 343, 345; Hansen,
 Business History 19

2012, pp. 690–691; Hausman, 2018, pp. 382–383, 391; Hollow, 2015, p. 61; Klaus, 2014, pp.
50–61, 83-86,183–187; Wilson, 2013, pp. 134–136, 149, 167–168).

5.5. Consequences: contested practices support socio-economic development

Businessmen and their apologists had more success in rationalising dubious practices when
they emphasised their positive consequences. The core of this narrative was that sharp prac-
tices were vital for sustaining a dynamic economy. The hold of this narrative, what might be
called a liberal one, was particularly persistent in Canadian mining, which may serve as an
instructive example. Armstrong (1997, 2001) describes how in Canada, and particularly in
Ontario, where resource exploitation was regarded as crucial to economic development, the
liberal narrative held sway, even as – like elsewhere – regulation was tightened. In his two
books, Armstrong presents a series of cases from 1870 to the 1960s which involved disputed
financial practices in the trading of Canadian mining stocks (such as transferring only part
of the receipts from primary share issues into company coffers, insider trading, wash trading,
bucketing, publishing unrealistic prospects of new mining development, and aggressive
selling of stock by boiler rooms, particularly to the US). Time and again, mining promoters
and their sympathisers (including some officials and politicians) defended the contested
practices with a narrative that gambling was part of the game in the mining business and
with claims that new, highly speculative ventures supported economic development. The
core of this narrative was unfounded: in 1960 producing mining companies were responsible
for financing 86% of exploration (Armstrong, 2001, p. 155). Furthermore, a report showed
that only 5% of new Ontario mining companies between 1907 and 1953 actually started
mining, and only 16% of this small minority had paid any dividends to investors (Armstrong,
2001, p. 228, percentages calculated). Nevertheless, the liberal narrative found a receptive
ear in several regulators, who opted for a none-too-strict enforcement of the rules.
As part of their narrative, Canadian mining promoters presented themselves as the cham-
pions of small investors by selling them ‘penny stocks’. Several fraudsters similarly drew upon
anti-establishment sentiments (Balleisen, 2017) and constructed a kind of emancipatory
narrative in which they claimed they were serving the common people whose interests were
being neglected or even infringed upon by established financial institutions. Examples are
New York bankers in the 1820s who legitimised their evasion of the requirement to charter
their banks by drawing upon a populist rhetoric (Hilt, 2009, p. 92), the British banker Thomas
Farrow who claimed (perhaps sincerely) during his trial for accountancy fraud in 1921 ‘that
all he had ever wanted to do was protect the poorer classes from unscrupulous moneylenders
and encourage thrift amongst those of small means’ (Hollow, 2014, p. 174), and Charles Ponzi
who simply stated that he was the only banker or businessman sharing his profits so gen-
erously with the public by offering a 50% return on investment (Zuckoff, 2005, p. 209).

5.6. Regulation: hinders development and provides false security

Emphasising the benevolent external effects of sharp business practices was an obvious
rhetorical device to delegitimise regulatory interference. Such a frame celebrating free enter-
prise fits into a popular view that too much regulation hinders technological progress and
economic development and and that ‘fraud is a by-product of an otherwise successful market
economy, and is to be tolerated as such’ (Toms, 2017, p. 369). In the caveat emptor doctrine,
20 H. VAN DRIEL

protection of potential victims was not needed and regulation could even make things worse
by giving investors and consumers a false sense of security. This latter argument was used,
for instance, in 1856 by a British parliamentarian to remove all substantial requirements for
financial disclosure introduced in the Company Act of 1844, which had been brought in in
response to several scandals (Robb, 1992, p. 148; see Armstrong, 1997; Balleisen, 2017;
Jankowski, 2002; Mihm, 2007; Osthaus, 1976, for other examples of this rationalisation).

6. Narratives legitimising regulatory responses

It was primarily a changing appreciation of the consequences of dubious practices that
prompted commentators and regulators from the late-nineteenth century onwards to con-
struct narratives supporting stricter regulation. These regulatory narratives often challenged
several of the rationalisations discussed above. Therefore, the first subsection will discuss
regulatory narratives that involve several parts of the conceptual framework in
combination.

6.1. Negative consequences, malpractice, and competitive pressure

There are strong indications that, as a rule, it was the suspected consequences of dubious
practices rather than the practices themselves which generated public outcry, provoking
narratives contesting their rationalisation as common practice and calls for action. Put simply,
regulatory responses were above all impact-driven. For instance, the social construction of
counterfeit money changed dramatically during the American Civil War when the Union
government introduced ‘greenbacks’ as the first national paper currency and suddenly began
to clamp down forcefully on counterfeiting: ‘What was once a nuisance or even an alternative
source of currency was now a crime against the state …’ (Mihm, 2007, p. 308). Similarly, after
the stock crash hit Canada in October 1929, the news media sought a scapegoat for this
economic disaster and found it in stockbrokers such as Ike Solloway. He was convicted for
bucketing (see Section 3 above), but according to his lawyer, reflecting upon the case 20
years later, this was just for ‘following the practice of the other brokers’ which had been
tolerated up till then (Armstrong, 1997, p. 167).
Also very instructive in this respect is the comparison by Cox (2007) of the aftermath of
two English company debacles, the Royal Mail Steam Packet Company (1931) and the British
Tobacco Trust and allied companies involved in the ‘pepper scandal’ (1934). In 1931, Royal
Mail’s chairman Lord Kylsant was given a one-year jail sentence, because a debenture pro-
spectus concealed the fact that his company had paid out dividends from secret reserves
for several years, which was illegal under the British Larceny Act. In the case of the pepper
scandal it was less obvious whether fraud – as it was understood at that time – had actually
been committed, since there were no explicit guidelines on whether or not information on
expected future product prices should be included in business prospectuses. Paradoxically,
the sentence left Kylsant’s reputation in the City intact since his offence was seen as a ‘tech-
nical one’ (Jones, 2011a, pp. 124–125, notes that painting a rosy picture in prospectuses was
considered common practice in those days). However, a similar conviction demolished the
reputation of one of the businessmen involved in the pepper scandal because in this case
‘financial dealings sought to generate profits in ways that threatened the orderly operations
of the commodity markets on which much of the City of London’s financial reputation rested.
 Business History 21

One consequence of this speculative scheme, for example, was the transfer of a substantial
share of the world’s pepper trading to New York …’ (Cox, 2007, p. 837). This example shows
how difficult it is to differentiate sincere moral indignation about malpractice from concern
or even anger about their wider negative impact.
Both in the UK and the US, growing concern about the damage done by dubious practices,
rather than any moral reappraisal of those practices as such, drove efforts to regulate more
strictly from the closing decades of the nineteenth century. From the 1820s, public outrage
in Britain about malpractice erupted periodically (Taylor, 2013a) and laissez-faire Victorian
society was ‘far less comfortable with and less tolerant of fraud than historians have depicted’
(Taylor, 2007, p. 701). Nevertheless, until the 1870s, investors were predominantly seen as
greedy persons, who did not deserve the same protection as innocent victims of outright
forgers (Taylor, 2013a; Taylor, 2018). By the 1870s, however, the strong growth of the corpo-
rate economy had raised the potential impact of commercial dishonesty to such a high level
that ‘Corporate scandals threatened to destroy the trust required to sustain commercial
transactions in an increasingly impersonal market … As the century wore on, then, the
interests of investors and the wider “public interest” became increasingly conflated’ (Taylor,
2013a, p. 252). With a broadening shareholder base, investors were increasingly seen as
passive actors. In the absence of sufficient shareholder protection by corporate governance
and company law reform, these investors could only be protected from themselves if there
was a credible threat that fraudsters would be prosecuted. A changing appreciation of the
individual responsibility of victims of fraud thus underpinned the ‘criminalisation’ of business
fraud. The criminalisation of corporate financial manipulation was a haphazard process, but
the eventual change was unmistakable. For example, when the partners of a private firm
called Overend and Gurney concealed its large debts when floating the company in 1865,
only for it to fail the following year, their lawyer defended them successfully in court by
claiming that ‘it was an accepted principle in equity that non-disclosure did not amount to
fraud’ (Taylor, 2013a, p. 150). By the 1890s, however, British courts regularly convicted busi-
nessmen, including some well-known figures, to penal sentences of several years for omitting
information in prospectuses and other behaviour that had long been regarded as accepted
‘common practice’. Increasing concern about the destabilising effect of fraud thus resulted
in ‘ideological shifts in favour of greater state regulation of the economy to protect investors’
(Robb, 1992, p. 147).
Similar to Taylor’s analysis of the British development, but not supported by a systematic
decade-by-decade investigation of scandals, Balleisen’s analysis suggests that the increasing
impact of financial abuses fuelled an intensification of the battle against fraud in the US,
too: ‘Because a growing number of Americans had begun to invest in stocks and bonds, the
resulting financial losses reached more deeply into farming communities and the urban
middle class’ (Balleisen, 2017, p. 127). This author perceives that, from the 1880s in particular,
there were ‘Calls for greater regulatory paternalism … from many quarters … and individuals
from all these groups who, at some moments viewed business fraud as a menace to economic
and even social order’ (Balleisen 2017, p. 7). It was under the pressure of political agitation
and outcry in the press about malpractice on the securities markets, starting with Kansas in
1911, that almost all US states adopted blue sky laws before 1933. These blue sky laws intro-
duced mandatory financial disclosure and registration of securities dealers and ‘gave state
officials authority to distinguish firms with viable business plans from those that lacked
decent prospects or represented pure swindles’ (Balleisen, 2017, p. 127).4 However, the
22 H. VAN DRIEL

regulation through blue sky laws probably had only a limited impact on the prevalence of
dubious practices. This also applies to occasional attempts at a priori banning of certain
practices. In 1923, alarmed by revelations during the so-called Fort Worth trials, the state of
Texas changed its blue sky law dating from 1913 by ‘… specifically barring false dividends,
merger schemes, and skimming’, but the Texas blue sky office was understaffed and could
not live up to its task (Olien & Olien, 1990, citation on p. 145).
Like the perpetrators themselves, some contemporary observers blamed competitive
pressure for the dubious practices. Between the late 1890s and the 1920s, the National
Association of Credit Men repeatedly pointed to competitive pressure as a cause of wide-
spread dubious practices employed by retailers and promoters (Balleisen, 2009, p. 126).
Finally, one set of New Deal reformers seemed to adopt the ‘competitive pressure’ narrative
in order to legitimise far-reaching industry regulation in the utilities sector, which had been
plagued by scandals in the early 1930s (see Section 7.3 below). The New Deal measures were
part of a general doctrinarian shift from caveat emptor to caveat venditor (‘seller beware’).
After the Second World War, heightened concern over consumer rights reflected the general
view that vulnerable economic actors in particular deserved protection from fraud (Balleisen,
2017). This sentiment gained broad political support as a large part of the post-war gener-
ation involved in combating fraud, among them Congressmen, ‘… had imbibed the critique
of unregulated capitalism and the positive view of governmental power ushered in by the
New Deal’ (Balleisen, 2017, p. 292). This prevailing mood stimulated further regulation in a
rather autonomous way. Comparatively small incidents might suffice to trigger tighter reg-
ulation, mainly through new disclosure rules, as happened, for instance, with the securities
markets and franchisors in the 1960s (Balleisen, 2017, pp. 283–284, 295–297). Competitive
pressure was reduced by industry regulation also in other sectors than utilities, including
the savings and loans industry discussed in Section 7.4.
Still, regulators showed themselves to be selective in terms of which parts of the economic
system they targeted. Judging from the literature surveyed, they did not often publicly reflect
on the impact of financial innovations, which arguably are among the main environmental
determinants of fraud and scandals. Authorities rarely clamped down upon financial instru-
ments that invited risk-seeking behaviour (the ban on tontines mentioned in Section 4.1
above is an exception in this respect). Although an important part of the US business com-
munity came to support caveat venditor, political scientists, legal scholars, and economists
of various political persuasions continued to raise objections to anti-fraud activities (Balleisen,
2017, pp. 334–339). These critics framed regulation as ineffective, as costly, as curbing com-
petition and innovation, or – most fundamentally of all – as not needed since competitors
and financial intermediaries would serve to inform the public about financial malpractice.
The last of these narratives endorsed the superiority of the market as an instrument for
reducing information asymmetry. This familiar criticism of regulation foreshadowed the
advent of neo-liberalism and deregulation in the late 1970s.

6.2. Lack of independence of corporate watchdogs

Being to some extent immune to the up and downs in the popularity of regulation, over the
course of the twentieth century US regulators became more inclined to attribute business
failures that turned into scandals to inadequate governance and control. The New Deal
regulation brought in after a number of scandals which simplified the structure of utility
 Business History 23

companies is well known (see Section 7.3 below), but a major scandal in 1970 also led to an
important change in the regulation of governance and control. Cheffins (2015) writes that
the failure of the Pennsylvania Railroad after its merger with New York Central was attributed
to mismanagement as the board let its chairman diversify the company into real estate to
the detriment of the railway services. This bankruptcy, the largest in US history until then,
triggered proposals and measures by the Securities and Exchange Commission (SEC) and
the New York Stock Exchange to reform governance by increasing the number of outside
directors and creating independent auditing committees in corporations. Rather arbitrarily,
the Enron affair and other corporate scandals in the early 2000s triggered regulators to
re-emphasise the lack of independence of company watchdogs as the most problematic
aspect of governance and control (see Section 7.5 below).

6.3. Personalisation of guilt

To analyse the regulatory impact of scandals on regulation it is vital to know how much
emphasis was laid on the personal guilt of perpetrators (see Section 5.4 above). In theory, a
focus on flawed individuals as being responsible for fraud and correcting this by penalising
those individuals will bolster the liberal narrative of limiting business regulation as much as
possible (Taylor, 2018, pp. 353–354). Taylor’s own empirical analysis shows that a regulatory
response of consistently penalising individuals is not necessarily motivated mainly by a
narrative which emphasises personal guilt (Taylor, 2013a). He nevertheless draws attention
to a fundamental insight. Two short examples suggest that a battle of narratives which
personalise guilt but which each blame a different group of culprits will be unlikely to form
the basis for a regulatory response.
A tremendous over-issue of the share capital of the Julian Petroleum Company and accom-
panying dubious practices which came to light in May 1927 led to sustained public outrage
in California (Tygiel, 1994). By 1930 public opinion had divided into two camps: those who
highlighted the guilt of the ‘bankers’, who had profited from money pools established to
push up the share price, and those who blamed the brokers, who had received generous
commissions for trading in what were now considered fake shares. This inconclusive exchange
of accusatory narratives could not provide a common ground for a regulatory response,
although Tygiel (1994, p. 326) claims, but does not substantiate, that the scandal inspired a
revision of California’s blue sky law in 1931. Another example of a similarly unproductive
battle of narratives is the French scandal that broke out in late 1933 over various officials,
politicians, and lawyers who – sometimes only allegedly – had failed to sanction, had pro-
tected, or even helped the serial swindler Sacha Stavisky over a number of years. In this
debate, ‘the left’ and ‘the right’ blamed each other, ‘but together they confirmed old illusions
of deceptions in high places and contrived in that way to deepen the crisis of confidence’
(Jankowski, 2002, p. 213).

7. Battles of narratives about major scandals and regulatory reform

Both Hansen (2012, see Section 7.2 below for an elaboration) and Hausman (2018) underline
how a clearly identifiable villain is a vital part of what makes scandalmongering appealing
to people at the time. Sense-making of scandals is normally not focussed exclusively on one
type of determinant, one aspect of the contested practice, or one consequence. It is far too
24 H. VAN DRIEL

simple to reduce sense-making to either blaming individuals or blaming ‘circumstances’ or

the ‘system’, as the system could refer to regulatory frameworks, governance and control
systems, and/or various aspects of the economic environment, including macroeconomic
and monetary policies, economic crises, or competitive pressure. This variety will be shown
in the following discussion of sense-making about five major scandals in different time
periods. It is an effort to assess which narratives may effectively ‘outcompete’ others and
shape a regulatory response. Crucially, the nature and the appeal of the narratives co-de-
termine whether and how policy entrepreneurs are able to implement existing agendas for
reform (Romano, 2005).

7.1. The Freedman’s Bank: blaming individuals or an economic crisis

The tragic history of the Freedman’s Savings Bank illustrates the complexity of some scandals,
as the failure of this US bank in 1874 resulted from a combination of many factors: inadequate
governance, misappropriation at the top, high overhead costs, an expensive new main office,
‘bad’ (often unsecured) loans, inadequate governmental supervision, local embezzlement at
branch level, and the general Panic of 1873 (Osthaus, 1976). The Freedman’s Savings Bank was
founded in Washington D.C. in 1865 to serve the financial needs of freed slaves and black Civil
War veterans. Even the appointment of 50 very prominent and humanitarian trustees could
not prevent abuses. Poor communications at the time gave the inexperienced (if not fraudu-
lent) cashiers and other employees in branches in the Deep South in particular a large degree
of freedom, making it easy for them to embezzle funds. Worse still, the bank’s bylaws allowed
power to be concentrated in committees made up of a small number of people. In 1867, three
directors gained power, and in 1870 – against the firm’s new charter – started to grant loans
on a large scale on overrated or worthless collateral, including to other firms with which the
three directors were involved. Osthaus (1976) recognises the external pressure to offer com-
petitive interest rates to savers which pushed the directors to lobby Congress for permission
to enter the risky business of real-estate loans at a time when other savings banks were making
similar moves. He even leaves open the possibility that recklessness and incompetence, rather
than dishonesty, were responsible for the dubious practices.
There were no such nuanced considerations in how people made sense of the scandal
at the time, since it became intertwined with broader socio-political narratives. Since the
bank was founded, the Bank’s protagonists had proclaimed the creed of thrift, industry, and
emancipating black people. From their side, many Southerners, given voice by the Southern
Democratic press, considered the Freedman’s Bank an unwanted attempt by Northerners
to reconstruct their society. Osthaus (1976, p. 173) summarises effectively how the suspen-
sion of the bank’s activities in 1873 was interpreted by two competing, grossly simplifying
narratives: while the Freedman’s Bank’s defenders attributed it mainly to the Panic of 1873,
that is, to external economic circumstances, critics – both those who sympathised with the
black cause and those who had opposed the bank and its reconstruction mission from the
very beginning – blamed the bank managers. When an official report published in April 1874
attached more importance to bad luck than to managerial misbehaviour in explaining the
liquidity deficit at the Freedman’s Bank and concluded that the bank could survive, it led to
a storm of criticism: ‘… the Democratic Press, North and South … listed the bad loans, pre-
dicted failure at any moment, and chorused a one-word refrain: swindle’ (Osthaus, 1976, p.
201). New runs on the bank resulted and finally the bank proved to be insolvent.
 Business History 25

In one important sense, the frequently very biased critics ‘won’ the battle of the narratives.
Although claimants finally received 62% of their savings, ‘To salvage their own self-respect
and to explain the unbelievable cataclysm, many blacks came to believe the legend that
from the beginning the whole operation had been to swindle the freedmen …’ (Osthaus,
1976, p. 201). The scandal led many black people to lose faith in frugality as a way forward:
new banks that were meant especially for them – the first of which were established only
14 years after the failure – attracted fewer deposits than the Freedman’s Bank had done at
its peak. On the other hand, none of the bank managers was convicted and the scandal does
not seem to have inspired changes in the regulation of bank governance. This battle of
narratives blaming either ‘flawed individuals’ or ‘economic circumstances’ thus partly
remained unresolved. The next example shows that a narrative which specifies the circum-
stances more in terms of a governance ‘system’ may have a greater impact on the regulatory
response to a scandal.

7.2. The Danish Landmandsbanken: liberalism versus finance capitalism

In 1922 Landmandsbanken, the largest Danish (and Scandinavian) bank, collapsed and other
Danish bank failures followed in its wake (Hansen, 2012). In making sense of these scandals
again the main bone of contention was whether the bank managers, in particular
Landmandsbanken’s earlier celebrated CEO Emile Glückstadt, or external circumstances were
to blame. A crisis or scandal may challenge the dominant narrative, in this case the ‘liberal
grand narrative’ of – in the words of Glückstadt in a private letter of September 1914 – taking
‘full advantage of the ample opportunities that are currently up for grabs’ (Hansen, 2012, p.
686). Hansen emphasises that a successful regulatory narrative must embody a new per-
spective, but also notes that it can build upon an existing counter-narrative – in this story
the one that criticises ‘finance capitalism’. In his account, the actual contested practices
seemed little more than a trigger for a battle of narratives. Hansen is very brief on Glückstadt’s
dubious financial acts (and those of his fellow bankers), only referring in general terms to
their excessive and speculative provision of credit and to one critic accusing Glückstadt of
‘stock speculation and window dressing of the account’ to cover up the disastrous results of
his excessive risk-taking (Hansen, 2012, p. 688).
What complicates the analysis of narratives is that they tend to have a compound nature.
In Hansen’s interpretation, the finance capitalism narrative not only framed the banks as too
powerful (e.g. by referring to interlocking directorates), but also blamed the banks’ inade-
quate internal control systems as well as the bankers’ incompetence and greed. The com-
peting narrative, which followed the prevailing liberal creed in blaming external forces,
incorporated both economic conditions (including worldwide conditions) and the Danish
monetary and fiscal policy. This multidimensional character of the narratives reflects how
complex the determinants of financial malpractice can be and is a reminder that historians
themselves are (re)constructing the narratives. After all, it is not self-evident to collapse
structural and personal factors into one narrative of ‘finance capitalism’. In fact, Hansen’s
reasoning on the expected impact of different types of narrative is paradoxical. On the one
hand, he states that for ‘fundamental changes to be implemented, the dominant narrative
of the crisis will have to stress systemic failure, rather than, for instance, erroneous control
systems or individual cases of greed and breach of trust’ (Hansen, 2012, p. 677). On the other
hand, he argues that narratives which personalise the guilt (here: the bankers as villains) are
26 H. VAN DRIEL

generally more appealing than those which refer to more anonymous economic forces. The
solution to the paradox seems to be that picturing bankers as villains helped to convince
the public that there was something fundamentally wrong with the financial system and
that tighter bank regulation was needed. Hansen does not discuss the considerations under-
lying the specific provisions of the Bank Act of 1930, which ‘reduced conflicts of interests by
severing the ties between banks and industrial companies so typical for finance capitalism
and the ‘Glückstadt system’. Bank ownership of shares and bank managers interlocking direc-
torates were reduced as well’ (Hansen, 2012, p. 696).This outcome illustrates the subtleties
involved when talking about changing ‘the system’. In broad terms, the liberals had to give
in to the finance capitalism paradigm by accepting a tighter bank governance regime, but
the liberal narrative remained too strong to give way to a third, socialist narrative propagating
a wholesale system change by the nationalisation of banks.

7.3. The New Deal: regulating competition versus governance measures

The New Deal regulations implemented by the US Federal Government in the 1930s are an
example of a battle between two competing narratives resulting in a ‘draw’. According to
Balleisen (2017, pp. 248–249), concern that widespread practices such as wash trading, skim-
ming profits, and several types of insider trading were undermining confidence in business
drove the New Deal reforms at the federal level. More outspokenly, Skeel (2005, p. 76) claims
that ‘… it took a complete breakdown of American corporate life, punctuated by Samuel
Insull’s spectacular Icarus Effect collapse, to make the reforms possible’. The collapse of Insull’s
pyramid of firms under the burden of excessive debt shocked the many small investors who
had thought that utility bonds in particular were a safe investment. Insull was one of the
few business tycoons whose firms were not financed by Wall Street banks (banks which
collectively were called the ‘Money Trust’). According to Skeel, Insull thus escaped scrutiny
by the Money Trust, which probably would have moderated Insull’s excessive risk-taking.
The crash of 1929 and the following Depression, however, led to much criticism of the
Money’s Trust’s monopolistic practices.
President Roosevelt’s advisors agreed that managers’ Insull-style dominance over large
corporations and the Money Trust should be tackled, but strongly disagreed about how to
organise competition in a different manner. One group inspired by the famous lawyer and
Supreme Court Justice Louis Brandeis maintained that the government should promote
competition by small companies and should also prescribe extensive disclosure. Another
group, which counted Adolf Berle and Gardiner Means (the writers of the now classic book
The Modern Corporation and Private Property, published in 1932) among its members, how-
ever, declared that it was ‘too late to turn the clock on the growth of big business’ (Skeel,
2005, p. 92). Their solution was to end competition in certain industries by bringing in exten-
sive federal oversight. Policy entrepreneurs thus drew upon different pre-existing narratives
to legitimise their preferred solution.
Skeel holds that the ensuing New Deal regulation was a ‘split decision’, with utilities reg-
ulated according to the narrative of the Berle group, and banking and securities according
to that of the Brandeisian advisors. The Public Utilities Holding Company Act (PUHCA) of
1935 prescribed that utility holdings could have only two levels, thus simplifying firm struc-
ture in an apparent tit-for-tat response to the Insull scandal. Furthermore, the PUHCA’s other
stipulations ensured regional monopolies for still relatively large firms and thus eased
 Business History 27

competitive pressure, as was advocated by the Berle group. In contrast, the Glass-Steagall
Act of 1933 deconcentrated the banking industry as it prohibited banks from combining
commercial and investment banking and put an end to the domination of the Wall Street
‘titans’. To substitute for the watchdog function of the now discredited Money Trust, the New
Deal reformers also drafted the securities acts of 1933 and 1934 mandating extensive finan-
cial disclosure by listed firms.
The occurrence of several scandals within a comparatively short period of time may
prevent authors from achieving consensus on the antecedents of new legislation. While
Skeel underlines the impact of Insull’s failure, Hausman (2018) considers the collapse – also
in 1932 – of the Associated Gas and Electric Company (AG&E) as primarily responsible for
the passage of the PUHCA, since, unlike Insull, Howard Hopson, who controlled AG&E, was
imprisoned for fraud and could serve as the ideal villain. Similarly, Jones (2011a, pp. 125–6)
sees the 1932 crash of Kreuger & Toll – whose stocks were listed in New York – as the main
impetus for the 1933 Security Act, with its prescription of a mandatory audit, while Olien
and Olien (1990, p. 172), referring to a textbook on securities regulation, claim that ‘major
parts’ of this act ‘were created with the oil frauds of the 1920s in mind, because congress-
men were convinced that the blue sky laws of states had been inadequate …’. As none of
the cited studies reports in detail on congressional discussions about the acts, this remains
an unresolved issue.

7.4. The Savings and Loan Banks (S&Ls) debacle: blaming flawed individuals or the
system
The regulation initiated by the New Deal was reversed from the late 1970s. At the same time,
reminiscent of earlier periods, the use of new complex financial instruments invited risky if
not fraudulent operations. This twofold environmental change led to the industry-wide sav-
ings and loan banks debacle of the 1980s (unless indicated otherwise, the following discus-
sion is based upon Calavita et al., 1997). The US savings and loan banks (S&Ls), or thrifts as
they were also called, got into financial trouble in the 1970s. While inflation and interest
rates soared, the S&Ls remained constrained by fixed mortgage rates and maximum interest
rates on new deposits. Showing themselves responsive to intense lobbying (if not bribery)
by industry representatives, between the late 1970s and mid-1980s the federal administra-
tion, federal agencies, and individual states freed the S&Ls from these and other restrictions.
The result of the deregulation was the emergence of reckless and often fraudulent finan-
cial practices that killed rather than saved the industry. Established and new thrifts engaged
in many insider abuses, such as selling overpriced land to their own company which subse-
quently failed, awarding themselves large loans from the company based upon collateral
with an inflated value, and using company funds for personal expenses and plain embez-
zlement. Accountancy fraud to conceal all these dealings was widespread.
One financial innovation that invited fraudulent practices played a very specific part in
the S&L debacle. Providing acquisition, development, and construction loans (ADC loans)
became very popular in the S&L industry in the first half of the 1980s. ADC loans represented
a ‘radical departure from previous practice’ and were ‘among the riskiest investments a finan-
cial institution can make’ (Calavita et al., 1997, p. 39). These loans entitled the thrifts to a
significant share of the project’s future profits, but they were unsecured and encouraged
‘adverse selection’ and ‘moral hazard’:
28 H. VAN DRIEL

By charging high interest rates and fees and taking a high percentage of future profits, thrifts
attracted only the worst borrowers/developers – those who had such limited access to other
lenders and such poor hopes of project profitability that committing a substantial portion of
(unlikely) future profits to the thrifts imposed no real cost … it was highly probable that large
numbers of ADC projects would go very wrong. When they did the developer had no financial
stake in the project, no personal guarantee, and could convert loan funds to personal uses. Not
surprisingly, many simply walked away from troubled real estate projects, letting the thrifts
foreclose on the loans and suffer the loss. (Calavita et al., 1997, p. 40)

Yet there was something in it for the thrift owner-managers. Before their business failed,
they used the ADCs to report high earnings growth (including from fees), which legitimised
paying high bonuses and dividends for several years. In fact, the cited study seems to argue
that the thrifts constructed a kind of Ponzi scheme, and used a new financial vehicle that
suggested a sound source of income in order to attract enough new deposit money.
By the mid-1980s, the industry began to collapse, starting in Texas, and investigations
followed. By 1987, ‘one-third of the savings and loan industry was officially insolvent, and
many more S&Ls were insolvent on a tangible net worth basis’ (Calavita et al., 1997, p. 110).
Nevertheless, both Democrat and Republican politicians remained largely silent on the S&L
debacle until after the presidential elections in 1988, since politicians from both sides were
involved with it. After the elections, however, the S&L collapse became front-page news,
focussing attention mainly on the individual perpetrators, including leading Congress mem-
bers who were forced to resign.
Around 1990, however, after the first rage in the press about the fraudsters in the S&L
industry had subsided, economists and industry experts started to downplay personal guilt,
stressing instead abstract economic factors (including declining real-estate values). The ‘sys-
tem’, that is, the recently deregulated environment in combination with federal deposit
insurance that had increased from 40,000 to 100,000 dollars, encouraged a strategy of ‘gam-
bling for resurrection’, since the government in final instance carried the risk. Calavita et al.
(1997) counter this narrative by arguing that only a third of the thrifts adopted such a high-
risk investment strategy and they typically went bankrupt. Investing everything in one ailing
industry (vacancy rates in real estate were already rising by 1983) was only understandable
in light of an a priori intent to commit fraud. Incompetence on the part of newcomer thrift
owners is ruled out as an explanatory variable since ‘… the worst thrift failures consistently
involved development loans to borrowers who were known to be uncreditworthy’ and ‘…
appraisals and credit checks were often conducted after the loan had been disbursed’
(Calavita et al., 1997, pp. 35, 36).
This (well-argued) framing of malice as the main cause of the S&L debacle seems to have
been shared by prosecutors, since never before in US history had so many resources been
devoted to prosecuting white-collar crime. However, the authorities’ response was guided
mainly by the calamitous impact of the debacle: prosecutors gave priority to fraud cases
that led to firm insolvency, and criminal justice was a secondary consideration. Calavita et al.
(1997) estimate the total losses of the failures to be at least 5 billion dollars and calculate
the cost of the bail-out for the US government at 500 billion dollars (including future interest
payments on government bonds issued). Unfortunately, they do not discuss the consider-
ations underlying the impact-driven comprehensive restoration of regulation in the S&L
industry by the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of
1989 and related acts, which also gave government agencies more authority and resources
 Business History 29

and raised the penalties for financial abuses. Except for the raising of penalties, this reform
seems to endorse the view that attributed the S&L debacle to systemic causes rather than
to malicious individuals. However, no ban was implemented on ADC loans despite these
being the financial instrument that had so obviously facilitated widespread malpractice.

7.5. The Enron scandal and Sarbanes-Oxley Act (SOX): an existing agenda dictates
reform
There are important similarities between the S&L debacle and the Enron scandal of 2001.
Deregulation enabled financial innovation, in this case facilitated by a range of new infor-
mation and communication technologies which increased the anonymity of economic
transactions (Balleisen, 2017, pp. 356–364), leading to excessive risk-taking – sometimes
amounting to fraud and company failure. The scandal was followed by a much-discussed
regulatory reform known as the Sarbanes-Oxley Act (or SOX) of 2002.
In the natural gas sector, from which Enron originated, deregulation started with the
liberalisation of producer prices in 1978 and culminated in open access to the pipelines at
standard prices in 1992 (unless indicated otherwise, the discussion below is based upon
Salter, 2008). The product of a merger of two natural gas pipeline operators in 1985, Enron
introduced a Gas Bank in 1989, offering buyers the novelty of long-term contracts with fixed
prices. In 1992, Enron’s CEO Kenneth Lay may have used his political connections to get an
exemption from the strict public supervision of the use of financial derivatives for some
sectors, including energy (Skeel, 2005, p. 146). In the same year, Enron became the largest
natural gas trader in North America, but – due to lack of industry knowledge – extensions
of the platform model to other utilities were unsuccessful and in 1997 Enron’s profits dropped
dramatically. In that year, Andrew Fastow, Enron’s Chief Financial Officer, began to develop
innovative financial schemes using Special Purpose Entities (SPEs). By taking advantage of
accounting rules on SPE non-consolidation, which allowed the SPEs to be 97% financed by
debt guaranteed by Enron (Mulford & Comisky, 2011, p. 420), and of a lack of scrutiny by
Enron’s accountant Arthur Andersen, Fastow was able to transfer debts from the Enron bal-
ance sheet and to manipulate reported earnings. He thus concealed Enron’s deteriorating
financial position, and the SPEs were a major cause of the company’s downfall. In its cover-up
operations, Enron was helped by the fact that in 1992, a decade earlier, Gas Bank’s initiator
Jeffrey Skilling (who would become Enron’s COO in 1997) and Arthur Andersen had managed
to obtain permission from the SEC to adopt mark-to-market accounting. All revenues and
profits could thus be booked in the year that a long-term contract was signed, something
that up till then only financial institutions had been allowed to do. By 2000 this type of profit
made up more than half of Enron’s reported total profits (Brewster, 2003, p. 229). In October
2001, Enron was forced to issue financial restatements, sending the company into a down-
ward spiral which culminated in its bankruptcy in December 2001.
Enron’s collapse in 2001 was considered the biggest corporate failure in US history. It
resulted in a loss in shareholder value of 60 billion dollars and Enron’s employees lost not
only their jobs, but in many cases also their pensions. After the outcry about the Enron
scandal had subsided, only the collapse of WorldCom in 2002 – which in turn became the
largest US business failure ever – triggered a regulatory response from Congress by passing
the comprehensive Sarbanes-Oxley Act (SOX) the same year. Skeel (2005, p. 144) expresses
a widely held view that it was not just ‘the whiff of fraud’, but the magnitude of the Enron
30 H. VAN DRIEL

and WorldCom debacles with their many duped ‘ordinary American investors’ and the fall of
‘business geniuses’ that generated big headlines in the papers and calls for tighter regulation.
This again underlines the overwhelming importance of the socio-economic impact of fraud
and public outcry in instigating substantial regulatory reform.
Observers attributed the Enron debacle to, among other things, failures in internal control,
an incentive structure that drove excessive risk-seeking, and irresponsible if not fraudulent
behaviour by executives (Fastow, Lay, and Shilling were all given jail sentences). The regu-
latory narrative that gained dominance was, however, narrowly focused on the (suspected)
lack of independence of the non-executive directors and auditors as a main cause of the
Enron scandal. The risks and the increased information asymmetry flowing from the use of
new financial instruments did not feature significantly in this interpretation, although exter-
nal control of Enron had been hampered by the unprecedented complexity of its pyramid
of off-balance-sheet SPEs and other financial constructions that almost no-one understood
– making Enron to some extent similar to the empires of Kreuger and Insull that had fallen
in 1932 (Skeel, 2005; Salter, 2008; Brewster, 2003). SOX contained new requirements on
disclosure of off-balance-sheet accounting (S.O. Act, 2002), but Skeel (2005, p. 192) notices
that SOX paid almost no attention to reducing the complexity of company structures.
In contrast, a core provision of SOX is that only outside, independent directors can become
members of a firm’s audit committee, which selects the auditor. This is one of the reasons
why Salter (2008) depicts SOX as an overhasty and ill-conceived knee-jerk reaction. According
to this author, it was not a lack of independence, but Enron directors’ lack of training and
‘touch’ with the company that contributed to their laxity in questioning the management
policies (Skeel, 2005, p. 183, notes that independent directors already had a majority in most
company boards – see Section 6.2). In a similar vein, another author reports the view of a
former Andersen employee that the Andersen team at Enron had ‘needed more information
from management – not more distance’ (Brewster, 2003, p. 251; see also Squires et al., 2003,
pp. 13–14). This rationalisation did not sound generally convincing since the simplicity of
the WorldCom fraud, in which daily expenses were reported as capital expenditures to raise
profits by 3 billion dollars5 was shocking: ‘Enron prompted Congress to wonder if accountants
were corrupt. WorldCom prompted Congress to wonder if accountants were incompetent’
(Brewster, 2003, p. 285).
The ‘corruption’ narrative gained the upper hand (it should be noted that, more than the
auditor failure itself, the news in early 2002 that Andersen’s Enron team had shredded incrim-
inating evidence generated public outcry about the practices of the famous accountancy
firm, which did not survive the scandal). SOX also restricts auditors in providing non-audit
services (mainly consulting) to their clients. This reflected a concern among regulators which
had grown during the previous decades that providing consultancy services and auditing
services to the same customer tempted accountancy firms to compromise upon the quality
of the auditing process in order to keep the – generally more lucrative – consultancy work.
In June 2001, on the eve of the Enron scandal, firm reports demanded by the SEC showed
that accounting firms derived over 70% of their revenues from consulting (Brewster, 2003,
p. 11). In vain, accountancy industry representatives again and again repeated that there
was ‘not a single shred of evidence that any audit had ever been compromised due to con-
sulting services’ (Brewster, 2003, p. 220). Some of them acknowledged, however, that com-
petitive pressure fostered risk-seeking behaviour. Ironically in light of later events, in 1973
the FTC had begun to press accounting firms to say goodbye to their live-and-let-live type
 Business History 31

of competition and demanded that their trade association stopped prohibiting competitive
bidding (Brewster, 2003, pp. 136–138). An author collective of four former Arthur Andersen
employees argue that, by the 1990s, increasing competitive pressure drove the firm to adopt
a more aggressive sales approach in auditing, which was at odds with its function of serving
the public interest. They conclude that Andersen’s fall was ‘At its root … about an entire
system’ (Squires et al., 2003, citation on p. 171). Yet, regulators declined to adopt such a
narrative that blamed competitive pressure for auditor failure.
In sum, the SOX protagonists – among them many former SEC officials, including first
and foremost the Commission’s former chairman Arthur Levitt – pushed an existing nar-
rative that blamed malpractice on companies providing both auditing and consulting
services to the same customer and on audit committees not being sufficiently independent
(Romano, 2005, see also Brewster, 2003). These ‘policy entrepreneurs’ profited from a win-
dow of opportunity, created by a combination of a marked drop in stock prices feeding
public dissatisfaction, a looming re-election which prompted congressmen to demonstrate
that they were responding quickly to the abusive practices of big business, and a business
sector too compromised by the scandals to resist new regulation effectively. Members of
Congress did not even really discuss major new regulations included in SOX, once again
underlining how a sense of urgency to react to the scandals in any way drove the regulatory
reform.6

8. Discussion and conclusion

This section discusses the contribution of the historical literature surveyed to the scholarly
insights into fraud and scandals, with a focus on the US and to a lesser extent (for the pre-
1940 period) on Great Britain since the nineteenth century. It starts with the main findings
on the nature of fraud and scandals, their determinants and consequences as distinguished
in the conceptual framework. It then proceeds by discussing common rationalisations of
dubious financial practices as well as counter-narratives constructed by contemporaries
promoting regulation. A central conclusion is that the increasing socio-economic impact of
financial malpractice was primarily responsible for a trend towards tighter regulation from
the late nineteenth century onwards, which was finally reversed a century later under the
influence of an emerging neo-liberalism.
Generally, the fact that white-collar crime is embedded in regular business practice makes
it easier to conceal fraud. Social construction of contested practices – as reported by the
authors who are themselves involved in that process of social (re)construction – differed
according to time and place, but by and large from the late nineteenth century people
became less tolerant of certain dubious practices.
With regard to the economic environment, the studies confirm the insight that booms
fuel risk-seeking behaviour and conceal fraudulent operations, while busts reveal malpractice
or lead to fraud to hide or recoup losses. Fostering a more impersonal economy, innovations
typically facilitate fraud by increasing information asymmetry for investors and consumers.
Several examples illustrate that new financial instruments may by their nature invite fraud-
ulent use or encourage businessmen to behave recklessly.
Regarding corporate governance and control, until recently directors often neglected
their task of monitoring executives, sometimes because they had been co-opted on to the
board by those same managers. Complex firm structures clearly facilitated dubious practices
32 H. VAN DRIEL

in a few important cases reported in the surveyed literature. The importance of auditors for
preventing fraud seems to have been limited.
Several of the studies do not portray greed as the perpetrators’ most dominant trait, but
point instead to hubris or incompetence as factors which lead to dubious practices. Some
even marginalise the importance of individual behavioural dispositions in explaining fraud.
A few US studies suggest that restraint and an inclination to excessive risk-taking among
managers both had a fairly strong explanatory power after the Second World War.
A doctrine of caveat emptor or a free-market ideology dominated until the late-nineteenth
century and prevented stricter regulation of fraud. Combined with weak enforcement of
existing rules, this provided ample opportunities for fraudulent operations. The pivotal role
of the press in socially constructing scandals is highlighted in several of the articles and
monographs. Publicity thus formed a substitute for or a complement to formal regulation
which became tighter and, in the end, also more effective from the late nineteenth century
onwards. From the 1970s, deregulation prepared the way for new large scandals, which in
turn triggered important new, but more narrowly focused, regulation.
In sum, the literature survey suggests that the economic environment has a persistent
influence (most notably through innovation) on facilitating or even stimulating dubious
practices, that governance and control have only a weak preventative effect, and that indi-
vidual traits and regulation, though bound by the context and conventions of the particular
time period, are important in explaining the prevalence of malpractice. The financial con-
sequences for victims could be significant and tended to increase over time, while the
general business climate could also suffer as a result of dubious practices, leading to busi-
ness failures.
How do these historical insights into contested financial practices, their determinants,
and consequences relate to how contemporaries made sense of them? The classification
presented in Table 2 builds upon the conceptual framework depicted in Figure 1. The main
rationalisations and the narratives calling for regulation identified in this literature survey
are classified according to the contested practices, their determinants, and their conse-
quences (regulation is included both as a determinant and as a response). The most mundane
popular rationalisation adopted by businessmen was to depict their contested behaviour
as ‘common practice’. Furthermore, in addition to blaming various environmental factors for
the failure, they might adapt the ‘business as usual’ frame by citing competitive pressure as
an environmental factor that forced them to engage in dubious activities. As shown by what
happened in Britain, most remarkably, regulators and the press for a long time emphatically
attributed the losses resulting from fraud to the greed of the investors. The need for entre-
preneurial discretion was used to legitimise lax governance and control, while auditors
rationalised their failure to detect fraud by referring to a lack of inside information. Most of
these rationalisations absolved the perpetrators from personal guilt by referring to circum-
stances. In contrast, the rhetorical device of shifting attention from dubious practices to the
good character of the perpetrator had a personalising nature.
In a more pretentious way, by stressing the benevolent external effects of their efforts,
businessmen and their sympathisers legitimised contested practices as a contribution to
socio-economic development. They argued that these practices were part and parcel of a
dynamic and innovative economy and sometimes even claimed that their maverick opera-
tions served the underprivileged in particular. This rationalisation in line with the caveat
emptor doctrine long served as the main effective argument against stricter business
 Business History 33

regulation, and an additional argument was often that regulation only gave investors or
consumers a false sense of security.
From the 1880s, calls for stricter regulation became stronger, driven by a rise in losses
due to fraud and other dubious practices, which were increasingly seen as damaging the
economy and even society as whole. Also, in a developing economy, investors were being
seen more and more as passive actors who had a lot to lose from fraud. This growing concern
was the main impetus for contesting the ‘business as usual’ rationalisation much more force-
fully than before. This translated into tighter regulation of these practices, often by demand-
ing more extensive financial disclosure. This response is in line with the expected regulatory
focus included in Table 2. In general, however, the logic of the relations between emerging
regulatory narratives and the substance of regulatory changes indicated in the table applies
only to a limited extent. The overwhelming importance of the impact (shock effect) of scan-
dals in generating a regulatory response makes the focus of this response less predictable,
as acknowledged in the classification in Table 2. More generally, political and ideological
considerations mattered, and a significant reluctance to organise business from above
remained even when regulation was in its heyday between the 1930s and the 1970s.
Regulators could prioritise disclosure measures even when they – endorsing a narrative
adopted by some of the perpetrators themselves – attributed dubious practices also to
competitive pressure, probably because changing the industry structure as a whole was
considered more fundamentally in conflict with the tenets of economic liberalism. Tellingly,
financial innovations – representing an environmental factor obviously conducive to mal-
practice – were left largely untouched. A large shock seemed needed to trigger far-reaching
measures to regulate competition. In the US, only the scandals in the early years of the
Depression in the 1930s legitimised industry regulation. The New Deal regulation also con-
cerned governance structures. Novel types of measures in this field were delayed until the
1970s in response to a major scandal, although weaknesses in governance structures had
become apparent long before that.

Table 2.  Classification of narratives and regulation concerning fraud and scandals.
Conceptual framework
factor Rationalising narrative Regulatory narrative Expected regulatory focus
Practices Common practice Malpractice Regulation of financial
practices (including
financial disclosure)
Economic environment Economic circumstances/ Competitive pressure Industry regulation
Competitive pressure
Greedy investors Passive victims No expected regulatory
focus
Governance and control Entrepreneurs need Lack of transparency Reduction in firm size and
discretion/ Lack of complexity/ Financial
information by disclosure
accountants
Lack of independent More independence for
oversight watchdogs
Individual traits Good intentions and Personal guilt Penalties for individuals
personal merits
Consequences Socio-economic Negative socio-economic No expected regulatory
development impact focus
Regulation Regulation hinders Regulation prevents No expected regulatory
development/ provides negative socio- focus
false security economic impact
34 H. VAN DRIEL

A regulatory focus on imposing penal sanctions did not necessarily reflect a narrative
primarily blaming the individual traits of perpetrators for fraud. In the UK, stricter and more
consistently applied penal sanctions were driven by a growing concern over the impact of
malpractice, rather than by a changing appreciation of the personal responsibility of perpe-
trators. Nevertheless, it remains a fundamental insight highlighted by Taylor (2018) that
penalising individuals can be a substitute for business regulation. A few examples indeed
suggest that sense-making mainly by blaming (categories of ) actors makes a substantial
regulatory response less likely. However, some authors note instructively that blaming indi-
viduals is a usual part of an outcry about dubious business behaviour, and is needed to
create a sense of urgency that paves the way for any regulatory response. It is crucial to
acknowledge that distinct narratives – as (re)constructed by authors – about major scandals
are likely to contain several elements, making the precise nature of regulatory response less
predictable. Even if contemporaries agree upon the ‘circumstances’ as the main cause, they
may refer to different aspects of the economic environment (business cycle, economic policy,
competitive pressure) or to firm governance issues. Still, the case studies discussed in this
review suggest that emphasising the circumstances, rather than flawed individuals, reduces
the chance that embedding interpretations of scandals into wider narratives will lead to a
stalemate. A regulatory response is then likely to be guided by certain pre-existing narratives
and agendas for reform, as shown by the aftermath of the high-profile Landmandsbanken
scandal in Denmark in 1922, the US corporate scandals of 1932, and the Enron/WorldCom
debacles in 2001–2002. Besides other measures, all these scandals triggered some kind of
reform of governance and control, reflecting an existing agenda for reform. The focus of the
regulatory response thus depended only to a limited degree on the circumstances surround-
ing the particular contested practices.

9. Comments and suggestions for future research

To summarise, the business history publications included within this review extend and
deepen the more general insights into fraud and scandal discussed at the beginning of this
article. They illustrate the prominent influence of a range of different (financial) innovations
on the prevalence of malpractice during the past two centuries. The studies also illuminate
the practical limits to preventing and suppressing malpractice through regulation and the
impotence of governance and control in this respect. They show that fraud and excessive
risk-taking may be driven not only by greed and hubris, but also by other individual traits
such as incompetence and naïve optimism. The publications map the variations through
time in the social construction of not only dubious financial practices, but also their deter-
minants and consequences (including regulation), in particular by paying extensive attention
to the role of the press. They also suggest that general ideological and political considerations
may offer a more powerful explanation of why certain regulatory measures are taken than
might be suggested by a logical relationship between narratives on contested practices and
their determinants on the one hand and the regulatory response on the other. Above all,
the publications demonstrate that the socio-economic impact of malpractice is often decisive
for a substantial regulatory reform to occur – reforms which tend to be guided by existing
agendas, as illustrated in several of the case studies.
It still remains problematic to assess the relative importance of the determinants of fraud
and when and how practices that become contested through sense-making may give rise
 Business History 35

to scandalmongering and regulatory responses. Business historians could shed further light
on these central questions by a careful comparison across time and place of the nature of
contested practices and their determinants, the construction of narratives about them, and
the aftermath of the scandals – in particular, the regulatory responses. Several of the studies
reviewed provide instructive comparisons of fraud and scandals, their determinants, and
consequences in one industry or one country in the same period (Cox, 2007; Hollow 2015,
Olien & Olien, 1990; McCartney & Arnold, 2001; Taylor, 2013a) or in different periods (Balleisen,
2017; Cheffins, 2015; Hilt, 2009; Hollow 2015; Olien & Olien, 1990; Taylor, 2013a) and in dif-
ferent countries (Armstrong, 1997; Armstrong, 2001).7 Olien and Olien (1990, pp. 58–59 and
172–173) not only note that oil promoters copied dubious promotional techniques from
the mining industry in the 1910s and 1920s, but also explain that knowledge of fraudulent
practices that were commonplace in this period can help researchers to understand the
basic nature of more recent questionable practices (e.g. boiler room operations). As men-
tioned previously, McCartney and Arnold (2001) illustrate how historians can determine the
relevance of corporate governance for limiting fraud by comparing the practices of one
executive operating under different governance regimes, while the comparative method
applied by Cox (2007) and Taylor (2013a) demonstrates very effectively the overwhelming
importance of the socio-economic impact in explaining whether similar financial practices
are regarded as scandalous or not. In addition, linking the types of regulatory response to
narratives, as done in the classification in the previous section, can facilitate the search for
an answer to questions such as why so few corporate managers were indicted in the wake
of the global crisis that started in 2008, unlike what happened in earlier episodes (Taylor,
2018, p. 354). In an earlier publication, the cited author has already suggested an answer to
this question: the priority that the British authorities gave to minimising the socio-economic
impact of dubious practices, resulting in bank rescue operations, ‘had the side-effect of
insulating bankers from the consequences of failures by dampening popular outrage’ (Taylor,
2013a, p. 266).
The insights into common narratives gained through the survey may enhance further
comparative research exploring the similarities and differences between periods and places
regarding the social construction of contested practices. The classification of the basic ratio-
nalisations as voiced in earlier periods can help researchers to identify perhaps less obvious
current-day articulations of those rationalisations. For instance, Hilt (2009, p. 111) notes that
the extensive speculative lending that led to the financial crisis of 2008 was legitimised in a
similar way to speculative lending in the 1820s: ‘Although it was criticized as unsound and
possibly illegal, this lending was defended in populist terms as providing much needed
credit to those unfairly turned away by banks’.
To determine the particular impact of narratives, an analysis should be made of the debate
about (partially) competing narratives changing the interpretation of the contested practices,
possibly culminating in a shared dominant narrative. In this respect, business scholars
Suddaby and Greenwood (2005) offer a valuable framework of rhetorical strategies (or ‘the-
ories of change’) when discussing contested practices. Two of those rhetorical strategies are
particularly relevant for studying the sense-making of business fraud and other questionable
financial practices. A historical theorisation depicts a new practice as the outcome of a grad-
ual development, making it familiar to the audience, akin to the ‘business as usual’ frame so
often adopted by those accused of dubious financial practices. Depicted as normal business
(see also Galvin et al., 2004), these practices are no longer new when they become the subject
36 H. VAN DRIEL

of public debate. According to the historical literature surveyed, critics often tended to indi-
rectly question the acceptability of common practices by emphasising their calamitous effect
on investor interests and the economy (or even society) at large. A more fundamental way
for critics to counter the historical theorisation would be to turn to history and show that
there have been times when the practices they contest were not accepted as normal, or
were not even known at all – thus undermining the ‘business as usual’ frame. The historical
studies surveyed do not contain elaborate examples of such counter-theorisation, and this
hints at an underdeveloped area of research. Alternatively, critics could draw analogies with
other countries where similar practices are more tightly regulated or even prohibited (see
Armstrong, 1997, for comparisons between the US and Canada).
A second relevant rhetorical strategy that Suddaby and Greenwood dub a cosmological
theorisation shows a fair degree of resemblance to the historical theorisation, but emphasises
the exogenous nature of the change which human agents subjected to it cannot control.
This type of theorisation is akin to the ‘blaming circumstances’ narratives described above.
Interestingly, the critics of contested practices and those who defend them can find common
ground in blaming the system rather than individuals, a consensus which – in the end – could
generate broad support for regulation of industries and corporate governance systems. In
this way, the ‘system’ would lose its exogenous connotation. An emerging common narrative
which blames circumstances may thus – paradoxically – undermine a cosmologic theorisa-
tion aimed at defending the status quo and at resisting regulation. Applied in this way,
general rhetorical strategies as distinguished by Suddaby and Greenwood may serve to
sharpen analysis of the dynamics of the battle of narratives concerning one or more scandals.
Several of the historical studies discussed demonstrate that people tend to make sense
of contested financial practices according to prevailing general narratives or paradigms.
Very instructively, Hansen (2012), Osthaus (1976), and Taylor (2013a) dwell upon default
frames of blaming certain circumstances or groups of actors for malpractice. Jankowski
(2002) refers in very general terms to earlier scandals, suggesting that the heavily politicised
scandalmongering about Stavisky’s fraudulent operations in the 1930s was typical of the
French socio-political regime during the Third Republic. More extensive study of the social
construction of earlier scandals would be an appropriate way to assess the prevailing inter-
pretative framework regarding questionable practices (which, in the French case, tended to
prevent rather than inspire a regulatory response). A historical perspective of this kind could
thus make a vital contribution to understanding the sense-making of contested practices,
drawing upon insights not only from business and economic history but also from social,
political, intellectual, and legal history. The influence of prevailing general narratives on the
sense-making of individual scandals thus points to a fruitful avenue for further research,
namely to identify dominant ideological and theoretical models about the organisation of
the economy and managerial behaviour. For instance, the ascendance of the general creed
of ‘regulatory capitalism’ in the 1930s (Yergin & Stanislaw, 1998) made policymakers more
susceptible to the idea of ‘organising’ competition when confronted with suspected mal-
practice, while the emergence of agency theory as a dominant institutional logic (Zajac &
Westphal, 2004) may help to explain the focus of scandal-inspired regulatory reform on
governance and control in previous decades.
Existing paradigms likely contain a perspective on the appropriate organisation of the econ-
omy – for example, a free-market doctrine or, the opposite, a pro-regulation narrative. It is one
of the central findings of this article that scandals generally trigger, rather than shape,
 Business History 37

regulatory responses. From the literature surveyed, it is not always clear whether and how
scandals had a distinctive impact on the substance of post-scandal regulation (it should be
noted here that regulation is not a major subject of several of the publications reviewed). Even
the very insightful studies by Calavita et al. (1997), Hansen (2012), and Skeel (2005) do not
extensively cover contemporary discussions of the specifics of scandal-inspired regulation. An
in-depth narrative analysis of such discussions is needed to clarify the relationship between
specific scandals and subsequent regulation. For instance, judging from the literature reviewed,
it is still unclear which scandals were actually instrumental in inspiring important elements of
the New Deal regulation. Narratives from the past are always (re)constructed by scholars. Some
learning outcomes from scandals may only be inferred (see Safley, 2009, p. 45, for an example),
but historians should try as far as possible to find out precisely how scandals – through their
contemporary interpretation – led to subsequent changes in regulation or not.
Romano’s lengthy article (2005) provides a methodology for such an analysis. This legal
scholar carefully describes the personal backgrounds of the witnesses who took part in con-
gressional hearings about the much discussed Sarbanes-Oxley Act (SOX) introduced in the US
in 2002, which policies they recommended, which arguments they brought forward in support,
and to what extent they based these arguments on a fair representation of scientific findings.
The contributions of congressmen to these debates are analysed in a similar way. To substan-
tiate her conclusion that the Enron scandal was used as a vehicle for implementing an existing
agenda for reform, Romano also provides some historical context as she discusses what type
of regulation ‘policy entrepreneurs’ had earlier sought. Her analysis shows that a fuller under-
standing of the antecedents of regulatory reform can be achieved by taking political ideologies
and interest politics into account. For instance, if one looks at legal cases, the order in which
US states introduced blue sky laws from 1911 cannot be explained by differences in the inten-
sity of securities fraud (Mahoney, 2003). Instead, according to Mahoney’s statistical analysis, it
seems to have reflected primarily differences between states in terms of whether there was a
strong broad-based coalition in favour of limiting the power of ‘big finance’ through blue sky
laws, and support also from small bankers wanting to limit competition in the securities (see
also Macey and Miller, 1991; see Armstrong, 1997, pp. 66–69, for a similar qualitative finding
on the order of the introduction of blue sky laws by Canadian provinces).
In her SOX analysis, Romano (2005) only evaluates the outcomes of variable-based sci-
entific studies on the relation between provision of consulting services by accountants and
the quality of their audits, between audit committee independence and performance, and
between some other variables. The analysis in this perspectives article, however, shows that,
for a full understanding of the impact of scandals on regulation, a careful qualitative analysis
of sense-making of the scandal is still required. In a valuable attempt at generalisation,
Keneley (2008, p. 329) adopts a general stage-model about the relation between an event
(a scandal in her historical case study) and regulation: ‘Initial adaptive responses will be
designed to stabilize the industry, limit contagion and protect stakeholder’s assets. Later
innovative responses will lead to more fundamental improvements …’. Findings from busi-
ness history can help to refine general models of this kind, just as these findings can enrich
the burgeoning academic literature on policy learning which currently lacks ‘empirical vari-
ation in the degrees/types of policy change and in the degrees/types of policy learning
processes’ (Moyson, Scholten & Weible, 2017, p.174). As has been shown, historians can also
adopt concepts from various other disciplines to enhance our insights into whether and
how societies learn from fraud and scandals.
38 H. VAN DRIEL

Notes
1. Carnegie and O’Connell (2014, p. 450) refer incorrectly to Breyer (1993) for this citation.
2. Proquest contains both ABI/Info and Econlit. The coverage of business history and economic
history journals is very poor in Scopus (it does not include Business History and Enterprise and
Society and includes Business History Review only from 1996) and virtually absent in Science
Direct (no Business History, Business History Review, Enterprise and Society, Journal of Economic
History, or Economic History Review).
3. Similarly, at the end of the twentieth century, at the German electrical engineering company
Siemens, ‘many assumed that the competition also paid bribes and that giving up this
long-standing practice unilaterally would result in a disastrous slump in sales’ (Berghoff, 2018,
p. 429).
4. More so than Balleisen, Macey and Miller (1991) and Mahoney (2003) acknowledge the variety
in the blue sky laws. Only a minority of states copied the Kansas model, according to which
regulators subjected proposed issues of securities to a “merit review”, evaluating not only
whether the offers were honest but also whether they promised investors a fair return. Instead,
a range of other states focussed on the prevention of fraud proper in their pre-clearance.
5. The increase in capital expenditures was concealed by a simultaneous regular reduction in this
balance-sheet item (Mulford & Comisky, 2011, p. 422).
6. Another striking example illustrating the importance of a shock effect is that of the Australian
life insurance industry. Here an isolated blatant embezzlement of 65 million Australian dollars
by an outsider from an incumbent company in 1990 triggered fundamental changes in control,
financial reporting, and solvency standards (Keneley, 2008).
7. In contrast, the article by Govekar (2008) is an example of an ill-executed comparative study of
the waves of scandals that plagued the US around 1900 and 2000, lacking vital details on major
aspects identified by the author (e.g. new technologies and business models, greed of lionised
CEOs, and pre- and post-scandal regulation).

Acknowledgement
I am deeply indebted to Steve Toms, who generously shared his ideas with me and commented on
earlier drafts of this article. Thanks also to Vasil Daskalov, Inga Hoever, and Monica Keneley for literature
references. I claim full responsibility for the content of the article.

Disclosure statement
No potential conflict of interest was reported by the author.

Note on the contributor

Hugo van Driel is assistant professor of business history at the Rotterdam School of Management,
Erasmus University. He has recently published studies on citation patterns and the use of theory
and methods in business history.

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