Why management fraud is unstoppable

Management fraud is unstoppable because no controls, past or present, exist to completely control management's actions. Management controls internal control, and can generally do as it pleases, including overriding controls whenever they prevent management from attaining its objectives. Corporate governance in its present form is ineffective because it is based on classical economic theory and the agency theory, which is anachronistic and promotes an adversarial relationship between stockholders and management but ignores the existence of the employees. A better system of corporate governance must be developed. This article examined the internal controls that US corporations are supposed to implement and upon which the independent auditor must rely when judging the integrity and reliability of a company's accounting records and the resulting financial statements. It concludes that the force of law can be a deterrent, but only after the damage has been done.