1. Executive summary
In 1988, Investment broker Barlow Clowes collapsed, owing more than £156 million to more than 18000 investors. It offered the market a fund which purported to invest in low-risk Government gilt-edged stock with high return, but as it turned out, the high returns were down to the fact that investor’ cash had actually been put in very high risk projects, including more than £100 million secretly channeled to fund Peter Barlow’s lavish lifestyle. The scandal was set in an overheated market with relaxed regulations and radical investors arbitraging high profits. The reasons behind the scandal not only lie in the Peter Clowes’s personal greediness and lack of integration, but in the independence and competences of the internal and external auditing function, and the conscientiousness of authoritative institutions (such as DTI). A lack of internal corporate governance also contributed to the tragedy. Although time has passed, the historical scandal reminds us of the importance of the rationality of investors, conforming legal reforms (SOX), enhancement of corporate governance and the competences and integrity of auditors in authoritative industries.
Accounting scandals are political and business frauds which arise from the disclosure of misconduct of directors in the company or governments.Barlow Clowes is a famous accounting scandal in British history which is still being referred to even after many years. This scandal involves misappropriation of the investors’ funds by its director, which makes millions of investors lose their money. This draws our attention to find the reasons behind it. Hence, this report will be divided into four parts. The brief history of Barlow Clowes will be introduced in the first part and three main approaches that Barlow Clowes used to conduct a fraud will be illustrated in the second part. The third part will analyze the reasons for this scandal in aspects of corporate governance, auditing, accounting and environmental contributors. Finally, the implication and reform after Barlow Clowes scandal will be assessed associated with further concerns.
3. Part One: Case overview
Barlow Clowes is the famous accounting scandal in the mid-1980s. Peter Clowes, one of the directors of Gibraltar company Barlow Clowes, operated an off-shore fraudulent investment scheme, by offering the investor higher rate of return in the low-risk government gilt-edged securities. This scheme attracted 18000 small UK investors to invest their money into the company on the recommendation of the dealers. As a result, Peter attracted about £140 million, and he put more than £100 million to fund his lavish lifestyle through a company in Gibraltar. In fact, Peter’s scheme was originally a 'bond washer', which transformed high-taxed income into low-taxed capital gains. When the tax rules changed, Clowes began to invest various higher-risk assets to keep the scheme going (Dalton, 2011). However, the crash of stock market in 1987 leaded to the collapse of the value of many fund’s assets (Cowie, 2011). This makes the scheme began to unravel and finally collapsed in 1988. It is said that 16 investors committed suicide as a result of losses incurred over this scandal. In 1989, the Department of Trade and Industry (DTI) agreed to pay £153 million as ex-gratia compensation to 14250 investors who lost money in Barlow Clowes. However, it took more than 20 years for taxpayers to repay this £153 million. In 1992, Peter Clowes was convicted and sentenced to 10 years in prison based on 113 witnesses’ testification against him. The picture below gives a brief history of Barlow Clowes.
4. Part Two: Approaches to financial fraudulence
4.1 Gilt-edged securities
Certain national governments issue bonds named Gilt-edged securities or gilts for shorts. In terms of the simplest form of UK government bond, gilt-edged security is legal essentially and makes up the largest...
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