Current Event Article

In: Business and Management

Submitted By maddie123
Words 664
Pages 3
On April 24th of this year, the Los Angeles Time published an article highlighting the imprisonment of a former KPMG partner for his role in multiple illegal transactions that derived from the disclosure of insider information. The article notes that Scott London pled guilty to insider trading after “repeatedly” tipping off a friend (Shaw) to corporate secrets of major KPMG clients (amongst these: Herbalife Ltd. and Sketchers USA Inc.) in exchange for monetary and gift compensation. As a result of his actions, London was sentenced to 14 months in federal prison and to pay a fine of $100,000. The greater loss for the former partner; however, is noted to be his high-paying position and extraordinary damage to his reputation.

In review of this article, one notes that insider trading is a strong example of information asymmetry in the form of adverse selection. As per its definition, adverse selection is “a type of information asymmetry whereby one or more parties to a business transaction… have an information advantage over other parties.” (Scott, 2014). In this case, Shaw gained an unfair advantage over ordinary investors by receiving and exploiting London’s insider information that provided for numerous profitable trades.

In Chapter 4, the Efficient Securities Market Theory is introduced which further explores the issue of information asymmetry. In brief summary, the chapter states that, “Efficient securities market theory alerts us to the primary reason for the existence of accounting, namely information asymmetry. When some persons have insider information, the adverse selection problem arises leading to pressure to find mechanisms, such as financial reporting, by which investors with information disadvantage are protected from possible exploitation by the better informed.” (Scott, 2014). Essentially, one notes that the distribution of relevant and useful…...

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