Initial public offering (IPO) fraud is prevalent in the capital market. Kuvvet and Palkar, for instance, found 1,772 fraud cases among companies in the United States between 1996 and 2017 (173). Yang, Tian, Song and Tan also reported that there were 170 cases based on IPO process violation within the capital market in China, in the period from 2004-2015. 73.6% of these cases involved falsification of financial reports (Yang et al. 532). In general, the cases described the various attempts by companies or sponsors to mislead investors at the time the firms were going public.

The organizations used their information advantage to misguide investors into overestimating the expected cash flow and the price at which related securities would be supplied. Issuers with a history of IPO fraud often cite the costly IPO imposed on newcomers as the main driving force (Kuvvet and Palkar 169). The issuers usually violate the regulations to obtain capital. The generated capital helps to finance operational expenses and settle current debt. Meeting IPO also increases consumers’ awareness of the company and creates opportunities for expansion in market share. Although the falsification of IPO process enables small firms further their growth, the practice is a crime.

Kantian deontology explains that it is wrong to lie and that lying breaks down all human interactions (Misselbrook 54). As it is, the IPO process trickery disregards the recommended rules of action. It also breaks the trust which is vital in economic transactions (Kuvvet and Palkar 169). Trust promotes a company’s stock market involvement, prevents incomplete contracts, and serves as an informal contracting technique in improving innovation (170). While it is important to promote ethical business practices, there is also a need to set reasonable IPOs for the small companies attempting to go public.

Why would a Company Falsify IPO?

There are different factors that cause companies to falsify sales or violate other rules that guide IPO process. The first one is the geographical location of a firm. Kuvvet and Palkar argued that structuring and acquisition of capital is greatly influenced by investment decisions of the nearby companies, even if they belong to different sectors (171). The financial policies of organizations may as well be affected through social and cultural exchanges that involve corporate executives. These interactions could alter a firm’s governance and convince it into adopting antitakeover strategies practiced by nearby companies.

Avery’s manager must have worked in a geographic region where falsifying sales was a common practice. From the case study, the manager calls the practice “a common way of meeting sales goals” (Bartlett). Kuvvet and Palkar also indicated that attractiveness of IPO-fraud is based on the fact that geographical areas with higher rate of corporate misconduct experience considerable underpricing. This leads to increase in return volatility on post-IPO stock (172). It is, thus, clear that IPO pricing is dictated by severity of fraud.

In other words, significant underpricing equals the most severe fraud encounters. Another factor that encourages IPO-based fraud is the influence from coworkers. If a financial advisor of a new coworker has a history of financial misconduct, the chances of committing similar violations rise (173). Exchanges that happen through board connections also raise the possibility of financial misconduct. Similarly, Avery’s manager has a history of sales falsification and is very likely to influence her into taking similar actions. This means that policymakers must solve the risk factors of IPO-fraud before enforcing laws intended to stop violations in IPO procedures.

Is it Legal, then?

Intentional misrepresentation of sales is an offense. From the case study, Avery’s manager tell her that the “practice of falsifying sales reports is now illegal” (Bartlett). This shows that company executives and subordinate employees already know the rules concerning economic transactions hence any deviations are intentional. According to Yang et al., the markets belonging to both developed and developing economies have put in place enforcement systems to regulate securities (528). The regulations identify administrative penalties that apply to market players that interfere with standardization of market order and protection of investors.

 If a company offers misleading information, therefore, the consequences are severe penalties on the executives that signed the incorrect statements. Yang et al. also explained that the irregularities within IPO process distorts efficacy of public enforcement system. Cooperation of market participants with the enforcement systems is essential for successful implementation of capital market regulations.

No law can be effective if the target groups do not comply with its terms and conditions.  If the fraud gets to a level where interests of investors are damaged, the capital market development is hindered (530). Investors are the ones that bring capital which companies invest in various projects and settle their debt obligations. Without the capital from investors, no significant progress can be achieved in the capital market.


From the above discussion, it is apparent that IPO-fraud has both advantages and disadvantages. For areas with higher fraud proportions, companies have no problem if others behave in a similar way. In such places IPO fraud can become a universal law (Misselbrook 55) because firms’ executives believe the practice is the only way of attaining reasonable pricing. However, presenting false sales is unlawful and violates the guidelines put in place by enforcement systems. As discussed in Kantian deontology, the actions are based on lies and have a very high potential of destroying human relations.

It also shows that firms that allow such irregularities do not respect the humanity of investors. The virtue ethics also emphasizes the development of excellent mind habits because they guide an individual into making optimal decisions when confronted with ethical dilemmas (Morris and Morris 203). With virtue ethics, a person should identify excellent traits in others and work virtuously towards attaining fulfillment in life. This means that Avery may only take the advice of her manager if she believes it is excellent and upholds virtuous attainment of goals. In this case, the advice violates rules regarding excellence of mind habits because it involves deviating from the standards set by the enforcement system to define the ‘right’ actions.

Business ethics encourages trust in transactions and protection of rights of all market participants, companies and investors. Any action that works against these principles is thus inappropriate for business. All forms of cheating or provision of misleading details is disrespectful and makes the individuals that commit the fraud untrustworthy. To promote effectiveness of rules enforced to inform ethical business decisions, the law enforcers should implement strategies for solving the challenges that lead companies into deceiving investors. In particular, the capabilities of firms per region should be assessed to avoid setting of costly IPOs for small firms that wish to go public.