The spectacular downfall of the FTX cryptocurrency exchange might just be the tip of the iceberg, The Economist contends in “A Sleuth’s Guide to Corporate Fraud.”

Malfeasance crops up when economies and markets crumble—as investors head for the exits, true earnings are nakedly exposed and financiers resort to creative accounting. Take the bankruptcy of Enron following the dot-com crash of 2001 and Bernie Madoff's Ponzi scheme that he had no choice but to unmask when the global financial markets nearly imploded in 2008.

With the U.S. economy possibly tipping into a recession, yet other frauds are likely to be uncovered, The Economist says.

“The global financial crisis of 2007-09 exposed fraud and negligence in mortgage lending,” the magazine writes. “The stock market bust of the early 2000’s unmasked the deceptions of the dotcom bonanza and the book-cooking at Enron, WorldCom and Global Crossing.

“The next downturn seems likely to uncover a similar wave of corporate fraud.”

Pressures on companies to appease the investing and politically correct masses by complying with environmental, social and governance (ESG) criteria, or greenwashing, is one area ripe for trickery.

CEOs’ gargantuan compensation, now in the billions, is another. Corporate chieftans are pressured to deliver predictable profits and smooth earnings, which can result in moving non-cash items, or accruals, from one quarter or year to the next.

Venture capital and private equity owners are also notoriously prone to questionable accounting to hide bad bets—easy since they have wide leeway over assessing and writing down valuations.

Two new types of fraud born out of the COVID-19 pandemic are undoubtedly going to involve excess inventory and suppliers going bust.

Companies can also get creative with depreciation or debt. One excusable reason could be to avoid being downgraded from a rating agency, though the real reason, The Economist says, is “some fraudsters are sociopaths who don’t feel the need to justify themselves to anyone.”

The bottom line: “Book-cooking can feel acceptable in a slump, in cases where the boss sincerely believes the business has good long-term prospects—but even the ‘smoothing’ that seems acceptable in a boom will be judged harshly in a bust.

“It is easier to keep a fraudulent show on the road in a short downturn. In a prolonged one, a few sorts of corporate sinners are likely to be unmasked.”