This is the fourth part in my series discussing corporate fraud. For more on this topic please read
Business Topics
Types of Fraud
However, financial statement manipulation is simply on the edge of the fraud landscape. Much more common are asset misappropriations. The three basic types of asset misappropriations are skimming, larceny and fraudulent disbursements. Skimming and larceny occur when cash is taken directly from the employer, the difference between the two being that skimming occurs before the cash has a chance to be reported. Fraudulent disbursements are a way of scamming the corporation into giving the fraudster payments. Fraudulent disbursements are one of the more popular method of fraud and are implemented in a number of different ways. False billing and payroll schemes are the most common according to the text. Shell companies or ghost employees are often used to make the organization distribute payment with minimal expose outside of the immediate system. In more some of the more complicated cases, corruption in all forms is prevalent. Bid rigging, kickbacks and bribes are all forms that corruption can flourish in the corporate environment. The best way to combat this is through a combination of increased security measures working in conjunction with one another to best prevent organization fraud. While the two organizations should have some overlap and maybe some shared responsibility, one is not a substitute for the other. Both are critical to maintaining the proper level of internal controls necessary to prevent fraud
Government Response to Corporate Fraud
I next want to discuss the history of the governmental response and the more noteworthy commentary on corporate culture in the last thirty years. Although measures to prevent corporate crime were in effect before the 1980s, one of the more sufficient events was the formation of COSO in 1985. COSO is the Committee of Sponsoring Organizations, a volunteer group formed by the major accounting, finance, and other professional organizations. The committee reviewed instances of fraud and made key recommendations to improve reporting and internal controls. Among these were having an audit committee composed entirely of independent directors, developing a written code of ethics, and recommending that the SEC have new power to bar or suspend those involved in fraudulent financial statement reporting. In addition, COSO established a framework for an effective internal control program, which has become the standard framework for many companies in the United States. The authors next detail the Sarbanes-Oxley Act of 2002, which created the Public Company Accounting Oversight Board and established other procedures and safeguards. Sarbanes-Oxley vastly increased the requirements and protocols for publicly traded companies, as well as creating new laws in the areas of securities fraud, white-collar crime, and whistleblower protection.
On Corporate Fraud
Corporate fraud has always been one of the scourges of civilized society, although in the past decade we have witnessed unprecedented levels of greed in corporate culture. The past decade has been marred by Enron, WorldCom, Adelphia and many others, as fraud shrinks our economy by approximately six percent. Watchful eyes cannot be everywhere at all times, but often the problem is that the individuals responsible for oversight lapse on their duty of independence. In response, wide scale reform has been passed into law as the government tries to combat the problem on all fronts. However, even the most stringent reforms, reporting requirements, and penalties do not deter all fraudulent behavior within the corporate environment. I want this series of articles to serve as reference point for a variety of individuals, since fraud is a serious concern whose aftershocks can be felt well outside of the company. Thoroughly understanding and utilizing the methods contained in this book will help combat the challenges we now face today in the work place.
The BLT Mindset: Where’s the Bacon? (Or Why Lawyers Should Go to B-School)
Let me tell you a quick story. When I was a second year law student, I had an idea about how to provide the perfect tax return by combining the expertise of a CPA and a lawyer to tackle the preparation process. I had my million-dollar idea! So I sat on my couch with my laptop and said, “Ok, time to make this work.” And then I came to the realization that I did not know the first thing about what it took to run a business or where to start. And then I came to another realization that, if I did not know the first thing about running a business, what made me qualified to give people legal and tax advice about how to run their business. I could not answer that, so I went to business school.