When considering the criminal underworld and which crimes affect the most victims, white-collar crimes might not be the first that come to mind. White collar crimes are typically considered to be nonviolent crimes primarily for the monetary gain of the perpetrator. They include the wide range of criminal acts possible in and through corporations, including: embezzlement, securities fraud, insider trading, Ponzi schemes, money laundering, forgery, and identity theft. Many of the various types of white-collar crimes involve some form of perpetration of fraud. According to the Association of Certified Fraud Examiners (2012), organizations estimate that 5% of business revenue losses are caused by fraud in any given year. When these numbers are applied to the world’s Gross Domestic Product, it accounts for more than $3.5 trillion a year.
Clearly, this area of criminal activity truly does affect a great number of people. Because of this, there is a constant search for new and innovative ways to detect, deter, and prevent white-collar crimes. With new breakthroughs in technology and processes such as the mining of big data, security professionals—both internal and external—can cull large amounts of data to determine abnormal patterns of behavior in order to detect potential fraud committed against or by the company. It’s noteworthy that the government has put together a task force to target fraud through data mining and the sharing of information across agencies (U.S. Attorney’s Office, 2013). As the investigative techniques by the government become more sophisticated, it is important that corporations take active steps to ensure their internal systems and audits and their own data mining endeavors are detecting and preventing fraud as well.
Of the many different types of white-collar crimes that exist, many fall under the corporate crime umbrella. A couple of the most high profile types of these crimes include the misappropriation of company funds and financial statement fraud.
The misappropriation of company funds is, simply stated, employee theft, and that type of financial theft is not victimless (ACFE, 2012, p. 10). There are a wide variety of ways in which employees can steal from a company. Employees can skim: which is when an employee takes money on behalf of the company, but does not record it on the company’s books. Cash larceny is when the employee steals cash after it has been recorded, but before it has been deposited in the bank. There are any number of billing schemes whereby an employee bills customers, vendors, or the company for goods or services never delivered, sometimes carried out by the creation of shell companies or the opening of separate accounts for the purpose. False expense reimbursements involve the employee submitting expense claims to the company for personal, rather than corporate, expenses.Check tampering involves an employee actually utilizing a company check in some way—whether it’s by depositing it into the employee’s account, rather than the company account or it’s stealing blank company checks and using them. Payroll fraud is when the employee claims to have worked and is paid for work not actually performed. Cash register disbursements are amounts of cash taken right out of the register prior to the company’s deposit being made. The misappropriation of cash on hand could involve the taking of petty cash from the premises. Non-cash appropriations include the stealing of a company’s inventory.
Financial statement fraud can go to the very heart of company valuation and the misleading of potential investors. Interestingly, this type of fraud can be incredibly sophisticated: it can involve the creation of shadowy offshore shell corporations and hidden bank accounts, or the type of accounting sleight-of-hand that helped perpetrate the financial bust of 2009. It can also be incredibly simple and straightforward: the fudging of numbers on the ledgers, for example. It involves some sort of asset/revenue overstatement or asset/revenue understatement (or a combination of both). Asset/revenue overstatements include fictitious revenues, concealed liabilities and expenses, improper asset valuations, improper disclosures, and timing differences. The understatements can include understated revenues, overstated liabilities and expenses, improper valuations, and timing differences. Comparatively speaking, while financial misstatement schemes made up only about 8% of the frauds covered by the ACFE’s 2012 study, this type of fraud accounted for the highest amount of monetary loss by far: over $1,000,000.
The impact of white-collar crime on organizations is immense. Not only does fraud cost companies up to 5% of their annual revenues, companies must invest money in fraud-detection and fraud-prevention efforts to try to protect its investors and shareholders as a part of corporate governance procedures. While it can be argued that the expense of preventing fraud in the company makes the investment worthwhile, it’s still a cost of doing business that the corporation must spend and thus subtract from its bottom line.
Some of the safeguards corporations and security professionals can and should use to protect themselves and their investors include internal audit controls, management reviews, account reconciliations, external audits, document examinations, IT controls, and an employee hotline for tips. Interestingly, the ACFE states that tips are the main source for investigators, which emphasizes how important employee hotlines can be for corporate security, even when compared with new and highly advanced methods of data mining and IT detection.
One of the most high profile of recent white-collar crimes involving financial statements (or the misstating of company finances) is that perpetrated by David H. Brooks, the former CEO of a pre-eminent supplier of body armor to the U.S. military in the Middle East (U.S. Attorney’s Office, 2013). On August 15, 2013, he was sentenced to 17 years of prison for 14 counts of conspiracy, mail and wire fraud, securities fraud, obstruction of justice, and lying to auditors. He caused the valuation of the company’s stock to be overinflated and then sold off his stock prior to the revelation of a flaw in the production of some thousands of products. He lied to external auditors and said that a large part of his inventory had been destroyed in a hurricane. The auditor eventually washed its hands of the company.
In this instance, a shareholder lawsuit was one of the original signals to law enforcement about the widescale corporate fraud committed by Brooks. This began around the time of the exposure of the defective products and Brooks’ unloading of his stocks prior to the revelation. Federal investigators also gave credit to the Financial Fraud Enforcement Task Force, created by Pres. Obama to help federal agencies and law enforcement organizations to coordinate efforts to discover and prosecute financial crimes.
White-collar crimes are some of the crimes that affect the largest numbers of people. Recent breakthroughs in technology, such as data mining, can assist corporations with internal controls to help prevent and detect corporate fraud. Interestingly, employee hotlines still seem to be the most useful and highest cost avoiders for corporations in the detection of white-collar crime.
Association of Certified Fraud Examiners [ACFE]. (2012). Report to the nations on occupational fraud and abuse: 2012 global fraud study. Austin, TX.
The United States Attorney’s Office, Eastern District of New York. (2013). David H. Brooks, founder and former chief executive officer of DHB Industries Inc., sentenced to 17 years in prison for insider trading, fraud, lying to auditors, and obstruction of justice [Press release]. Retrieved from http://www.justice.gov/usao/nye/pr/2013/2013aug15.html