Corporate Fraud

Fraud in corporate America is not exceptional as would seem from sound bites focused on Enron. According to surveys of the Association of Certified Fraud Examiners (ACFR), fraudsters and white-collar hackers are the cause of loss of 6% of the revenue or $600 billion in 2002 ($ 2 million for each company) earned by companies. Just how ineffective are the current controls are in checking this fraud is indicated by the fact that an average scheme lasted 18 months before it was detected if at all.

The malfeasance in Enron could not have been exposed without the whistleblowers. A report by ACFR found that tips accounted for the highest share of fraud detected, i.e., 43% of all. Additionally, tips accounted for 51% of the frauds committed by owners and executives. Yet, the experience of whistleblowers in the past has been that they are not rewarded for the risks they take, the more likely possibility is that they will be hounded for sticking their neck out. Sarbanes Oxley Act, together with related proposals from NASDAQ and NYSE, require that the audit committee establish procedures for receiving and reviewing complaints submitted without an ulterior motive in mind. Companies are also required to build confidence so that employees don't fear any retaliation should they decide to report untoward accounting methods.

Fraud is most frequently perpetrated by senior executives in a company. According to a Wall Street Journal (July 8 th 2002), 70% of corporate frauds involved the CEO. The losses incurred were much lower, when an employee was involved instead of a senior executive of a company, by a factor of nearly fifteen. In the past, chief executives could override any dissent within a company to escape the consequences of their crimes.

Sarbanes Oxley has strengthened the hands of audit committees within the boards to ensure that report any management override. Fraud is also often reflected in unusual journal entries often at the time of close of accounts. Sarbanes Oxley Act, under its Section 404, requires reporting on control systems and their internal auditing so that shareholders know whether the company has the processes to detect such fraudulent activities.

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