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March 7, 2014

The Enemy Within: Fraud within companies is a risk that can never be eliminated, just managed

“BUSINESS has always been plagued by fraud: witness the South Sea Company in the 1710s (which enveloped the British economy in a giant bubble) or Charles Ponzi’s Securities Exchange Company in 1920 (which gave the world the Ponzi scheme) or the Enron and WorldCom scandals in the early 2000s. Ambitious fraudsters are attracted to businesses for the same reason that Willie Sutton, a contemporary of Ponzi, reportedly said he robbed banks: ‘Because that’s where the money is.’”

“Some frauds are committed by people at the top such as Bernard Madoff or Allen Stanford. Others are committed by hired-hands lower down the organisation. But all frauds involve abusing people’s trust and diverting corporate resources for personal ends. Fraud by wayward employees, be they high or low, can never be eliminated. Directors and executives can, however, treat it like any other unavoidable risk, and manage it professionally.”

“The risk is particularly acute at the moment. Companies are straining the bonds of loyalty. They are making ever more use of contractors and temporary workers. They are putting more pressure on employees to hit targets; they are also holding down the wages of the majority of workers while increasing the boss’s pay. This is all happening at a time when economic activity is shifting to the emerging world (where corporate fraud is rife) and to the internet (where fraudsters are having a field day). Kroll, a security consultant, found that 70% of the companies that it studied were affected by fraud in 2013, up from 61% in the previous year.”

“At the same time the punishment is harsher than ever. Companies nowadays run the risk of being held liable for their employees’ misbehaviour unless they can show they had done their best to prevent it. Directors who play even the smallest role in frauds can now go to prison. America’s Foreign Corrupt Practices Act and its European imitators have made a serious crime of something once seen as normal business practice: bribing foreigners. Companies infected by fraud can incur all sorts of other costs. Their licences to trade may be withdrawn, they may be barred from bidding for government work and they may be subjected to online campaigns urging customers to boycott them.”


Read full Economist article here.

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