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Corruption in Management
Contents
chapters title Page no.
1 introduction 2
2 Corruption 3
3 Types of corruption 4-9
4 Corporate crime 10-11
5 White collar crime 12-13
6 Blue collar crime 14-16
7 Organized crime 17
8 State corporate crime 18
9 Issues of coporate crime 19-20
10 Discussion 21-2411 Accounting scandals 25-26
12 Notable accounting
scandals
27-31
13 Major accounting
scandals
32
14 BCCI 33
15 Enron corporation 34
16 World com 35
17 Various companies scams 36-58
18 Corruption unethical
activity
59
19 Conclusion 60
20 bibliography 61
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INTRODUCTION
People everywhere are more concerned than they ever have been about corruption
and business ethics. This represents social changes that are occurring everywhere, though
to different degrees. Corruption has entered the public sphere and dealing with corruption
must become a foremost issue in training business professionals.
Forms of corruption arise from a myriad of behaviors that are all lumped together
and called corruption. Confounding this problem are the subtle variations in how
corruption is defined. Complicating how we view corruption is the possibility that some
forms of corruption may allow us to accomplish goals in highly bureaucratic and
inefficient environments better than we can if we are strictly honest and ethical.
Corruption is a very complex issue, made no simpler by international production and
commerce.
Corruption has become an issue of major political and economic significance in
recent years and the necessity to take measures against it has become evident.
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CORRUPTION
The word corrupt (Middle English, from Latin corruptus, past participle of
corrumpere, to destroy : com-, intensive pref. and rumpere, to break) when used as an
adjective literally means "utterly broken".
The word corruption means the destruction, ruining or the spoiling of a society or
a nation. A corrupt society stops valuing integrity, virtue or moral principles. It changes
for the worse. Such a society begins to decay and sets itself on the road to self
destruction. Corruption is an age old phenomena. Selfishness and greed are the two main
causes of corruption. Political corruption is the abuse of their powers by state officials for
their unlawful private gain.
Corruption cannot be divorced from economics. Inequality of wealth, low wages
and salaries are some of the economic causes of corruption. Employees often strike
corrupt deals to supplement their meager incomes. A license-permit regime or scarcity of
basic commodities promotes corruption.
Most of us have an idea of what corruption is. But we dont necessarily share the
same idea. That is why we need to ask the question about what corruption is. For
example, do you believe giving money to speed up the processing of an application is
corruption? Do you think awarding contracts to those who gave large campaigncontribution is corruption? Do you think bribing a doctor to ensure your gets the
medicine she needs is corruption? Do you think using government construction
equipment to build an addition on ones house is corruption?
Corruption is not just the clearly bad cases of government officials skimming
off money for their own benefit. It includes cases where the systems dont work well, and
ordinary people are left in a bind, needing to giv e a bribe for the medicine or the licenses
they need.
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TYPES OF CORRUPTION
Bribery
Bribery requires two participants: one to give the bribe, and one to take it. In
some countries the culture of corruption extends to every aspect of public life, making it
extremely difficult for individuals to stay in business without resorting to bribes. Bribes
may be demanded in order for an official to do something he is already paid to do. They
may also be demanded in order to bypass laws and regulations. In some developing
nations, up to half of the population has paid bribes during the past 12 months
In recent years, efforts have been made by the international community to
encourage countries to dissociate and incriminate as separate offences, active and passive
bribery. Active bribery can be defined for instance as the promising, offering or giving by
any person, directly or indirectly, of any undue advantage [to any public official], for
himself or herself or for anyone else, for him or her to act or refrain from acting in the
exercise of his or her functions. (article 2 ofthe Criminal Law Convention on Corruption
(ETS 173) of the Council of Europe). Passive bribery can be defined as the request or
receipt [by any public official], directly or indirectly, of any undue advantage, for himself
or herself or for anyone else, or the acceptance of an offer or a promise of such an
advantage, to act or refrain from acting in the exercise of his or her functions (article 3 of
the Criminal Law Convention on Corruption (ETS 173)).
Trading in influence
Trading in influence, or influence peddling in certain countries, refers to the
situation where a person is selling his/her influence over the decision process involving a
third party (person or institution). The difference with bribery is that this is a tri-lateral
relation.
But from a legal point of view, the role of the third party (who is the target of the
influence) does not really matter although he/she can be an accessory in some instances.
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It can be difficult to make a distinction between this form of corruption and
certain forms of extreme and poorly regulated lobbying where for instance law- or
decision-makers can freely "sell" their vote, decision power or influence to those
lobbyists who offer the highest retribution, including where for instance the latter act on
behalf of powerful clients such as industrial groups who want to avoid the passing of
certain environmental, social or other regulations perceived as too stringent etc.). Where
lobbying is (sufficiently) regulated, it becomes possible to provide for a distinctive
criteria and to consider that trading in influence involves the use of "improper influence",
as in article 12 of the Criminal Law Convention.
Graft
While bribery includes an intent to influence or be influenced by another for
personal gain, which is often difficult to prove, graft only requires that the official gains
something of value, not part of his official pay, when doing his work. Large "gifts"
qualify as graft, and most countries have laws against it. (For example, any gift over $200
value made to the President of the United States is considered to be a gift to the Office of
the Presidency and not to the President himself. The outgoing President must buy it if he
or she wants to keep it.)
Another example of graft is a politician using his knowledge of zoning to
purchase land which he knows is planned for development, before this is publicly known,
and then selling it at a significant profit. This is comparable toinsider tradingin business.
Patronage
Patronage refers to favoring supporters, for example with government
employment. This may be legitimate, as when a newly elected government changes the
top officials in the administration in order to effectively implement its policy.
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It can be seen as corruption if this means that incompetent persons, as a payment for
supporting the regime, are selected before more able ones. In non-democracies many
government officials are often selected for loyalty rather than ability. They may be almost
exclusively selected from a particular group (for example,Sunni Arabs inSaddam
Hussein's Iraq, thenomenklatura in theSoviet Union, or the Junkers in Imperial
Germany) that support the regime in return for such favors.
Nepotism and cronyism
Favoring relatives (nepotism) or personal friends (cronyism) of an official is a
form of illegitimate private gain. This may be combined with bribery, for example
demanding that a business should employ a relative of an official controlling regulation
affecting the business. The most extreme example is when the entire state is inherited, as
inNorth Korea orSyria. A milder form of cronyism is an "old boy network", in which
appointees to official positions are selected only from a closed and exclusive social
network such as the alumni of particular universities instead of appointing the most
competent candidate.
Seeking to harm enemies becomes corruption when official powers are
illegitimately used as means to this end. For example, trumped-up charges are often
brought up against journalists or writers who bring up politically sensitive issues, such as
a politician's acceptance of bribes.
Embezzlement
Embezzlement is outright theft of entrusted funds. It is a misappropriation of
property.
Another common type of embezzlement is that of entrusted government
resources; for example, when a director of a public enterprise employs company workers
to build or renovate his own house.
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Kickbacks
A kickback is an official's share of misappropriated funds allocated from his or
her organization to an organization involved in corrupt bidding. For example, suppose
that a politician is in charge of choosing how to spend some public funds. He can give a
contract to a company that is not the best bidder, or allocate more than they deserve. In
this case, the company benefits, and in exchange for betraying the public, the official
receives a kickback payment, which is a portion of the sum the company received. This
sum itself may be all or a portion of the difference between the actual (inflated) payment
to the company and the (lower) market-based price that would have been paid had the
bidding been competitive. Kickbacks are not limited to government officials; any
situations in which people are entrusted to spend funds that do not belong to them are
susceptible to this kind of corruption. Kickbacks are also common in the Pharmaceutical
Industry, as many doctors and physicians receive pay in return for added promotion and
prescription of the drug these Pharmaceutical Companies are marketing. (See: Anti-
competitive practices,Bid rigging.)
Unholy alliance
An unholy alliance is a coalition among seemingly antagonistic groups, especially
if one is religious,[7] forad hoc or hidden gain. Like patronage, unholy alliances are not
necessarily illegal, but unlike patronage, by its deceptive nature and often great financial
resources, an unholy alliance can be much more dangerous to the public interest. An
early, well-known use of the term was byTheodore Roosevelt (TR):
"To destroy this invisible Government, to dissolve the unholy alliance between
corruptbusinessand corruptpolitics is the first task of the statesmanship of the day."
1912 Progressive Party Platform, attributed to TR[8] and quoted again in his
autobiography[9]where he connects trusts and monopolies (sugar interests, Standard Oil,
etc.) to Woodrow Wilson, Howard Taft, and consequently both majorpolitical parties.
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In modern English usage the words corruption and corrupt have many meanings:
Political corruption: the abuse of public power, office, or resources by
government officials or employees for personal gain, e.g. by extortion,soliciting or offering bribes.
Police corruption
Corporate corruption: corporate criminality and the abuse of power by
corporation officials, either internally or externally.
Putrefaction: the natural process of decomposition in the human and
animal body following death.
Data corruption: an unintended change to data in storage or in transit.
Linguistic corruption: the change in meaning to a language or a text
introduced by cumulative errors in transcription as changes in the
language speakers' comprehension.
Bribery in politics, business, or sport (including match fixing).
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Rule of law Governmental corruption of judiciary includes governmental
spending on the courts, which is completely financially controlled by the
executive in many transitional and developing countries. This undermines
the principle of checks and balances and creates a critical financial
dependence on the judiciary. It covers latent governmental spending on
the judiciary in the form of privileges cars, country houses,expenses.
Such a system is completely outside the realm of transparency and creates
a precedent for the corruption of the judiciary by executive authorities.
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CORPORATE CRIME
In criminology, corporate crime refers to crimes committed either by a
corporation (i.e., a business entity having a separate legal personality from the natural
persons that manage its activities), or by individuals that may be identified with a
corporation or other business entity (see vicarious liability and corporate liability). Note
that some forms of corporate corruption may not actually be criminal if they are not
specifically illegal under a given system of laws. For example, some jurisdictions allow
insider trading.
Corporate crime overlaps with:
W hite-collar crime, because the majority of individuals who may act as or
represent the interests of the corporation are employees orprofessionals of a
highersocial class;
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Organized crime, because criminals can set up corporations either for the
purposes of crime or as vehicles forlaunderingthe proceeds of crime. Organized
crime has become a branch of big business and is simply the illegal sector of
capital. It has been estimated that, by the middle of the 1990s, the "gross criminal
product" of organized crime made it the twentieth richest organization in the
worldricher than 150 sovereign states (Castells 1998: 169). The worlds gross
criminal product has been estimated at 20 percent of world trade. (de Brie 2000);
and
State-corporate crimebecause, in many contexts, the opportunity to commit crime
emerges from the relationship between the corporation and thestate.
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White collar crime
Within the field of criminology, white-collar crime has been defined by Edwin
Sutherland as "a crime committed by a person of respectability and high social status in
the course of his occupation" (1939). Sutherland was a proponent of Symbolic
Interactionism, and believed that criminal behavior was learned from interpersonal
interaction with others. White-collar crime, therefore, overlaps with corporate crime
because the opportunity forfraud, bribery, insider trading, embezzlement, computer
crime, copyright infringement, money laundering, identity theft, and forgery is more
available to white-collaremployees.
Historical background
The term white-collar crime only dates back to 1939. Professor Edwin Hardin Sutherland
was the first to coin the term, and hypothesize white-collar criminals attributed different
characteristics and motives than typical street criminals. Mr. Sutherland originally
presented his theory in an address to the American Sociological Society in attempt to
study two fields, crime and high society, which had no previous empirical correlation. He
defined his idea as "crime committed by a person of respectability and high social status
in the course of his occupation" (Sutherland, 1939). Many denote the invention of
Sutherland's idiom to the explosion of U.S business in the years following the Great
Depression. Sutherland noted that in his time, "less than two percent of the persons
committed to prisons in a year belong to the upper-class." His goal was to prove a
relation between money, social status, and likelihood of going to jail for a white-collar
crime, compared to more visible, typical crimes. Although the percentage is a bit higher
today, numbers still show a large majority of those in jail are poor, "blue-collar"
criminals, despite efforts to crack down on corporate crime.
Other fiscal laws were passed in the years prior to Sutherland's studies including antitrust
laws in the 1920's, and social welfare laws in the 1930's. After the Depression, people
went to great lengths to rebuild their financial security, and it is theorized this led many
hard workers, who felt they were underpaid, to take advantage of their positions.
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Much of Sutherland's work was to separate and define the differences inblue collarstreet
crimes, such as arson, burglary, theft, assault, rape and vandalism, which are often
blamed on psychological, associational, and structural factors. Instead, white-collar
criminals are opportunists, who over time learn they can take advantage of their
circumstances to accumulate financial gain. They are educated, intelligent, affluent,
confident individuals, who were qualified enough to get a job which allows them the
unmonitored access to often large sums of money. Many also use their intelligence to con
their victims into believing and trusting in their credentials. Many do not start out as
criminals, and in many cases never see themselves as such.
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Blue-collar crime
Crime and unemployment
The International Conference of Labour Statisticians (ILO) defines the unemployed as
persons above a specified age who, during the reference period, were without work, were
currently available for work, and were seeking work. The process of industrialization
encouraged working-class incorporation into society with greater social mobility being
achieved during the twentieth century.
But the routine of policing tends to focus on the public places where the economically
marginal live out more of their lives, so regulation falls on those who are not integrated
into the mainstream institutions of economic and political life. A perennial source of
conflict has therefore involved working-class youth but, as long-term structural
unemployment emerged, an underclass was created. Ralf Dahrendorf argues that the
majority class did not need the unemployed to maintain and even increase its standard of
living, and so the condition of the underclass became hopeless. Box (1987) sums up the
research into crime and unemployment at pp967:
The relationship between overall unemployment and crime is inconsistent. On balance
the weight of existing research supports there being a weak but none-the-less significant
causal relationship. However, properly targeted research on young males, particularly
those from disadvantaged ethnic groups, which considers both the meaning and duration
of unemployment, has yet to be done. The significance of unemployment will vary
depending on its duration, social assessments of blame, previous experience of steady
employment, perception of future prospects, comparison with other groups, etc.
Hence, there is likely to be a causal relationship between relative deprivation and crime,
particularly where unemployment is perceived as unjust and hopeless by comparison withthe lot of other groups. Thornberry and Christenson (1984) analyzed data from a
longitudinal cohort study ofdelinquencyin Philadelphia and found (at p405):
Unemployment exerts a rather immediate effect on criminal involvement, while criminal
involvement exerts a more long-range effect on unemployment. What this and other
empiricalresearch demonstrates is that crime-rates, especially for property offences, were
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higher during periods of unemployment than of employment. This suggests that holding
constant other variables, the same youths commit more crimes while unemployed. This is
not surprising since unemployment provides an incentive to commit offences and erodes
the social controls which would otherwise encourage conformity. But crime also rose
during the so-called period of affluence, prompting the Right Realism of James Q.
Wilson and his associates in the United Stateswho argued that the criminal justice system
was failing, and the Left Realism attributed to Jock Young, which argued for situational
changes to reduce the availability of criminal opportunities in the environment. More
generally, the growth ofanomie (see Durkheim and, more recently, the Strain Theory
proposed by Merton), predicted a strong correlation between unemployment and property
crime. But Cantor and Land (1985) found a negative association for unemployment and
property crime in the United States. They argued that unemployment decreases the
opportunity for property crime since it reflects a general slowdown in production and
consumption activities and it increases the ability to guard property due to a greater
concentration of time at home.
Conservatism alleges the failure ofstate agencies charged with the task ofsocialization to
instill self-discipline and moral values resulting in permissiveness, a lack of conformity,
and liberalization.
The "evidence" that there are new affluent criminals allows populist politicians to deny
any link between inner-city deprivation and crime. The Left avoids the issue of morality
and crime which denies earlier work in Marxist criminology linking crime and the culture
of egoism stimulated by economic advance under capitalism as a more amorally
materialistic culture emerges. As Durkheim asserted, moral education cannot be effective
in an economically unjust society. Thus, additional research is required, using a more
complex model of crime and control to include variables such as opportunities or
incentives relative to a country's standard of living, potential punishment, chance of being
caught, law enforcement efforts and expenditures on theft and property crime relative to
other crimes, size of the country's criminal population, education levels, and other socio-
economic factors. A further factor currently being researched is the role of the media in
the social construction of "hot spots" or dangerous places within a city. Crime is a
substantial element in media news reporting. Media research is now determining whether
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the coverage of crime is spatially representative of where crime occurs, or
disproportionately presents crime as occurring in certain areas of a city, thereby skewing
public perceptions and the political response (see Paulsen: 2002).
Organized crime
Organized crime or criminal organizations is a transnational grouping of highly
centralized enterprises run by criminals for the purpose of engaging in illegal activity,
most commonly for monetaryprofit. The Organized Crime Control Act (U.S., 1970)
defines organized crime as "The unlawful activities of [...] a highly organized, disciplined
association [...]".Such crime is commonly referred to as the work of the Mob in the U.S.
Mafia is a term used to describe a number ofcriminal organizations around the world.
The first organization to bear the label was the Sicilian Mafia based in Sicily, known to
its members as Cosa Nostra. In the United States, "the Mafia" generally refers to the
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Italian American Mafia. Other powerful organizations described as mafias include the
Russian Mafia, the Irish Mob, the Chinese Triads, the Albanian Mafia, Bosnian mafia,
the Japanese Yakuza, the Neapolitan Camorra, the Calabrian 'Ndrangheta, the Apulian
Sacra Corona Unita, the Indian Mafia, the Unione Corse, Serbian Mafia, the Mexican
Mafia and the Bulgarian mafia. There are also a number of localized mafia organizations
around the world bearing no link to any specific ethnic background.
Some criminal organizations, such as terrorist organizations, are politically motivated
(see VNSA). Gangs may become "disciplined" enough to be considered "organized". An
organized gang or criminal set can also be referred to as a mob. The act of engaging in
criminal activity as a structured group is referred to in theUnited States as racketeering.
State-corporate crime
In criminology, the concept of state-corporate crime refers to crimes that result from
Public-private partnership and inherent distorted relations of the state and the policies and
practices of commercial corporations. The term was coined by Kramer and Michalowski
(1990), and redefined by Aulette and Michalowski (1993). These definitions were
intended to include all "socially injurious acts" and not merely those that are defined by
the local criminal jurisdiction as crime. This is not universally accepted as a valid
definition so a less contentious version has been adopted here. As an academic
classification, it is distinguished from:
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corporate crime, which studies deviance within the context of a corporation and by a
corporation;
political crime, which is crime directed at the state; and
state crime or "state-organised crime", which studies crimes committed by government
organisations (Chambliss: 1989).
One of the assertions made by those involved in this work is that a focus on the actual
relationship between the state and corporations dependent on the state for their
profitability can expose a more complete range of criminal activity than might be
provided by independent analyses of corporate or state-organised crimes.
Definitional issues of Corporate Crime
Legal person
An 1886 decision of the United States Supreme Court, in Santa Clara County v. Southern
Pacific Railroad 118 U.S. 394 (1886), has been cited by various courts in the US asprecedent to maintain that a corporation can be defined legally as a 'person', as described
in the Fourteenth Amendment to the U.S. Constitution. The Fourteenth Amendment
stipulates that,
"No State shall make or enforce any law which shall abridge the privileges or immunities
of citizens of the United States; nor shall any State deprive any person of life, liberty, or
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property, without due process of law; nor deny to any person within its jurisdiction the
equal protection of the laws."
In English law, this was matched by the decision in Salomon v Salomon & Co[1897] AC
22. In Australian law, under the Corporations Act 2001 (Cth), a corporation is legally a
'person'.
This doctrine ofcorporate personhoodhas often impeded prosecution of corporate crime
by allowing corporations to claim Bill of Rightsprotections in court, sometimes with
success.
Function of law
History shows that laws have always served as instruments of regulation. Lea (2001)
argues that whereas crime used to be the exceptional event, disrupting the otherwise
normal socio-economic processes, as crime becomes more frequent it lost its status as an
exceptional event and became "a standard, background feature of our livesa taken for
granted element of late modernity." (Garland 1996: 446)
Enforcement policy
Corporate crime has become politically sensitive in some countries. In the United
Kingdom, for example, following a number of fatal disasters on the rail network and at
sea, the term is commonly used in reference to corporate manslaughterand to involve a
more general discussion about the technological hazards posed by business enterprises
(see Wells: 2001). Similar incidents of corporate crime, such as the 1985Union Carbide
accident in Bhopal, India (Pearce & Tombs: 1993) and the behaviour of the
pharmaceuticalindustry (Braithwaite: 1984).
The Law Reform Commission of New South Wales offers an explanation of such
criminal activities:
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"Corporate crime poses a significant threat to the welfare of the community. Given the
pervasive presence of corporations in a wide range of activities in our society, and the
impact of their actions on a much wider group of people than are affected by individual
action, the potential for both economic and physical harm caused by a corporation is
great."
Similarly, Russell Mokhiber and Robert Weissman (1999) assert:
"At one level, corporations develop new technologies and economies of scale. These may
serve the economic interests of mass consumers by introducing new products and more
efficient methods of mass production. On another level, given the absence of political
control today, corporations serve to destroy the foundations of the civic community and
the lives of people who reside in them."
Discussion
Criminalization
Behavior can be regulated by thecivil law (including administrative law) or the criminal
law. In deciding to criminalize particular behavior, thelegislature is making the political
judgment that this behavior is sufficiently culpable to deserve the stigma of being labeled
as a crime. In law, corporations can commit the same offences as natural persons.
Simpson (2002) avers that this process should be straight forward because a state should
simply engage in victimology to identify which behavior causes the most loss and
damage to its citizens, and then represent the majority view that justice requires the
intervention of the criminal law. But states depend on the business sector to deliver a
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stable economy, so the politics of regulating the individuals and corporations that supply
that stability become more complex. For the views of Marxist criminology, see Snider
(1993) and Snider & Pearce (1995), for Left realism, see Pearce & Tombs (1992) and
Schulte-Bockholt (2001), and for Right Realism, see Reed & Yeager (1996). More
specifically, the historical tradition ofsovereign state control ofprisons is ending through
the process ofprivatisation. Corporate profitability in these areas therefore depends on
building more prison facilities, managing their operations, and selling inmate labor. In
turn, this requires a steady stream ofprisonersable to work. (Kicenski: 2002)
The majority of crimes are committed because the offender has the 'right opportunity',
i.e., where the offender simply sees the chance and thinks that he or she will be able to
commit the crime and not be detected.[dubious discuss][citation needed]
For the most part,[ peacock term] greed, rather than conceit, is the motive, and the
rationalisation for choosing to break the law usually arises out of a form of contempt for
the victim, namely that he, she or it will be powerless to prevent it, and has it coming for
some reason. For these purposes, the corporation is the vehicle for the crime. This may be
a short-term crime, i.e., the corporation is set up as a shell to open credit trading accounts
with manufacturers and wholesalers, trades for a short period of time and then disappears
with the revenue and without paying for the inventory. Alternatively and most
commonly, the primary purpose of the corporation is as a legitimate business, but
criminal activity is secretly intermixed with legal activity to escape detection. To achieve
a suitable level of secrecy, senior managers will usually be involved. The explanations
and exculpations may therefore centre around rogue individuals who acted outside the
organizational structures, or there may be a serious examination of the occupational and
organisational structures (often hinged on the socio-economic system, gender, racism
and/or age) that facilitated the criminal conduct of a corporation
Bribery andcorruption are problems in the developed world, and the corruption of public
officials is thought[according to whom?] to be a large cause of crime in poor countries
that have large IMF debts and IMF sovereign obligations.
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Penalties
In part, this will be a function of the public perception of the degrees of societal
culpabilityinvolved. Weissman and Mokhiber (1999) catalog the silence and
indifference of the major media in the face of the widespread corporate
corruption. Only in part is this justifiable. The news media find it difficult to
respond to corporate crime both because reporting may compromise the trialby
tainting thejury's perceptions, or because of the danger ofdefamation
proceedings. Further, major corporate crime is often complicated and more
difficult to explain to the lay public, as against street orproperty crimes, which
may provide graphic visual evidence of harm to victims injured, or of property
that has been damaged orvandalized in spectacular fashion. But, moresignificantly, the news media are owned by large corporations which may also
own prisons. Thus, the political decisions on the resources to allocate to
investigate and prosecute will tend to match the electorate's understanding of the
dangers posed by 'crime'. In sentencing, the fact that the convicted individuals
may have had an impeccable character as presidents, CEOs, chairmen,directors
and managers is likely to be a mitigating factor.
Examples of criminal behavior in most jurisdictions include: insider trading, antitrust
violations, fraud (usually involving the consumers), damage to the environment,
exploitationof labour in violation of labor andhealth and safetylaws, and the failure to
maintain a fiduciary responsibility towards stockholders.
Enforcement and legal or quasi-legal corrupt activities
One example, may be in the area of takeovers and top executive compensation:
It is fairly easy for a top executive to reduce the price of his/her company's stockdue to
information asymmetry. The executive can accelerate accounting of expected expenses,
delay accounting of expected revenue, engage in off balance sheettransactions to make
the company's profitability appear temporarily poorer, or simply promote and report
severely conservative (e.g. pessimistic) estimates of future earnings. Such seemingly
adverse earnings news will be likely to (at least temporarily) reduce share price. (This is
22
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again due to information asymmetries since it is more common for top executives to do
everything they can to window dress their company's earnings forecasts). There are
typically very few legal risks to being 'too conservative' in one's accounting and earnings
estimates.
A reduced share price makes a company an easier takeover target. When the company
gets bought out (or taken private)at a dramatically lower pricethe takeover artist
gains a windfall from the former top executive's actions to surreptitiously reduce share
price. This can represent 10s of billions of dollars (questionably) transferred from
previous shareholders to the takeover artist. The former top executive is then rewarded
with a golden handshake for presiding over the firesale that can sometimes be in the 100s
of millions of dollars for one or two years of work. (This is nevertheless an excellent
bargain for the takeover artist, who will tend to benefit from developing a reputation of
being very generous to parting top executives).
Similar issues occur when a publicly held asset ornon-profit organization undergoes
privatization. Top executives often reap tremendous monetary benefits when a
government owned or non-profit entity is sold to private hands. Just as in the example
above, they can facilitate this process by making the entity appear to be in financial crisis
this reduces the sale price (to the profit of the purchaser), and makes non-profits and
governments more likely to sell. Ironically, it can also contribute to a public perception
that private entities are more efficiently run, reinforcing the political will to sell off public
assets. Again, due toasymmetric information, policy makers and the general public see a
government owned firm that was a financial 'disaster'miraculously turned around by
the private sector (and typically resold) within a few years.
23
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Accounting Scandals
Accounting scandals, or corporate accounting scandals, arepolitical andbusiness
scandals which arise with the disclosure of misdeeds by trusted executives of large
public corporations. Such misdeeds typically involve complex methods for misusing or
misdirecting funds, overstating revenues, understating expenses, overstating the value ofcorporate assets or underreporting the existence of liabilities, sometimes with the
cooperation of officials in other corporations or affiliates.
In public companies, this type of "creative accounting" can amount to fraud and
investigations are typically launched by government oversight agencies, such as
the Securities and Exchange Commission(SEC) in the United States.
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Scandals are often only the 'tip of the iceberg'. They represent the visible catastrophic
failures. Note that much abuse can be completely legal or quasi legal.
For example, in the domain ofprivatization and takeovers:
It is fairly easy for a top executive to reduce the price of his/her company's stock - due
toinformation asymmetry. The executive can accelerate accounting of expected
expenses, delay accounting of expected revenue, engage inoff balance sheet transactions
to make the company's profitability appear temporarily poorer, or simply promote and
report severely conservative (eg. pessimistic) estimates of future earnings. Such
seemingly adverse earnings news will be likely to (at least temporarily) reduce share
price. (This is again due to information asymmetries since it is more common for top
executives to do everything they can to window dress their company's earnings
forecasts). There are typically very few legal risks to being 'too conservative' in one's
accounting and earnings estimates.
A reduced share price makes a company an easiertakeovertarget. When the company
gets bought out (or taken private) - at a dramatically lower price - the takeover artist gains
a windfall from the former top executive's actions to surreptitiously reduce share price.
This can represent tens of billions of dollars (questionably) transferred from previous
shareholders to the takeover artist. The former top executive is then rewarded with
agolden handshakefor presiding over the firesale that can sometimes be in the hundreds
of millions of dollars for one or two years of work. (This is nevertheless an excellent
bargain for the takeover artist, who will tend to benefit from developing areputation of
being very generous to parting top executives).
Similar issues occur when a publicly held asset or non-profit
organization undergoesprivatization. Top executives often reap tremendous monetary
benefits when a government owned or non-profit entity is sold to private hands. Just as in
the example above, they can facilitate this process by making the entity appear to be in
financial crisis - this reduces the sale price (to the profit of the purchaser), and makes
non-profits and governments more likely to sell. Ironically, it can also contribute to a
public perception that private entities are more efficiently run reinforcing the political
will to sell off public assets. Again, due to asymmetric information, policy makers and
the general public see a government owned firm that was a financial 'disaster' -
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miraculously turned around by the private sector (and typically resold) within a few
years.
Notable accounting scandals
Company Year Audit Firm Country Notes
Nugan Hand
Bank1980[1] Australia
ZZZZ Best 1986[2] United StatesPonzi scheme run
by Barry Minkow
Barlow Clowes 1988[3]United
Kingdom
Gilts management
service. 1110
million missing
MiniScribe 1989[4] United States
Polly Peck 1990[5] United
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Kingdom
Bank of Credit
and Commerce
International
1991[6]United
Kingdom
Northern RockUnited
Kingdom
Clearstream Luxembourg
Phar-Mor 1992[7] United States
Informix 1996[8] United States
Cendant 1998[9] Ernst & Young United States
Waste
Management,
Inc.
1999[10] Arthur Andersen United StatesFinancial
mistatements
MicroStrategy 2000[11] PricewaterhouseCoopers United States Michael Saylor
Unify
Corporation2000[12] United States
Computer
Associates2000[13] KPMG United States Sanjay Kumar
Xerox 2000[14] KPMG United StatesFalsifying financial
resultsOne.Tel 2001[15] Ernst & Young Australia
Enron 2001[16] Arthur Andersen United States
Jeffrey
Skilling, Kenneth
Lay,Andrew
Fastow
Adelphia 2002[17] Deloitte & Touche United States John Rigas
AOL 2002[14] Ernst & Young United States Inflated sales
Bristol-Myers
Squibb2002[14][18] PricewaterhouseCoopers United States Inflated revenues
CMS Energy 2002[14][19] Arthur Andersen United States Round trip trades
Duke Energy 2002[14] Deloitte & Touche United States Round trip trades
Dynegy 2002[14] Arthur Andersen United States Round trip trades
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p://en.wikipedia.org/wiki/KPMGhttp://en.wikipedia.org/wiki/One.Telhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-14http://en.wikipedia.org/wiki/Ernst_%26_Younghttp://en.wikipedia.org/wiki/Enronhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-15http://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Jeffrey_Skillinghttp://en.wikipedia.org/wiki/Jeffrey_Skillinghttp://en.wikipedia.org/wiki/Kenneth_Layhttp://en.wikipedia.org/wiki/Kenneth_Layhttp://en.wikipedia.org/wiki/Andrew_Fastowhttp://en.wikipedia.org/wiki/Andrew_Fastowhttp://en.wikipedia.org/wiki/Adelphia_Communications_Corporationhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-16http://en.wikipedia.org/wiki/Deloitte_%26_Touchehttp://en.wikipedia.org/wiki/John_Rigashttp://en.wikipedia.org/wiki/AOLhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Ernst_%26_Younghttp://en.wikipedia.org/wiki/Bristol-Myers_Squibbhttp://en.wikipedia.org/wiki/Bristol-Myers_Squibbhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Accounting_scandals#cite_note-17http://en.wikipedia.org/wiki/PricewaterhouseCoopershttp://en.wikipedia.org/wiki/CMS_Energyhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Accounting_scandals#cite_note-18http://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Duke_Energyhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Deloitte_%26_Touchehttp://en.wikipedia.org/wiki/Dynegyhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Arthur_Andersen8/3/2019 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El Paso
Corporation2002[14] Deloitte & Touche United States Round trip trades
Freddie Mac 2002[20] United StatesUnderstated
earnings
Global Crossing 2002[14] Arthur Andersen Bermuda
Network capacity
swaps to inflate
revenues
Halliburton 2002[14] Arthur Andersen United StatesImproper booking
of cost overruns
Homestore.com 2002[14][21] United StatesImproper booking
of sales
ImCloneSystems
2002[22] KPMG United States Samuel D. Waksal
Kmart 2002[14][23] PricewaterhouseCoopers United States
Misleading
accounting
practices
Merck & Co. 2002[14] United States
Recorded co-
payments that were
not collected
Merrill Lynch 2002[24] Deloitte & Touche United States Conflict of interest
Mirant 2002[14] United StatesOverstated assets
and liabilities
Nicor 2002[14] United States
Overstated assets,
understated
liabilities
Peregrine
Systems2002[14] KPMG United States Overstated sales
Qwest
Communications2002[14] United States Inflated revenues
Reliant Energy 2002[14] Deloitte & Touche United States Round trip trades
Sunbeam 2002[25] United States
Tyco 2002[14] PricewaterhouseCoopers Bermuda Improper
28
http://en.wikipedia.org/wiki/El_Paso_Corporationhttp://en.wikipedia.org/wiki/El_Paso_Corporationhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Deloitte_%26_Touchehttp://en.wikipedia.org/wiki/Freddie_Machttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-19http://en.wikipedia.org/wiki/Global_Crossinghttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Halliburtonhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Move.comhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Accounting_scandals#cite_note-20http://en.wikipedia.org/wiki/ImClone_Systemshttp://en.wikipedia.org/wiki/ImClone_Systemshttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-21http://en.wikipedia.org/wiki/KPMGhttp://en.wikipedia.org/wiki/Samuel_D._Waksalhttp://en.wikipedia.org/wiki/Kmarthttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Accounting_scandals#cite_note-22http://en.wikipedia.org/wiki/PricewaterhouseCoopershttp://en.wikipedia.org/wiki/Merck_%26_Co.http://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Merrill_Lynchhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-23http://en.wikipedia.org/wiki/Deloitte_%26_Touchehttp://en.wikipedia.org/wiki/Miranthttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Nicorhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Peregrine_Systemshttp://en.wikipedia.org/wiki/Peregrine_Systemshttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/KPMGhttp://en.wikipedia.org/wiki/Qwest_Communicationshttp://en.wikipedia.org/wiki/Qwest_Communicationshttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Reliant_Energyhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Deloitte_%26_Touchehttp://en.wikipedia.org/wiki/Sunbeam_Productshttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-24http://en.wikipedia.org/wiki/Tyco_Internationalhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/PricewaterhouseCoopershttp://en.wikipedia.org/wiki/El_Paso_Corporationhttp://en.wikipedia.org/wiki/El_Paso_Corporationhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Deloitte_%26_Touchehttp://en.wikipedia.org/wiki/Freddie_Machttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-19http://en.wikipedia.org/wiki/Global_Crossinghttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Halliburtonhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Move.comhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Accounting_scandals#cite_note-20http://en.wikipedia.org/wiki/ImClone_Systemshttp://en.wikipedia.org/wiki/ImClone_Systemshttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-21http://en.wikipedia.org/wiki/KPMGhttp://en.wikipedia.org/wiki/Samuel_D._Waksalhttp://en.wikipedia.org/wiki/Kmarthttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Accounting_scandals#cite_note-22http://en.wikipedia.org/wiki/PricewaterhouseCoopershttp://en.wikipedia.org/wiki/Merck_%26_Co.http://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Merrill_Lynchhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-23http://en.wikipedia.org/wiki/Deloitte_%26_Touchehttp://en.wikipedia.org/wiki/Miranthttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Nicorhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Peregrine_Systemshttp://en.wikipedia.org/wiki/Peregrine_Systemshttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/KPMGhttp://en.wikipedia.org/wiki/Qwest_Communicationshttp://en.wikipedia.org/wiki/Qwest_Communicationshttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Reliant_Energyhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Deloitte_%26_Touchehttp://en.wikipedia.org/wiki/Sunbeam_Productshttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-24http://en.wikipedia.org/wiki/Tyco_Internationalhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/PricewaterhouseCoopers8/3/2019 Corruption in Management
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Corruption in Management
Internationalaccounting,Dennis
Kozlowski
WorldCom 2002[14] Arthur Andersen United States
Overstated cash
flows,Bernard
Ebbers
Royal Ahold 2003[26] Deloitte & Touche Netherlands
Inflating
promotional
allowances
Parmalat 2003[27][28] Grant Thornton SpA Italy
Falsified
accounting
documents, Calisto
TanziHealthSouth
Corporation2003[29] Ernst & Young United States Richard M. Scrushy
Chiquita Brands
International2004[30] United States Illegal payments
AIG 2004[31] PricewaterhouseCoopers United States
Accounting of
structured financial
deals
Bernard L.
Madoff
Investment
Securities LLC
2008[32] Friehling & Horowitz United States Ponzi scheme.[33]
Anglo Irish
Bank2008[34] Ernst & Young Ireland
Anglo Irish Bank
hidden loans
controversy
SatyamComputer
Services
2009[35] PricewaterhouseCoopers India Falsified accounts
Lernout &
HauspieBelgium
Lehman 2010[36] Ernst & Young United States Failure to
29
http://en.wikipedia.org/wiki/Tyco_Internationalhttp://en.wikipedia.org/wiki/Dennis_Kozlowskihttp://en.wikipedia.org/wiki/Dennis_Kozlowskihttp://en.wikipedia.org/wiki/Dennis_Kozlowskihttp://en.wikipedia.org/wiki/WorldComhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-f2002-13http://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Bernard_Ebbershttp://en.wikipedia.org/wiki/Bernard_Ebbershttp://en.wikipedia.org/wiki/Bernard_Ebbershttp://en.wikipedia.org/wiki/Aholdhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-25http://en.wikipedia.org/wiki/Deloitte_%26_Touchehttp://en.wikipedia.org/wiki/Parmalathttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-26http://en.wikipedia.org/wiki/Accounting_scandals#cite_note-27http://en.wikipedia.org/wiki/Grant_Thorntonhttp://en.wikipedia.org/wiki/Calisto_Tanzihttp://en.wikipedia.org/wiki/Calisto_Tanzihttp://en.wikipedia.org/wiki/HealthSouth_Corporationhttp://en.wikipedia.org/wiki/HealthSouth_Corporationhttp://en.wikipedia.org/wiki/Accounting_scandals#cite_note-28http://en.wikipedia.org/wiki/Ernst_%26_Younghttp://en.wikipedia.org/wiki/Richard_M._Scrush