Corporate Crime Through History And Its Place in Corporate America Today
Corporate crimes have taken center stage in our thoughts, imaginations and most importantly on the front pages of our newspapers. Of course, with the recent incarceration of Martha Stewart, we've come face-to-face with the very public persona of corporate crime, but much of the history is behind the scenes rather than on our television screens daily. According to the Encyclopedia of White Collar and Corporate Crime, by Lawrence Salinger, corporate crime has been around as long as there have been corporations. Salinger actually profiles the early corporate crime perpetrators as criminaloids: "The criminaloids encounter feeble opposition and since their practices are often more lucrative than the typical criminal act, they distance their more scrupulous rivals in business and politics and reap an uncommon worldly prosperity. The key to the criminaloid is not evil impulse, but moral insensibility. The criminaloid prefers to prey on the anonymous public. He goes beyond this by convincing others to act instead of acting himself, which protects him from liability and being labeled a criminal, and is instead immune to such scrutiny. The criminaloid practices a protective impersonation of the good. The criminaloid counterfeits the good citizen." (Encyclopedia of White Collar and Corporate Crime).
This matches our perceptions -- and in fact often the reality -- of corporate criminals today. Take WorldCom, Enron and Tyco, for instance. The leaders of these corporations, now disgraced and criminalized, were the most upstanding members of our society. In fact, they, individually and as corporate representatives, contributed absolutely astronomical sums of money to charities and non-profit foundations.
Corporate crime has been more prevalent in recent years, it seems. Is this actually accurate? Most literature disagrees. In fact, recent trends suggest that only prosecution of white collar and corporate crime has risen in the recent years; without any mention of the actual rates of corporate crime, since the crimes that are actually successful go largely unnoticed. (www.thepetitionsite.com)
The most common type of corporate crime, excluding cybercrimes, is insider trading. That is, essentially, what undid Martha Stewart. Corporate officials, with either privileged knowledge of their own firm's upcoming moves, or privileged knowledge of an another firm's moves when they are involved in those moves, sell or buy stocks or other investments offered by the company in order to benefit their own personal accounts. (Yahoo! Business: www.biz.yahoo.com)
Another type of corporate crime was exhibited in WorldCom and Enron: accounting confusion. Basically, corporate criminals work with auditors and accountants, or sometimes on their own, to either inflate or deflate the value of certain subsidiaries of the company, or otherwise hide assets or create fake assets to their own benefit. For instance, in Enron, hundreds of fake corporations were created that held fake value so that high-powered Enron executives could benefit.
WorldCom, for instance, was an example of this. The Oklahoma state attorney filed now-infamous criminal charges against MCI, formerly WorldCom, and six former employees including ex-chief executive Bernie Ebbers and former chief financial officer Scott Sullivan. Ebbers and Sullivan along with former controller David Myers, former director of general accounting Buford Yates, former director of management reporting Betty Vinson and former director of legal-entity accounting Troy Mornam, as well the telecommunications giant itself were charged with 'executing a scheme to artificially inflate bond and stock prices by intentionally filing false information with the Securities & Exchange Commission.'
The State of Oklahoma as well as securities analysts and the investing public allegedly used this information when making investment decisions, the charge says. This resulted in the loss of literally tens of millions of dollars that can be traced, and perhaps hundreds that cannot. (Fortune Magazine.)
State attorney general Drew Edmondson said they were all charged because they almost obviously stood to profit from the scheme. "This is not some rogue employee trying to line his own pockets. This was a conscious decision made for the benefit of the company," Edmondson said. It's the first time Ebbers has been criminally charged, while Sullivan has already faced several federal charges. The charges come just two weeks before MCI begins proceedings to try and emerge from Chapter 11 reorganization following the $11 billion reorganization.
The main takeaway from the WorldCom scandal is Edmondson's observation. The WorldCom scandal was a well-developed and well-planned scheme, rather than the case of one criminally-minded employee trying to steal some cash from his employer. Needless to say, the term "criminaloid" is recalled from the Encyclopedia on White Collar and Corporate Crime. These are not individuals who are viewed normally as menaces to society, like car thieves or graffiti artists. These are upstanding members of society, who are wealthy beyond belief, and who do indeed work hard, and even do contribute millions of dollars to charitable organizations.
As for Tyco, the chief executive officer Dennis Kozlowski was recently indicted in New York City for conspiring with executives and employees of art galleries and consultants to avoid paying more than $1 million in tax to New York City and New York State due on his purchase of costly paintings, including falsifying records to make it appear that the objects were shipped out of the state insetad. Kozlowski has resigned from Tyco in the wake of these charges. The criminal charges against Kozlowski for tax evasion have caused investors to worry that faulty accounting practices may have affected Tyco's performance reports.
This of course may be true, as about $600 million is in question on Tyco's assets sheet. (Business Week).
Eliot Spitzer, the New York attorney general, uncovered evidence that Merrill Lynch analysts had a policy and recommended to their investors that they buy investments they privately described as junk, or even in harsher terms, as the newspapers have been quick to point out. (www.bbc.co.uk)
All three of these scandals differ in tenor and genre, spanning misrepresentation to accounting morays to simple tax evasion. However, one thing they all have in common is the need for accountants and sometimes even auditors (they may be one and the same) to be in on the take as well. Or, at least, they must know or be willfully misled themselves.
All companies are required to submit detailed financial reports to the Securities and Exchange Commission from an "independent" auditing company. There are generally what have been considered to be five major accounting firms which perform the bulk of this audit work.
The "big five" accounting firms, as they are known, have increasingly turned to "management and consulting services" as a revenue source to augment their accounting practices to the extent that audit fees represent less than half of their revenues. This disturbing trend has been accomplished primarily in the last ten years or so.
Several major corporations have spent over 90% of their fees to accounting firms for these such management and consulting services, an ambiguous nomenclature without a doubt.
Critics maintain that auditing firms should not be compromised by providing consulting services to the companies that they audit. Indeed, this is one of the solutions to the corporate crime quagmire in which we find ourselves today. We must make sure that accounting and auditing and consulting are all kept separate, and force corporations to hire different entities for each, so that there are minimal conflicts.
These big five accounting firms have contributed heavily to federal election campaigns as well, which obviously complicates issues. Politicians are reluctant to bite the hand that feeds them and cut off a major source of the big five's revenue by forcing separation of church and state, if you will: separation of accounting and auditing.
When compared to revenues, campaign contributions of four these firms were among the top 10 political givers in the entire country. That is exactly why until the recent wave of corporate scandals, the accounting industry has successfully resisted congressional and regulatory efforts to separate the auditing and consultative functions. In 1995, the industry was able to convince the Senate to override a Presidential veto and pass legislation which limited the liability of accounting firms in shareholder litigation: a House and Clinton-administration failure that was far too prescient for comfort.
The accounting firm most under fire has been Arthur Andersen LLP. Andersen was founded in Chicago in 1913 and provided reputable and nearly peerless accounting services for nearly a century. In the aftermath of its felony conviction in the Enron matter, Andersen stopped providing Securities and Exchange Commission audit services and the firm has now been dissolved.
In Anderson's case, the conviction resulted because its "Enron project" employees shredded and destroyed crucial financial and accounting documents relating to Enron's operations. The irresistible temptation for complicity between Andersen and Enron is quite logical because its auditors and accountants had permanent offices in Enron's building. In fact, its staff wore Enron golf shirts, attended Enron parties and ski trips and generally were difficult to tell from Enron staff. Indeed, M=many Andersen employees were "promoted" and shifted into positions with Enron. Finally, Enron paid more for Andersen's consulting services than it did…