Just How Common Is Corporate Fraud?

“The use of the term ‘fraud’ in this article’s title is highly problematic. The authors themselves concede that they use the word ‘fraud’ ‘loosely’ and for ‘simplicity,’” said Joseph Grundfest, a Stanford Law School Professor, former S.E.C. Commissioner and creator of a database that tracks federal securities fraud cases. “But events they call fraudulent include alleged frauds that weren’t frauds, honest mistakes and differences of opinion about accounting treatment. Calling all these events ‘frauds’ is like ‘loosely’ calling a mouse an elephant for the sake of ‘simplicity’ and then rationalizing the overbroad categorization on grounds that both are mammals. Just as mice are not elephants, alleged frauds are not frauds, and differences of opinion are also not frauds.”

The mind-set of a typical fraudster is at the heart of the definitional issues, said Donald Langevoort of Georgetown University Law Center, a former special counsel to the S.E.C. who has written extensively about corporate crime and is familiar with the studies underlying the research by Mr. Dyck and his colleagues.

Legally speaking, prosecutors have to prove intent to defraud, but that’s not easy because perpetrators are often expert at lying to themselves, and defiant about the rules, he said. “People inside Enron were convinced accounting was bad and they are good,” he said. “Executives who think like that will cross the line.”

The S.E.C. recently adopted a rule aimed at changing that mentality. When it goes into effect later this month, it will require registered companies to develop clawback policies. Such rules allow companies to recover incentive-based pay from current or former executives if it was based on wrongly reported financials and the business is forced to do an accounting restatement.

Knowing that their own bonuses are on the line will encourage even defiant executives to be more vigilant, Mr. Langevoort said. But the new rule, and other efforts to crack down on corporate fraud, leave some businesses untouched.

Take Bankman-Fried of FTX, now under house arrest at his parents’ home in California, awaiting trial on an array of criminal fraud charges. He’s accused of siphoning billions of dollars from his businesses, facilitated by the fact that there were few financial records. On social media, in interviews and in his new Substack newsletter, the fallen executive has insisted he didn’t steal funds and could have saved FTX if lawyers hadn’t forced him to cede his spot as C.E.O. and file for bankruptcy in November.

Article source: https://www.nytimes.com/2023/01/14/business/dealbook/how-common-is-corporate-fraud.html