Corporate Fraud is Up Dramatically: Has anyone told John Cochrane?

By William K. Black

John Cochrane, the U. Chicago apologist-in-chief for elite corporate criminals, might want to read what the industry says about fraud.  Cochrane claims that the reason we have a modest economic recovery has nothing to do with inadequate demand, but is instead caused by government civil suits (not even prosecutions) against the financial industry’s massive frauds.

Cochrane apparently knows that corporate fraud does not exist, which is why he describes the government’s civil fraud suits as a “witch hunt.”  As I’ve described several times, Cochrane refuses to read the relevant criminology literature, but perhaps he’s willing to listen to the industry.

“If You See Something, Say Something: The quarterly examination of fraud reporting activity for the fourth quarter of 2013 from almost 15 million employees worldwide by  governance, risk and compliance services firm The Network Inc. and BDO Consulting reached a record-high of 25.83%. The survey of more than 1,400 organizations measures fraud reporting in comparison to all compliance reporting activity. ‘Fraud continues to be a huge risk in the workplace, and while it is concerning to see fraud growing as a percentage of all compliance issues, it’s reassuring that these incidents are being caught and reported,’ said Luis Ramos, chief executive of The Network.”

The underlying Network report adds these facts:

“As evidenced by The Network survey, there continues to be an increase in reported fraud incidents, which is consistent with the increasing volume of notable transgressions we are seeing in our investigative practice. Common incidents include FCPA violations, Ponzi schemes, as well as financial reporting, procurement and healthcare fraud.”

But there are two kickers that need discussion.  First, the Network survey does not, of course, report control frauds.  It reports almost exclusively the vastly smaller and less costly frauds that corporations (sometimes) report when they are led by non-controlling officers.  These lesser frauds are still “huge” and growing.  A single enormous control fraud can cause greater losses than all the frauds reported to the Network combined.

Second, why are the lesser but still “huge” kinds of fraud that are reported to the survey still growing despite what Network/BDO claims are ever more effective anti-fraud mechanisms?  Two obvious possibilities exist.  They are not necessarily mutually exclusive.  It could be that the anti-fraud mechanisms are more effective in identifying these frauds and this leads to increased fraud reports because frauds that previously escaped detection are now reported.  This would be a good news/bad news situation.  It could mean that the true incidence of fraud was not increasing as much as the survey indicated, but it would mean that the true incidence of fraud was even higher than thought in the past.

Another possibility is that “middling” frauds are increasing at least as rapidly as reported in the periodic surveys.  This would be true if control frauds were increasing because one of the imperatives of control fraud is to degrade the entity’s internal controls and ethics.  It would also be true if Gresham’s dynamics were arising.  The report specifically mentions (FCPA) violations.  The Foreign Corrupt Practices Act is a classic example of a Gresham’s dynamic in which those that cheat gain a competitive advantage in the absence of effective enforcement.  A Gresham’s dynamic can cause fraud to grow to the point that it dominates entire industries.

Oh, and will someone please tell Cochrane that he better tell private industry to stop their witch hunt against frauds so that our economy can recover more quickly from the Great Recession.

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