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THE STATE OF OCCUPATIONAL FRAUD
could constitute white-collar crime.” The report also states that businesses are as likely as individuals to be victims of white-collar crime, and that white-collar crimes, on a per-incident basis, are more costly than property crimes.29
From my long experience in the FBI, I also believe federal offense data are of limited use. The White Collar Crime Section of the FBI’s Criminal Investigative Division does keep track of white-collar crimes within the FBI’s purview (not all are), mainly for program assessment purposes and use in preparing budget testimony. The vast majority of these are Bank Fraud and Embezzlement (BF&E) matters, but here again the utility of the data for our purposes falls off rapidly. A BF&E offense may be committed by an employee seeking to defraud the bank (an occupational fraud for our purposes) or an outsider running some sort of swindle. Even this data is tracked only because the financial institution is federally insured, which gives the FBI the basis for its jurisdiction in the first place.
Most occupational frauds (those involving other than federally insured institutions) are usually captured under one of several federal statutes, some of which may not even be within the FBI’s White Collar Crime Program. Typical of these would be Interstate Transportation of Stolen Property, Fraud By Wire, Mail Fraud, and Conspiracy. In recent years, certain categories of computer crimes have been added to such statistics, as have violations of the Economic Espionage Act of 1996.
Again, we have the BF&E problem: From the statistics alone, it is difficult to determine if any of these acts involved an employee and were, thereby, an occupational fraud. Further, each judicial district in the United States, ninety-some in total, has prosecutive guidelines, which they use to prioritize prosecutions. Generally, these are set higher in urban areas than in rural locales. Thus, while a given statute may say that a theft of $5,000 or more will trigger federal prosecution, the reality is that the working number sufficient to arouse federal interest may be $50,000, $100,000, or higher. Depending on the district, matters below this threshold amount are not accepted into the federal system and, accordingly, are not considered federal crimes even though they are clear-cut violations of law.
This problem may, for all we know, be only the tip of a rather large iceberg. As Wells further notes with regard to the 6 percent figure:
Considering everything we know, it may be the best number we can use for the present. It at least gives organizations a rough measure of their potential exposure. Whether or not that exposure is ever discovered is a different matter. We have seen examples of occupational frauds in this book that have gone undetected for years. Except for a fluke of circumstance, many of them could still be thriving today. That, of course, is the most troubling aspect of many occupational frauds: the longer they go on, the more expensive they are. People who start committing fraud will generally continue unless there is a compelling reason to quit.30
Were Wells’ observations not dire enough, there is at least some research that indicates there may be powerful organizational imperatives toward fraudulent behavior. Research conducted in 1996 by Professor Arthur Brief of the Freeman School of Business at Tulane University found evidence that suggested a significant percentage of managers may forget their personal ethics when placed in a demanding business environment. In the study of about 400 executives, Brief found that 47 percent were willing to commit fraud by understating writeoffs that would cut into their company’s profits. Commenting on these findings, Brief noted: “People in subordinate roles will comply with their superiors even when that includes wrongdoing that goes against their individual moral code. I thought they would stick with their values, but most organizations are structured to produce obedience.”31 Brief’s findings may perhaps find support in studies reported in a book by Michael R. Young, Accounting Irregularities and Financial Fraud. He cites several studies that may be a cause for concern, particularly given that they came in a pre-Enron environment. Young notes:
A series of surveys conducted by PricewaterhouseCoopers shows that claims based on alleged accounting irregularities have increased from 25% of securities claims filed in 1997 to 49% just two years later. A similar study concluded that between 1992 and 1998, the number of securities lawsuits based on the need to restate audited financial statements increased by 750%. A separate survey of chief financial officers, conducted on a strictly anonymous basis, found that fully two-thirds had recently been subjected to pressure within their companies to misrepresent financial results. According to the survey, 55% had successfully resisted. At the same time, 12% had not.32