Big name corporations more likely to commit fraud: study
news.wsu.edu
news.wsu.edu
This type of analysis has some obvious limitations:
- Fraud is more likely to be recorded in public record when committed at big corporations. Many small companies also commit fraud, but it goes unnoticed, unpunished, or otherwise not recorded in ways accessible to researchers because they're too small to make waves. Maybe too small to bother prosecuting.
- Big companies have, by definition, more people, more activity, more transactions, and more opportunities for fraud. It's a mistake to assume that all fraud is orchestrated from the top of these companies. Often, it's mid-level managers looking to get a bonus, raise, or promotion who think they can get away with fraud in their little department.
In my anecdotal experience, big companies are far less likely to behave fraudulently than small, local companies. A big company knows that endemic fraud is a death sentence for their reputation and can bring intense regulatory scrutiny. A small company knows that they can defraud you out of a couple thousand dollars one time and it's not worth your time to pursue legal action.
Of course, most small companies I've worked with are not out to defraud your customers. Building a long-term relationship with a small company can be much more fruitful than being customer number 10,001 for a big company.
Always be careful, regardless of who you're dealing with.
In my anecdotal experience, big companies are far more likely to have figured out how to walk barely on the legal side of the line. It may not be fraud per se, but it doesn't feel different on the receiving end.
Here is an example that I saw while working as a consultant at Bristol Myers Squibb. They had perfected the art of paying a lot of their bills at the last possible moment. And were happy to accept penalties to delay it more. With the explicit hope that suppliers would go broke and out of business before successfully collecting, and then they wouldn't have to pay at all.
I was horrified, and the accountant who told me about it was describing how terrible it was to be taking calls from people whose life's work was going under, and be unable to pay them what they were owed because corporate policy was clear.
And none of it was actually fraud. They were very careful to stay just within what the contract allowed.
My family used to be in food processing. Walmart was one of the only grocers to pay their bills on time. We made next to nothing on the Walmart orders but we could count on the cash arriving when they said it would.
Everyone else, they would pay late or need to be endlessly reminded.
If the company you owe money to goes bankrupt that doesn’t absolve you from paying your bills.
If you’re a big supplier for BMS I assume your a critical part of their business, so why would BMS want you to go under?
If you’re a small supplier you wouldn’t even get on the radar of BMS leadership. Paying a small supplier a few million is a blip on BMS balance sheets.
Yes, big corps manage cash flow very tightly, will force unfavorable payment terms on suppliers, but using that as a strategy to bankrupt them? I doubt it. If anything big companies like BMS are risk adverse as hell.
Wouldn't accounts receivable be among the dead company's assets to be redistributed to creditors?
Hm, but small crime under the radar just as well apply to big corporations, meaning just as probably small company fraud might have been overlooked or ignored, so was probably lots of small crime on the big corporations.
So the bigger point still stands.
And what does it have to do with media coverage?
"We compiled data on 250+ US public companies involved in corporate securities frauds identified in 1,000+ Securities and Exchange Commission filings over 2005–2013"
I would assume their data is from the state from actual judgments and not that they dig in newspapers archives.
> Findings were robust to various empirical measures and additional controls for undetected fraud.
Otherwise, I think logic would dictate that greedy people try to get into bigger companies where decent amount of money is moving.
Same for fudging the books, it starts to make sense from a risk perspective if there is a decent amount of transaction to hide fraud in. For too small businesses, fraud will be more limited to not recording events (gifts etc.), and those arguably occur whatever the size of the company.
To put it differently, I think big companies will be more of a fraud magnet, and they’ll need super serious effort to guard against it. Those efforts are often not good enough/not incentivized so it’s bound to happen more often.
From the abstract I assume they looked at the group that was reported to the SEC for fraud and compared to a random selection of 500 companies and then compared what percentage amongst those two groups were big corporations, growth pressures etc..
Regarding the control for undetected fraud, there could be various methods that one can employ (e.g. when one has some statistics about undetected fraud for example). From the formulation in the abstract I assume that when they apply the controls their findings don't change, so with or without the controls large corporations are more likely to commit fraud.
If you were to measure the amount of fraud per capita, small corporations might dominate; but it's the impact or scope of fraud that makes one fraud more important than another. And even if fraud within an organization is not coordinated from the CEO down, it's still the organization as a singular entity that's held accountable for the behavior of its parts.
I'd imagine it's kind of a bell curve, with very small companies more likely (since some of those are 'fly by night'), increasing to some point due to more oversight / legitimacy needed to run a bigger organization, until they start to become powerful enough that corrupt people can hide things or accept fraudulent actions as a 'cost of business'.
Didn't investigate methods (and wouldn't be very qualified to judge anyway), but this study might not catch the smaller fish, so it would skew towards only catching the bigger ones, leading to the conclusion
It's rarely fraud in the legal sense of the term, but it's definitely fraud in the moral sense. They exploit information asymmetry (in one case, the main customer base was mostly teenagers unaware of their options such as card disputes or small claims court) or make it hard for people to claim compensation in case things go wrong, relying on the fact that most people won't bother for the relatively small sums (though at scale that adds up to quite a bit of money).
Maybe someone with access (OpenAthena, Shibboleth) could post the stats and methodology.
> This type of analysis has some obvious limitations:
> - Fraud is more likely to be recorded in public record when committed at big corporations. Many small companies also commit fraud, but it goes unnoticed, unpunished, or otherwise not recorded in ways accessible to researchers because they're too small to make waves. Maybe too small to bother prosecuting.
From the article >We compiled data on 250+ US public companies involved in corporate securities frauds identified in 1,000+ Securities and Exchange Commission filings over 2005–2013; we randomly selected a comparable control group of 500+ US public companies from Compustat. Based on logistic multivariate regression analyses, marginal profitability, a strong growth imperative, and firm prominence were significant fraud risk factors. Prominent Fortune 500 firms were more susceptible to marginal profitability and/or strong growth-opportunities as risk factors.
So it seems they only compared public companies and used SEC filings for identifying fraud, are you saying fraud for small public companies is less likely to be reported to the SEC than for large companies? Otherwise your argument does not apply.
> - Big companies have, by definition, more people, more activity, more transactions, and more opportunities for fraud. It's a mistake to assume that all fraud is orchestrated from the top of these companies. Often, it's mid-level managers looking to get a bonus, raise, or promotion who think they can get away with fraud in their little department.
That does support the thesis that large companies would commit more fraud. I didn't see a claim that fraud is orchestrated from the top.
> In my anecdotal experience, big companies are far less likely to behave fraudulently than small, local companies. A big company knows that endemic fraud is a death sentence for their reputation and can bring intense regulatory scrutiny. A small company knows that they can defraud you out of a couple thousand dollars one time and it's not worth your time to pursue legal action.
So after dismissing the representative research you bring up your anecdotal evidence. Was the motivation behind dismissing the presented research maybe that it doesn't match your own experience? This is a common psychological trap to fall into, but just because something does not match our own experience does not make it necessarily less true.
> Of course, most small companies I've worked with are not out to defraud your customers. Building a long-term relationship with a small company can be much more fruitful than being customer number 10,001 for a big company.
> Always be careful, regardless of who you're dealing with.
Rented a house from Invitation Homes. Show up. All windows open. House looks great, sign paperwork. Agent leaves.
Closed up windows, notice a chemical smell. Call, and told it’s just new carpeting, will be gone soon.
Me and family proceed to get extremely sick over the next months. Like people can’t wake up, forgetting names, stroke symptoms, etc.
Many calls got nothing but run around. Our mental capacities are greatly diminished.
Turns out there was a massive natural gas leak. Plus multiple appliances emitting Carbon monoxide.
Gas company stated it was a race to dying in sleep or house exploding.
So they knew house had weird smells and fed us endless lies about carpets, flooring, paint etc.
Carbon monoxide detector that came with the house was defective.
Destroyed health and career. One kid went from advanced placement to special needs. Dog went insane.
We also had a wall catch on fire, ac drop through a ceiling into kids room.
We left moment we could, and have a nice big bill from them for breaking lease.
Invitation Homes is straight up evil.
Were you able to find who lived there before you and if they had the same thing happen to them, then you have a much better case.
Plus they had no idea what 3 months of natural gas exposure would do to body.
Turns out most cases of being exposed to that much and that long simply end in explosion.
I wonder if there are lawyers who specialize in this kind of thing.
No one believed me. Kept shoving anti-depressants at me.
Took better then 2 years to find out what the stroke like symptoms were. They were strokes, go figure.
Toxic exposure activated factor 5 Leiden. So my blood clots like crazy now. Wasn’t an issue before.
Again, doctors don’t like to get involved.
Wife had a horrific cough for a year, then recovered. Kid isn’t the brightest anymore. But that’s hard to prove.
Overall you experienced systemic failure: the business fails to protect the customer but isn't held accountable, the health profession focuses on managing the individuals mental health instead of recognizing the exposure¹, government regulation did not protect you or help you afterwards. Legal needs evidence and money to make it work. It's all too hard and no one wants to know.
Whats really scary is that happens more than you think... And unless you are a part of a class action of people with similar issues, or you have power and influence, or it is a widely recognized issue, its really hard to deal with.
Look after yourself, your family and do your best.
¹ There could be studies in medical journals, or toxicology reports published by govt or others, but that doesn't mean your doctor will read or follow them. They might help extend your understanding though.
There are tons of risk factors for everything. If you're a smoker, and you worked in an asbestos factory, did the cigarettes or the factory give you lung cancer?
I'm a little surprised that some kind of gross negligence doesn't apply, regardless of any damages proven. Perhaps there wasn't any evidence they were aware?
Weird experience
Alternatively, the SEC might be more interested in looking into larger companies.
$0: 2.04%
<$25k: 0.69%
<$50k: 0.48%
<$75k: 0.54%
<$100k: 0.45%
<$200k: 0.44%
<$500k: 0.53%
<$1M: 1.10%
<$5M: 2.21%
<$10M: 4.21%
>$10M: 6.66%
(Your article concurs: "Only households with income above $1 million were examined at significantly higher rates.")
Also, there is a lot of detection lag. Enron committed crimes for quite a while before they got caught. So did MCI.
"We compiled data on 250+ US public companies involved in corporate securities frauds identified in 1,000+ Securities and Exchange Commission filings over 2005–2013; we randomly selected a comparable control group of 500+ US public companies from Compustat."
Nothing was discovered here, and the title is not supported by their methodology
It's being used in all sorts of contexts, e.g. violent crime, men are X times more likely to commit violent crime. That number comes from instances of violent crime and then you related the percentage of instances committed by men to the percentage of men in the population.
That's the exact same methodology, except here in this study they use the control group to find what the average size of a public corporation is.
"Securities fraud is a universal regulatory regime; anything bad that is done by or happens to a public company is also securities fraud, and it is often easier to punish the bad thing as securities fraud than it is to regulate it directly."
this right after:
"And so contributing to global warming is securities fraud, and sexual harassment by executives is securities fraud, and customer data breaches are securities fraud, and mistreating killer whales is securities fraud, and whatever else…"
[1] https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...
The point of TFA likely still stands, but I wonder to what extent the points from Levine's Bloomberg article colors, or skews the data.
Edited for formatting
If you do anything illegal, and there was any kind of economic transaction involved, you almost certainly committed money laundering.
If anything illegal happened, and the USPS was involved in any way... you're on the hook for federal mail fraud charges.
What people fail to see that these small crimes like theft, drug dealing, assassinations are done because white-collar criminals can launder money. If the money can't be laundered, drug money loses much of its worth.
It is understandable that seeing young men lying dead in the street is more tangible than a bank looking away or cooperating when they come across suspicious transactions. Yet if we want to really have an impact we'll have to do something else than (just) busting small time criminals for their crimes. The big guys make the small guys do the dirty stuff.
The probability that two individuals j, k will not commit fraud is (1 - P_j) (1 - P_k), which is smaller than either probability.
Therefore, the probability that fraud is taking place in an organization increases with the number of employees:
1 - (1 - P_1) (1 - P_2) ... (1 - P_n)
Sheer organization size is a predictor for occurrence of fraud; with increasing size, the probability tends toward 1.
We can know this without gathering any data at all, just by remembering high school probability and stats.
"Big name" is not the same thing as "big", but organization size correlates with fame. "Big name" is a facsimile for "big".
That assumption is not right. As corporate culture can encurage fraud by setting up unrealistic goals and rewarding fraud (if not get caught) - or it can really encourage to play by the rules.
And I assume this is what this study is about.
(also I hope that they taken size per employes into account)
Meanwhile smaller companies will have a lot of first time fraud.
Remember Amazon sellers? Once their reputation is tarnished they just create a new identity.
I've had "small businesses" be more than happy to do work that I don't need under the excuse that something is failing. Or run the charges because my insurance will pay. I had one or 2 electronic stores try to do a bait and switch. I've found that small businesses are more hungry to make a sale and are therefore more likely to be a bit more shady than the bigger companies.
If I have a choice I always pick the bigger company that has a reputation to protect over a small business that I don't really know.
Isn't that something. We spend most of our effort chasing the crime of least consequence? Now why would that be?
Conversely, white collar crime absolutely does cause physical harm, as does most economic ruin, which is highly correlated with morbidity for the less fortunate.
Two things that strongly support this are stranger kidnapping and domestic terrorism. Among possibilities that might take loved ones away from us, these are about the least likely.
> Feelings of safety are moreso a product of the media
The media reports distant tragedies as if they occurred in our own communities, leading the public to carry a sense of threat that doesn't reflect reality. However, the media is parroting (and amplifying) the messages that are given to it from LEO, Gov's and other official channels.
The media's shortfall is to trust Gov/LEO messaging, without spending the few moments of analysis to vet it's integrity.
I was pointing out their ineptitude. Vetting info before publishing is 101.
Citation needed.
> How rich or poor a country is doesn't really imply how safe.
Well, only because that's measured in a way that means Bill Gates could make Tuvalu the world's richest country simply by moving there. That has no bearing on whether rich people are safer – and whether extreme poverty makes people more of a risk to others.
Crime is something a person does, not who they are. When people do things, they do them for a reason. The most common reason for street crime is extreme poverty, and the most common cause of extreme poverty is white-collar crime.
You lost me there. Do you mean that a) of the set of extremely poor people, most are extremely poor because they've been the direct victim of white-collar crime, or b) white-collar crime as a whole is the leading cause for extreme poverty in a society?
Both interpretations seem very wrong to me. Do you have any data to back up that assertion?
Criminal is not a race. It is not a class. It is not a profession. Nobody is a criminal until they do a crime, and anyone can do a crime.
Most crimes are done by poor people in desperation at great risk. The most harmful crimes are done by rich people out of greed with very little risk.
That seems like a mistake since it can so easily and often cause poverty.
Who is the victim when banks steal from millions of people?
The bigger question is who are the criminals? You can't throw the building in jail, and just because a negative emergent behavior manifested doesn't mean any one person had to have taken an action rising to the level of criminal culpability.
If that is true (and I think it is) I would argue the law is wrong. It should absolutely be the case that senior executives have criminal liability for criminal behaviours that emerge under their stewardship whether or not they personally contributed to them. Either they knew about it in which case they're complicit or they didn't in which case they're negligent. The risk of criminal liability is also the only possible justification for the high current level of CEO pay relative to average salaries at most big name companies.
I think some care should be taken in being too reductive here. If a CEO oversees just 50 people (maybe companies should be capped at smaller sizes?) then there will be at least a 50:1 information reduction even if they spend all their working hours in 100% efficient information transfer. Moreover, in many cases I would expect the bulk of that missing information to be the more negative aspects of the business -- who wants to look bad to their superiors?
Adding to that, defaults matter. If by default a CEO is culpable then it's suddenly possible to force them into jail by simply joining as a malicious employee.
> The risk of criminal liability is also the only possible justification for the high current level of CEO pay relative to average salaries at most big name companies.
Not necessarily (I think the idea is that they're paid a lot because they bring in proportionally more profits/cashflow/etc?), but I agree it's a little fishy that a CEO can take credit for large gains and be handed a golden parachute when a company's fraud sees the light of day.
I'm curious as to why you think the state taking over temporarily would have positive effects. Would you mind elaborating?
Not only this, but term "white collar crime" has been abused to include what is properly termed "implies unwanted externalities", and so it weakens the meaning. Enron executives are not criminals simply because their industry pollutes! Nor are bankers criminals simply because their industry depends entirely on enforcing artificial scarcity and information asymmetry. Crime specifically requires breaking a law!
Another related disturbing trend that weakens the concept of "white collar crime" is the "wouldn't you gave done it, too?" argument. That is, to defend cheating or bad faith behavior by arguing that you would have done if you were in the same situation. There is a lot wrong with this kind of argument, and it is similar to "whataboutism" in that it functions as a kind of strawman that tacitly assumes egoism and moral relativism, and moreover projects that lack of principle onto the counter-party. (And if you claim you wouldn't do that, the other person can say you are posturing, etc. A very nasty rhetorical tactic indeed!
None of these effects are really new, but I think what is new is that the attention economy has as a side-effect cause an overall drop in the critical thinking skills needed in a large chunk of the population to ensure these cognitive mistakes don't become official policy. There has always been an unofficial bulwark against populism in America, comprised of the "elite" - the well educated, thoughtful, articulate, careful men and women trained in philosophy, morality, and religion, and who are wealthy enough to have time to spend on such matters. Obama was and is such a one. But apocalyptic levels of egoism and intellectual laziness has spread to all corners of our society, even, shockingly, to the elites themselves. (See: Josh Haweley).
The net effect is to weaken the notion of "white collar crime" into nothingness, which is great news for those that do it, and terrible news for the rest of us.
Not sure about this point. They're only not criminals because their industries can afford lobbyists and few others can.
To put it another way, lobbying is not illegal, therefore the fruit of the lobbying, to make something legal that should not be, is also therefore allowed. But this (roughly speaking, campaign finance reform) is another issue that, like white collar crime, is too abstract to produce outrage, and therefore, too weak to produce enough votes for change (as Bernie discovered).
I'm sorry to get the big name out, but. It's really part of the Marxist framework that there's mostly no willful conspiracy against the worker class, the balance of power is a result of a complex but understandable system, with some corrupt actors but they don't need to be, they just have conflicting incentives.
"9 times out of 10 they are not going to see the inside of a prison cell because their behavior...doesn't really need much reformation in the eyes of the people in power. Keep doing almost everything you're doing...keep working, keep creating jobs, keep starting new companies and going to badminton on Sundays...just pay your taxes. Whereas the guy that robbed the Taco Bell...it doesn't matter if he marches back into the store...hands over the 85 bucks directly to the manager...baby birds the burrito supreme back into his mouth...9 times out of 10 that guy is going to jail because the goal of the penal system is reforming criminals to fit a pre-existing mold of what a normal person is."
Of course this doesn't get into the very real issues of how modern US police departments work, systematic racism and other factors, but it's still an interesting perspective IMO.
*transcript: https://www.philosophizethis.org/podcast/episode-121-transcr...
What we have is a vengeful, punishment oriented prison system that is designed to bludgeon people for not fitting in, and also incidentally using them for slave labor.
That's an even stronger argument in favor of prison time for white collar crime because you cannot rehabilitate the perpetrator, you can only punish him.
Meanwhile for someone who is prone to violent behavior it is the opposite. That person still has the potential to do less damage in the future.
The primary reason for its current form is to appease the “fire and brimstone” folks who think that crime must be a result of inherent moral failings that can never be stamped out, so it’s simply what those folks deserve. It’s the flip side of the so-called Protestant work ethic. Go to literally any news article regarding a crime, and there are still plenty of eligible voters who want even more tough-on-crime, as if that has ever solved anything.
For reasons of a systemic nature, people seem to not call for this so passionately for white collar crime or the type of criminals who tend to perform it. There are very rare exceptions like Bernie Madoff but that is the exception and not the rule.
I would rather lose $1000 in the stock market because a company cooked the books than $50 by mugging or home burglary.
But you can single handedly sign off on some environmental fraud that kills/maims a hundred people and their unborn children
Sure, a big part of the problem is white-collar crooks working in industries that possess a lot of power to manipulate the world we live in, but we can't just absolve ourselves of responsibility. If you think it's a problem, find the most impactful ways you can help resolve it. Simply talking about it and convincing yourself that "you made more people aware of it" is not very impactful if that's all you're doing.
The policing system needs an overhaul
Who donates money to fund the studies?
I know someone else commented that my view is American, but the original article is about the (American) SEC... so... I will double down and show evidence from my home state: Pennsylvania.
https://www.psp.pa.gov/About-PSP/Documents/Pennsylvania%20St...
The whole idea of the PSP was to create a less violent force to control labor (compared to the companies' private security solutions).
The (downvoting) reader is encouraged to repeat this exercise for their own locality.
HSBC money laundering for criminal cartels. Big companies will commit outright crimes and when caught, simply pay some fines that is much less than the profit.
How does the market differentiate between money losing startup, like Amazon of past, and some money losing penny stock pitching free energy electric car engine, aka perpetual engine ? Lots of muddy waters and shady regulations that hide many fraudulent companies preying on people.
Curious if this has something to do with the type of law firms/accounting firms these big companies hire -- as opposed to smaller firms hired by struggling companies, that have more to worry about when it comes to reputation (aka the companies aren't forced to use them every few years, as with big acct firms)
Where does the article say they corrected for that, and what miraculous method did they use?