White Collar Crime in Organizations

Introduction 

Not every crime committed involves a smoking gun. Some crimes can be committed right before the victims without even a single shot fired. White collar crimes refer to criminal acts that are perpetrated by people in the course of business and are committed for economic gain. Such crimes can cost innocent citizens millions of dollars. Usually, white collar crimes are difficult to prosecute, as most of them involve sophisticated systems, as well as many different people 1 . Normally, the individuals committing the crime, including the corporation for which he works can be prosecuted. Big corporations and businesses get involved in fraud in a number of ways, and the public usually bears the burden of loss incurred. Fraud has become common in large organizations because managers and employees fraud their clients by misrepresenting facts through actions and words for financial gain. Such deceit is always deliberate, and it is meant to cause the victim to take action based on the facts 2 . Usually, the action results in significant financial injury. There some elements that should be present in a typical fraud case. The first element is that the false statement of the material fact occurred. The second is that the defendant knew that the statements made were false. The third element is that the defendant made the false statements deliberately and the victim relied on the statements to be true 3 . Finally, the victim suffered the consequences of the false statements. Additionally, such a statement must be considered a material fact. The common frauds that organizations can get involved in include Ponzi schemes, falsification financial statements, embezzlement, and theft. Fraudulent practices in organizations have both direct and indirect effects on the public, with the only beneficiaries being the perpetrators. Thus, fraud is increasingly becoming common in big corporations and businesses, with the investors and the general public being casualties. 

Ponzi Schemes 

Ponzi schemes represent some of how large organizations can get involved in fraud. A Ponzi scheme refers to the payment of money to earlier from funds contributed by later investors, instead of actual returns 4 . Thus, such organizations involved in Ponzi schemes do not invest in any worthwhile business venture, but rather thrive on deceiving investors. Ponzi schemes often fail in cases where there are not enough later investors to pay off the earlier investors. Additionally, problems arise when many earlier investors withdraw and demand payment. It is important to realize that Ponzi schemes can be extremely complex, as not all of them are created equal. 

The most notorious Ponzi scheme in United States history to date is the one that was executed by Bernard Madoff, a criminal mastermind who procured over $20 billion in stolen money. While it is still unclear when exactly Madoff's Ponzi scheme began, the Federal Bureau of Investigations estimates that it was around mid-1980s 5 . Madoff's Ponzi scheme involved soliciting clients who were subsequently asked to open trading accounts. The clients were promised limited risks, along with high returns for their investments. Madoff gained immense trust from his clients, as he fulfilled the promises that he made by paying the investors the exact amount that was promised. However, the clients never realized that the money they were paid was coming from the funds of the later acquired investors. To fully hide the fraud, Madoff managed to create a false portfolio for his clients and filed false statements with the Securities and Exchange Commission. The scheme worked, as it developed into a massive global operation over the decades. Madoff's Ponzi scheme continued up until in 2008 when the economy crashed. As a result, the investors began to pull out from, demanding payment from the company 6 . As expected, Madoff lacked the funds to refund to his clients, who were retreating. Madoff subsequently bowed to pressure and confessed the scheme to his sons. His sons turned him into the police, where he was arrested for a single count of securities fraud. Madoff was charged in 2009, and he pleaded guilty to 11 counts of fraud, theft, perjury and money laundering 7 . 

The United States Attorney's Office requested a maximum prison sentence of 150 years for Madoff. In support of such a harsh sentence, the United States Attorney’s office asserted that Madoff defrauded thousands of individuals and institutions, his crimes took a longer time and were extensive, and that he continued to allow the wrongdoings to occur although he had the power to stop them. 

This demonstrates that organizations can easily engage in fraud to the disadvantage of the public just like in the case of Madoff’s Ponzi scheme. Organizations that deceive investors to open trading accounts with them with the intent of committing fraud can lead significant losses for investors. The potential of Ponzi schemes makes it easy for organizations to engage in fraud, particularly when investors are looking for huge returns. Ponzi schemes are by their very nature fraudulent and criminal. 

Financial Statements Fraud 

Financial statements fraud is perhaps more complicated than other forms of business fraud. This type of fraud refers to the deliberate manipulation or the falsification of financial reports with the intention of misleading the users of the financial reports. The main consumers of most financial reports are investors and lenders. Therefore large corporations can manipulate their financial statements to win the confidence of investors and lenders. Companies with fewer debts and high profits are considered favorable by investors and lenders. Financial statements fraud can involve the portrayal of inaccurate or phony transactions 8 . Additionally, the fraud can also involve the exclusion of relevant non-financial information that could be helpful for both investors and lenders. Financial statements fraud is usually the result of an individual with a vested interest attempting to make a business appear that it was performing better than it is. 

There are hundreds of ways to leave faulty impressions, with more being devised every other day. Most financial statements manipulations tend to fall into various categories including false revenues, inflated asset valuations, hidden liabilities and expenses, and incomplete disclosure 9 . False revenues may take the form of fictitious sales, payments from customer accounts, including other revenue streams that are contrived to give the impression of higher revenue than it is. As such, many organizations may desire to paint a picture of a company whose sales are very high to attract more investors. Inflated asset valuations are fraudulent activities that are usually perpetrated on a company's balance sheet. In frauds involving inflated asset valuations, unrealistic values are often assigned to company property, investment securities, and inventory to dress up the company's values, as well as offset large liabilities. Hidden liabilities and expenses are frauds committed by companies which deliberately conceal their debts. This potentially leads to a stronger balance sheet than it is. When some expenses are excluded from the balance sheet, a misleading state is presented regarding a company's profitability or even cash flow 10 . This is because expenses have the effect of reducing the number of profits made by a company during a particular period. Incomplete disclosure involves hiding some important non-financial information that is considered potentially harmful to a company’s financial position. If such information is not revealed to potentially affected parties may render the financial statements misleading, amounting to fraud. 

The Enron Scandal presents a good example of a financial statements fraud. Enron is a former American energy company. The company became the largest company in history to file for bankruptcy, with $64.3 billion in assets 11 . The Enron Company began to experience huge financial losses and increasing debt in 2000. To hide such shortcomings, the organization began to commit a series of complex crimes with the intention of creating the appearance of financial stability 12 . The company achieved these through manipulation of financial statements. For instance, the company shifted any liability from Enron to another company. However, the company deliberately failed to record this loss in its books. Moreover, Enron lied to its employees and the public by overstating its value significantly. This caused employees and investors to lose a lot of money, and even go bankrupt. The CEO of Enron deliberately misrepresented the accuracy of the company’s financial statements to auditors. Such mischiefs allowed the company to be portrayed better, hence painting a false financial picture to the public and financial institutions. Therefore, it is clear that fraud has negative impacts on employees, investors, lenders, and the general public. This is because losses to employees, investors, and lenders have ripple effects that end up affected other sectors of the public negatively. 

Embezzlement 

Embezzlement occurs when an employee trusted with the handling of organizational property decides to take some or all that property for themselves. Embezzlements may be as simple as a cashier pocketing a few dollars or as complex as a senior executive creating false invoices for fictitious companies in their name 13 . Unlike other forms of fraud, embezzlement involves an employee who is entrusted by the company to safeguard the very property that was stolen. It is typically a crime committed by chief executive officers of large corporations, executives, and managers who hold powerful positions within an organization. 

One such organization that was significantly embezzled was Adelphia, which was the fifth-largest cable provider in the United States. The company became bankrupt in 2002 14 . John Rigas, who was the founder, and Timothy Rigas, his son, ran the company. John Rigas and Timothy Rigas were sentenced to 15 years and 20 years in prison for embezzling the money from corporate investors, and using corporate funds as their own. Adelphia, a company that had operated in the United States for more than 50 years, ended officially in 2006, as the remainder of its assets was purchased by Time Warner and Comcast 15 . This demonstrates the negative impact of white collar crimes not only on the company but also on the investors. It is also important to realize that the employees of the affected companies are negatively affected as they lose their employment. 

Organizational Culture and White Collar Crime 

Each organization or company has the responsibility of setting the prevailing tone among employees, as well as with the external business partners such as investors and lenders. For instance, competitiveness is one of the most important corporate values that are widely held. Good corporate values should be instilled in employees at all levels 16 . This will help organizations to gain a competitive edge. Additionally, good corporate values are essential for economic survival. Ethical and professional controls can be used to effectively guide employees to the moral high ground 17 . It is important to realize that organizations that fail to promote accountability and ethical practices are prone to incidences of white collar crimes. Failure to promote the most appropriate corporate culture in organizations today has contributed to various high profile white collar crimes, which have impacted negatively on different sectors of the public. 

Conclusion 

It is demonstrable that white collar crimes, particularly frauds, have led to immense losses to investors, employees, lenders, and other related sectors of the public. Big corporations and businesses get involved in fraud in a number of ways, and the public usually bears the burden of loss incurred. Fraud has become common in large organizations because managers and employees fraud their clients by misrepresenting facts through actions and words for financial gain. Such deceit is always deliberate, and it is meant to cause the victim to take action based on the facts. Usually, the action results in significant financial injury. Ponzi schemes, financial statements fraud, and embezzlement are some of the common frauds that large corporations get involved in. Appropriate organization cultures that inculcate the right values in employees could significantly help in reducing the incidences of white collar crimes. 

References 

Friedrichs, D. O., & Rothe, D. L. (2014). State-corporate crime and major financial institutions: interrogating an absence. State Crime Journal , 3 (2), 146-162. 

Gottschalk, P., & Rundmo, T. (2014). Crime: The amount and disparity of sentencing–A comparison of corporate and occupational white collar criminals. International Journal of Law, Crime and Justice , 42 (3), 175-187. 

Pontell, H. N., Black, W. K., & Geis, G. (2014). Too big to fail, too powerful to jail? On the absence of criminal prosecutions after the 2008 financial meltdown. Crime, Law and Social Change , 61 (1), 1-13. 

Geis, G. & Pontell, H. N. (2014). The trajectory of white-collar crime following the great economic meltdown. Journal of Contemporary Criminal Justice, 30(1), 70-82. 

Richman, D. C. (2014). Corporate headhunting. Harv. L. & Pol'y Rev. , 8 , 265.