Magazine article Risk Management

Breaking the Silence on White Collar Crime

Magazine article Risk Management

Breaking the Silence on White Collar Crime

Article excerpt

When Enron executives were arrested in 2002 and charged with crimes including fraud and illegal stock manipulation, it ended what might be the largest white-collar crime spree in history. By the time it was over, the company was ruined and thousands of employees lost their jobs. Enron stock had devalued so badly over the previous two years that shareholders would have had better returns had they bought soda pop and cashed in on the recycling deposits instead.

Perhaps one good thing about the Enron fiasco and other corporate scandals like it is that it has shed new light on white-collar crime. The average white-collar criminal, however, is not an executive looting the corporate treasury but a much lower-grade employee who, by design or by opportunity, steals from or defrauds his or her employer.

Referred to as "fidelity" losses, internal theft and fraud has reached epidemic proportions, according to the FBI. The fastest growing category of crime in the United States, employee theft and fraud costs U.S. businesses nearly $50 billion annually, costs the average business between 1 percent and 2 percent of annual sales, and is responsible for nearly 20 percent of all business failures. The Wall Street Journal has reported that up to three-quarters of all employees steal from their workplace at least once.

Despite all of this, employee theft and fraud remains off the public's radar, says Carl Pergola, director of the litigation and fraud investigation practices at BDO Seidman, LLP. The biggest reason for that is the victims themselves, Pergola says. Most companies, even if they catch employees stealing from them, do not report it to the police, press charges or even take measures to prevent it from happening again.

There are three reasons for this, the first being no perceived benefit. Most companies will investigate fidelity losses on their own. So long as they catch (and fire) the thief and get some kind of restitution--the thief gives back what he or she stole, insurance kicks in, or a third party provides recompense-companies feel their work is done.

There is also a fear of negative publicity. While this is a valid concern for firms whose business is based on integrity or public perception (i.e., a security firm), most businesses, Pergola says, have little to worry about. Still, the specter of negative publicity usually encourages them to take care of fidelity matters quietly and without police involvement.

A third reason is many companies view fidelity losses as isolated incidents. Dishonest employees often have personal issues, such as financial, gambling or drinking problems that lead them to crime. …

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