Fall 2011-Chapter 2- Studying White Collar Crime and Assessing Its Costs and When Fraud Pays

Fall 2011-Chapter 2- Studying White Collar Crime and Assessing Its Costs and When Fraud Pays

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Studying White Collar Crime and Studying White Collar Crime and Assessing Its Costs and “When Fraud Pays: Executive Self­Dealing and the Failure of Self­Restraint” White Collar Crime CRJU E491W­ Fall 2011 William C. Smith The General Problem The General Problem The upper, or white collar, classes have great influence over the definition of white collar crime, as well as the ways in which it is portrayed, perceived, and investigated. Those who wield great social or political control, or influence, over the government’s approach to white collar crime may, themselves, have subjective, or personal, reasons to support , or dissuade, a specific approach. The Challenges to Research The Challenges to Research Complex Nature of the Crime Trend in analysis has shifted from the individual to the organization Lack of objectivity among researchers Competing interests between disciplines such as law, economics, management, sociology and psychology, among others. General inaccessibility to offenders and organizations Lack of consensus on definitions and core concepts Reluctance to share truthfully due to considerations of market and shareholder impact Lack of a dedicated white collar crime database Two Major Research Approaches Two Major Research Approaches In the study of white collar crime, two research approaches predominate: The positivistic approach, which draws on the tradition of the natural and physical sciences, is based on systematic measurement and dispassionate, quantitative analysis; and The humanistic approach, which draws on the tradition of the humanities, is based on interpretative observations and qualitative methods. Research and White Collar Crime Research and White Collar Crime Research methods for studying white collar crime consist of journalistic and scholarly research. Media reports of white collar crime activities are largely a product of what we can be called “journalistic research.” The quality and credibility of such reports vary greatly, as there is an intrinsic bias toward the sensational and getting a good story often takes precedence over a balanced and thoroughly accurate representation of the facts. Even though journalists are trained to use sound methods for collecting and analyzing data, they must often contend with time and space constraints that preclude a full, and accurate, reporting of their findings. Scholarly Research Methods Scholarly Research Methods Scholarly research includes, among other methods, case studies, experiments and surveys. The case study method has been especially important to white collar crime scholarship and involves an in­depth study of a single case or set of related cases, drawing on a wide range of sources. A case study attempts to reconstruct events and provide an explanation for the crime; an especially important consideration given the relative lack of aggregate white collar crime data. A limitation of the method is that it is after­the­fact and may not have general application to other cases in the future. Experiments, which utilize a positivistic, or scientific, approach, are seldom used in the study of white collar crime due, to a great extent, to the difficulties inherent in controlling independent variables in a non­laboratory (i.e. field) setting. Surveys are most readily associated with the study of opinions, attitudes, and beliefs but can also be used to explore experiences. They have proved to be of little benefit in the study of the causes of white collar crime; although they are helpful in determining attitudes towards such crimes. White Collar Crime Prevalence White Collar Crime Prevalence Perceptions of the seriousness and prevalence of white collar crime vary according to the offense committed and the victim’s attributes, such as gender, race, socioeconomic status, or occupation. The prevalence of white collar crime is difficult to determine because data on white collar crime are not systematically collected by any official agency. The issue is further complicated by the lack of a uniform definition of white collar crime and the fact that, typically, victims of white collar crime are much more likely to be unaware of their victimization than are victims of conventional crimes. Additionally, awareness of white collar criminal victimization may not be apparent for years due to the extensive “lag time” for some offenses. Victimization and Self­Reporting Victimization and Self­Reporting Victimization and self­report studies provide a useful alternative to other limited data sources. Victimization surveys, such as that conducted by the National White Collar Crime Center (NW3C), the results of which establish a higher prevalence of white collar crime than what official data sources typically indicate. Victimization surveys are thought to provide a better estimate of the overall prevalence of white collar crime. Limitations of victimization surveys include the potential of both significant underreporting (unawareness of victimization) and over­reporting (fraud). Although self­report surveys have proven a useful tool in the study of conventional crime, their usefulness is less clear when addressing white collar crime. NW3C also produces white collar crime data reports, derived from its surveys, and other publications directed at detection and prevention of white collar crime. Costs of White Collar Crime Costs of White Collar Crime The costs and consequences of white collar crime, although difficult to quantify, are often higher than the costs associated with conventional crime. Costs fall into a number of categories: direct costs (victims’ losses); indirect costs (higher taxes, increased cost of goods and services, higher insurance rates, residual economic costs); physical costs (personal injury and loss of life); and other costs (distrust, alienation, de­legitimation, cynicism). Victims of White Collar Crime Victims of White Collar Crime There is no consensus as to the definition of a white collar crime victim. In a broad sense, all of us may ultimately be victims depending upon the particular type of white collar crime involved. Workers or employees are victimized by hazardous and illegal conditions in the work­place or by managerial practices that illegally deprive them of compensation or other labor­ related guarantees. Taxpayers are victimized by defense contract frauds and by frauds involving banks and saving institutions with government­ insured deposits. Some of us are especially vulnerable to victimization, such as the poor and the elderly. The Impact on Victims The Impact on Victims The impact of losses to any individual victim of a specific white collar crime can range from negligible, often spread among millions of victims, to financial devastation. Even within the framework of a specific white collar crime, the effect on individuals is not likely uniform. An investment fraud may wipe out one individual’s life savings while another individual may lose only a small percentage of personal wealth. Many Enron workers lost their jobs and savings, and felt angry and betrayed, following the collapse of the corporation in the wake of massive internal fraud. Defining Fraud Defining Fraud Legally, “fraud” may be defined as a ‘‘knowing misrepresentation of the truth or the concealment of a material fact to induce another to act to his or her detriment.’’ (Black’s Law Dictionary) In the context of white collar crime, fraud involves one individual’s use of deliberate false suggestion, concealment, or misrepresentation of the truth in order to gain a financial advantage over another person. Essential Aspects of Fraud Essential Aspects of Fraud Fraud involves an act of misrepresentation of fact on the part of the wrongdoer where the wrongdoer knew the representation was falsely made, or was made recklessly without knowing whether it was true or false. Generally, a person’s expression of an opinion will not be treated as a representation of fact that will support a claim of fraud, unless the opinion is stated as a fact, and in such a manner that it would be reasonable for another person to rely and act upon it as a fact. “Puffing” The law allows a significant amount of leeway for “puffing,” or sales talk, which seeks to obtain a consumer’s business through the seller’s statement of opinion as to the value of the item, or items, offered. Puffing is based on the seller’s subjective opinion and, so long as the opinion is not stated as objective fact, it does not form an actionable basis for fraud, even if the consumer relies on the puffing in deciding to purchase an item which, in the consumer’s opinion, does not rise to the seller’s subjective description of the item’s qualities. “This cottage is a handyman’s dream in need of some repair. It has a highly efficient, and cozy, floor plan with easy, direct, access to all interior areas, and is located within close walking distance of local shopping areas.”- Realtor Bonded leather is a vinyl product, backed with fabric and then a layer of latex or other material mixed with a small percentage of leather fibers in the backing material. There is no leather contained in the surface of the bonded leather. The vinyl surface is stamped to give it a leather-like texture.- From Wikipedia (“Bonded Leather”) Why the Concern with Fraud Why the Concern with Fraud The U.S. Department of Justice estimates that fraud, in the health care industry alone, annually accounts for between 3% and 10% of total public and private health care expenditures, or approximately $210 billion. The Internal Revenue Service estimated that tax fraud for the year 2001 totaled $290 billion, or more than 13% of all taxes owed. Since 2001, and the collapse of Enron, a greater focus has been placed on “executive fraud.” Executive Fraud Executive Fraud “Executive fraud,” also frequently referred to as ‘‘corporate fraud,’’ includes such acts as: (1) Falsification of financial information; (2) Self­dealing by corporate insiders; (3) Abusive trading practices including market and transaction timing schemes; and (4) Obstruction of justice with regard to any of the above three categories. A significant characteristic of executive fraud is that it often involves cheating stockholders and a subsequent erosion of investor confidence once the fraud is discovered, with the result that significant market declines result. Why Do People (Dis)Obey the Law Why Do People (Dis)Obey the Law Two conflicting human motives seem to best explain whether a person, such as a corporate executive, will obey the law or disobey it: pecuniary self­interest and moral self­restraint. Traditional economic analysis assumes that people are motivated by pecuniary, or material, self­interest and are more likely to commit fraudulent acts when it is in their pecuniary interest to do so. However, people do not always break the law because of their pecuniary self­interest and there is evidence to suggest that if a law has strong moral underpinnings, notwithstanding a pecuniary self­interest, a person is not likely to violate it. Morality and the Law Morality and the Law In large part, laws are based on some societal conception of morality. Because of the underlying morality, some people may not break the law because they simply want to “do the right thing” and not because they necessarily fear punishment; in other words, they are morally self­ restrained. Two possible explanations for moral self­restraint, where white collar crime is concerned, are a) people are interested in “things other than money”; and b) people have altruistic principles. Moral Saliency Moral Saliency The greater the respect for a particular law or regulation, the less likely is an individual to violate the law. Respect for a particular law may be described in terms of its “moral salience.” Moral salience relates to the societal interest the law in question is designed to protect and the perceived value of that interest to society as a whole. Moral Hierarchy of Laws Moral Hierarchy of Laws Laws can be ranked in a hierarchy of moral saliency based upon their objectives. Generally, the higher ranked the law in terms of its moral saliency, the less likely it is to be violated as a means of fulfilling pecuniary self­ interest. Particularly, where a law has very high moral saliency based upon a prohibited act’s acknowledged moral wrongness, there is almost universal compliance with the law. For example malum in se offenses, such as robbery and murder, are likely to carry great moral saliency. Cognition and Moral Salience Cognition and Moral Salience Offenses that do not have a high degree of moral salience, are more likely, in a given context, to be violated in order to accommodate pecuniary self­ interests of the offender. Some researchers have found, however, that people tend to “bind” their cognition of a law’s moral salience with their actions. When bad behavior precedes moral questioning, people tend to bend their moral beliefs to match their preceding action. When moral saliency precedes the temptation to act dishonestly, people generally tend to adjust their actions to align with the established moral code. Moral Disengagement Moral Disengagement The psychologist Albert Bandura has proposed that a person’s “moral disengagement” from a wrongful act can explain why ordinary people are able to engage in unethical behavior without apparent guilt or self­censure. Bandura concluded that "conducive social conditions rather than monstrous people" are required to produce heinous deeds. Corporate Disengagement Corporate Disengagement Where executive “moral disengagement” is concerned, the case of the collapse of Enron provides an extended insight into the complete failure of moral self­restraint by corporate executives. The Enron case marked a new milestone in corporate fraud. In many previous financial scandals, the interests of the executive wrongdoer and the corporation aligned. In Enron, those interests diverged, resulting in a sort of cannibalism that destroyed the organization. The Enron case also suggests that the violation of financial laws and regulations should be expected when the anticipated payout for wrongdoing becomes too high. The case illustrates what happens when executives have too little respect for legal obligations and a strong­held perception that fraud pays. ...
View Full Document

This note was uploaded on 02/20/2012 for the course CRJU E491 taught by Professor Mr.smith during the Fall '11 term at South Carolina.

Ask a homework question - tutors are online