Ethics and Small Business Fraud and White Collar Crime
Ethics and Small Business: Fraud and White Collar Crime
Introduction
Officials in respectable positions in institutions and occupations fall into temptations of engaging in irregular practices that amount to criminal offenses in the line of their daily operations. These official jobs are usually referred to as white collar jobs, thereby implying that the criminal liability in this class of operations is referred to as white collar crime. Business officials likewise fall into this category of officials likely to be subjected to the challenges of veering off the temptations to engage in these practices of misconduct (Friedrichs, 2002). It therefore follows that business management faces a number of issues regarding the conduct of employees and officials in dealing with improprieties that greatly reduce the profitability of the entity.
Control of the human resource over the improprieties that gravely affect the operations of the business seems to be an ever elusive topic, with developments in technology that aids in evasion. Justice systems have identified these improprieties and relief is available in several legal classes of proceedings highlighting the criminal liability on the perpetrators. A number of these irregular practices that constitute white collar crimes have been identified examples of which include various frauds, blackmail, bribery, cyber crime, counterfeiting, credit card fraud, currency schemes, embezzlements, extortion, forgery, insider trading, money laundering, tax evasion and welfare crimes. Fraud is perhaps one of the most common forms of criminal liability among many white collar position holders, which makes white collar fraud one of the areas of ethical concerns for the management.
Fraud and White Collar Crime against Ethics in Business
White collar crimes include a class on non-violent practices that are unacceptable before the law and professional regulations and are restricted within the business world. The rate at which these crimes happen in today’s commercialized society has orchestrated the need to have certain considerations in terms of specific legal provisions, professional regulation as well as in management approaches. Despite the devastating impact on individual investments, the performance of the national economy heavily relies on the level of crime and investor confidence that is likely to be affected by irregular practices among business people.
Business ethics are regulations that guide the business fraternity to take part in legal and right conduct that protects the interests of all the parties in the business. Moral principles are attached to ethical business conduct, which entail the conduct of the individual employees and the entire organization (Holtfreter, 2005). Legal frameworks have been formulated in the criminal and justice systems to protect parties to a business interaction from improper and unethical practices. At the individual level, personal conduct is supposed to follow ethical expectations protecting the organization and the customers in the spirit of being responsive to positive outcomes of various needs of the involved parties. Violation of these ethical expectations amounts to criminal liability among the individual employees. At the organizational level, the obligation of protection of the customers as well as the employees and investors clearly defines the corporate ethical code of conduct. Corporate crime arises from the conduct of the organization officials acting as agents of the organization when the protection of the stakeholders is compromised due to various unethical practices deemed also to be criminal before the law. Officials dragging the entire organization into criminal dealings participate in high level form of business crime since the entire entity as an institution is deemed to be involved in the crime.
Business and commercial ethics protecting the stakeholders from adverse effects of white collar crime are aimed at preventing their occurrence and they are backed by legal provisions that attempt to mitigate the effects of such crime. According to Holtfreter (2005), certain perspectives of the corporate crime fail to recognize that the organizational white collar criminals inflict harm to the organization in their personal conduct. Whether liability is passed to the organization or to the specific individuals, white collar crime remains to be problem to individual victims while certain individuals within the organization benefit. The distinction of white collar crime in business transactions regarding the individual offender and the entire organization may assist researcher to formulate appropriate interventions.
Corporate Fraud and the Investor
Investors need protection of their invested resources against fraudulent activities of the business officials due to the risks involved in the outcomes of the ill will. Various investment instruments are usually targeted for attack by the fraudsters due to the little suspicion of the activities of such funds. In view of the fact that the securities markets are heavily guarded by the capital market’s authorities, outsiders are less likely to be involved in the fraud involving an organization’s securities. The most affected type of fraud that affects such investment ventures are partnership interests where some of the investment partners seem to be in control of the group’s securities. Due to an apparent assumption that the capital markets authorities are on the look out for loopholes of fraud in the system, there is a general observation that the occurrence of fraud in securities involves a few individuals in a commonly held consideration of investment. Leaders or representatives of the investment make misrepresentations that amount to swindling of the rest of the group of their investment value (Cohn, 1995).
White collar fraud in investment arrangements has organizational tag thereby making it difficult to control the internal affairs of the partnership. According to Cohn (1995), perhaps the lack of audit regulations for business arrangements other than corporations contribute to the relatively higher risks in partnerships involving investor funds in security business thereby increasing the fraud risks. On the other hand, corporations are required to present their audited books as required by companies’ regulations thereby making it difficult for misrepresentations amounting to fraud at that level. White collar crime in the affected organizations is usually protracted and propagated by a few individuals on whom the responsibility of taking care of investor funds is bestowed. The unsuspecting investors suffer from breach of trust built in the investment relationship which translates to unethical behavior on the part of the involved managers. In terms of legal proceedings, the law may involve the office of the institutional in mitigation of losses and compensation of the investors. However, individual responsibility may also squarely fall on the individual, where the organization is also deemed to suffer from such misconduct. Perhaps much needs to be done to protect investors in other business arrangements other than the public companies which appear to be sufficiently covered by the legal frameworks requiring transparency in operations and books of accounts.
Corporate fraud may however occur in highly improvised deals that may not easily be detected by the regulations barring direct engagement of such misconduct, until revelations are made much later. According to Baumhart (1961), corporate fraud may involve a greatly backed motive in a company’s management such that the fraudulent intentions are almost irretraceable. The management may not necessarily be intending to engage in personal gains but lucrative engagements and undertakings may propel the ratification of transactions and deals that land the company into trouble. When it involves many difficult considerations that the management is required to deliberate on and deliver a verdict that will result in the best interest of the company, fraudulent decisions and considerations may result in corporate fraud. While such instances may be classified under organizational liability of the crime, the most influential individuals in the illegal consideration always bear the burden of the suffering occasioned by the decisions.
Investors and institutions suffering from fraudulent board decisions pay for the mistakes of a few managers making faulty decisions for having donated the role of agency to the fraudulent managers who represent their interests. According to Lane (1953), there are areas of common interest that contribute in the management faulty decision making processes thereby increasing chances of fraud. According to the author, leaders in business institutions are vulnerable to fraudulent decisions just as government institutions. Laxity in following the set out law forms the largest portion of the blame as the managers of specific jurisdictions find themselves between hard decisions making escape routes through fraud the simpler alternative. Every fraudulent case must be interrogated on a specific basis since there several factors that contribute to white collar crime in different settings, including internal standards set out by the management to prevent and mitigate the effects of such occurrences.
White Collar Crime Predisposing Factors
White collar crimes such as fraud, forgery and embezzlement are an area of concern for many institutions which have risks of misrepresentation from the leadership. It is the mandate of ethical regulations and codes to ensure that the unsuspecting public is protected from such practices as would cause losses to them having trusted in the conduct of the occupant of the fraud affected positions. Alternatively, the victims of the cases of white collar crime and fraud must be reinstated to their financial status as before the occurrence of the crime. It is perhaps important to recognize that there are predisposing factors that affect the organizations and individuals experiencing the white collar crime as mentioned above.
In this discourse, organizational predisposing factors are considered due to the impact that the business fraternity experiences from fraud. Perhaps the individuals carrying out the white crime within the business fraternity could assist in the setting out of deterrent systems as well as financial crime detection systems. According to Holtfreter (2005), there are certain features that are common among the perpetrators of white collar crimes which include the following considerations. There are high cases of white collar crime between cohorts of ages between 18 and 25 years and declines progressively above that age. The fact that there are age restrictions for employment opportunities could be a contributor for the minimum age, while achievement of maturity and responsibilities could account for the age distribution beyond the peak. An average of forty years was reported in the study conducted by Holtfreter (2005) in what was termed as typical white collar offenders.
On gender factors, the author found out that traditionally, there were higher chances of white collar crime among males than in females. However, recent trends suggest that the gender gap is closing down but this could be depended on institutional structures and environment which vary from one institution to the other. Alternatively, education achievement considerations for the majority of offenders revealed that high chances of fraud are likely to occur among highly learned individuals, but differences in specialization also points that this involves complex crimes such as fraud and forgery. Less learned individuals are more likely to participate in misappropriation and corruption among other petty crimes. In terms of the position held by the individual, it was observed that the position of the offender in different white collar crimes determined the nature of the crime committed within an organization. As an illustration, the author reckons that higher offices that carry with them higher aspects of trust from the employer are likely to face higher risk crimes when compare to those entrusted with lower cadre positions to man.
In terms of organizational vulnerability, the first as briefly mentioned above involves certain considerations of the features of the organization. Among the most definitive features, the size of the organization determines exposure and dealing with the various white collar crimes. According to Holtfreter (2005), small organizations lack in certain attributes of larger organizations which avail capacity to prevention, detection of white collar crime and provision of appropriate punishment of the various crime types. According to the author, the deterrent capacity of such a complex system becomes a benefit that the small organization cannot enjoy due to lack of capacity to detect and mitigate the involved effects. However, high level crimes may occur in the larger organizations causing such grave concerns that could relatively be said to inflict irreparable damage on the large organizations than those in smaller organizations. The author observes that due to the mix up in the outcomes of vulnerability, white collar crime cannot be said to be a problem due to the size. In addition, the type of business establishment under consideration determines the exposure risk as well as the mitigation system. Complex business systems are likely to expose the business to a number of bureaucracies which increase chances of concealment and evolution of crime loopholes. However, the environment in which the business operations progresses could define the course of business and the safety involved.
Prevention
The type of intervention involved in the counteraction against fraud can be categorized into three types namely; institutional, professional and legal. Although professional regulations in form of code of conduct that assists in dealing with various issues of economic crimes are relied upon in formulation of other forms of regulations and laws, there are distinctions between the enforceability and nature of the rules. Ethical considerations form the foundation of the professional code in which employees and professionals in business establishments are supposed to be guided. Protection of the public against adverse practices forms the foundation of the legal regulations against fraud and economic crimes. Internal and organizational standards are set by the management teams to ensure that the professional regulations as well as legal requirements are complied with at the individual and at the organizational level. Various business types may not be professionally regulated but the internal regulations in conjunction with the legal frameworks set out by the national legal systems is sufficient to deal with the crimes. The formulation of regulations handling white collar crimes is done in consideration of the supremacy of national laws to avoid conflicting positions. Harmonization of the regulations is usually done before the regulations come into force to avoid confusion in the operations of legal and professional frameworks.
National Protection
Government roles in business are very important for certain reasons such as protection of the interests of the public from exploitation by fraudulent business people. As an illustration, the US federal law is clear on the punishments that white collar crimes attract. The national laws are supposed to act as a strong indication of the extent that the government would go to discourage public exploitation through economic crimes. In a number of Federal Sentencing Guidelines, the US government passes a strong message to white collar criminals by imposition of severe penalties that have faced criticism. According to Block and Weissmann (2007), the judicial system is particularly vocal in deterring irregular practices that risks public resources by fact of breach of trust. Some of the strongest critics highlighted by the author include Professor Podgor through some of his works such as Throwing Away the Key where he criticizes the harshness with which defendants face under the Federal Sentencing Guidelines touching on white collar crimes such as fraud.
According to Block and Weissmann (2007), the criticism raised against the national framework of protection of the public against scrupulous deals engaged by those in position of management should be taken with contempt that it deserves. The government should act tough on the criminal mind that targets the unsuspecting public due to the principle of trust involved in a majority of business dealings that white collar crime takes advantage of. A strong judicial system detailed with the evolution of white collar crime is equipped with the mechanisms of detection as well as punishing the perpetrators in a manner that sends a deterrent message to white collar criminals. Adoption of technology in justice systems to involve efficient forensic detection of fraud and other economic crimes has been a milestone in dealing with irregular practices in business. However, it is still a difficult vice that needs an interdisciplinary as well as a multisectoral approach in order for benefits of synergies to act as a fine system deterring, detecting and punishing the perpetrators.
Professional and Management Interventions
According to professional regulations and national guidelines, internal controls are necessary for compliance with the expectations of proper conduct and ethical practices. According to Holtfreter (2005), the organization acts as the most convenient fraud management and prevention level since it has mechanisms of understanding the individuals likely to perpetrate crime. While the perpetrators of the crime could be in the management team, the level of crime at the higher level is considerably reduced if the majority of employees are kept in check through various internal control checks. Major auditing and accounting standards are provided by professional financial and economic groups guiding management teams to deal with internal control.
Internal control standards assist organizations to deal with the criminal problem at source thereby increasing the chance of detection, deterrence as well as initiating and implementing punishment interventions. Alternatively, internally generated control systems such as anonymous reports as well as appraisals assist in regulation of conduct of employees thereby bringing into check possible white collar crimes and irregularities. In terms of implementation and benefits of internal control standards, it is important that the management adopts such systems which increase chances of compliance with professional regulation as well as with legal regulations. As an illustration, setting up independent internal audit office makes it easier for the management to find out irregular financial practices likely to plunge the organization into financial troubles at the earliest instance possible, thereby averting a chain of negative impacts that could affect many more stakeholders. In modern management systems, the management must keep the internal controls updated in order to handle the evolving fraud types.
Modern management is equipped with skills that can handle fraud at various levels of involvement of business transactions. Professional assistance of audit processes and forensic accounting can be used to make management an important point of fraud detection and prevention (AICPA, 2011). Quantification of fraud risk at the departmental level will facilitate the process of fraud deterrence, detection and mitigation as various challenges emerge in the ordinary course of business operations. Evidence gathering through appropriate checks at the internal level can now be conducted using integrated systems that apply financial technology and computer applications. Professional courses that continue to enlighten the management teams in the modern world of hi-tech fraud are very vital in assisting the management to handle economic criminals at the earliest instant possible.
In conclusion, it is very important the management of small businesses understand the impact of unprecedented fraud levels on the performance of the business. While there are many tools to handle fraud and crime among business professionals and employees, there are considerations that must be made to determine the choice of the appropriate approach. Alternatively, the predisposing factors may expose the business to certain risks that must be known to the management in order to enable formulation of a suitable approach.
References
AICPA (2011) “Fraud Prevention, Detection and Response,” Retrieved from: HYPERLINK “http://www.aicpa.org/INTERESTAREAS/FORENSICANDVALUATION/RESOURCES/FRAUDPREVENTIONDETECTIONRESPONSE/Pages/default.aspx” http://www.aicpa.org/INTERESTAREAS/FORENSICANDVALUATION/RESOURCES/FRAUDPREVENTIONDETECTIONRESPONSE/Pages/default.aspx
Baumhart, R. C. (1961) White-collar criminal: the offender in business and the professions. New York, NY: Atherton Press
Block, J. A. & Weissmann, A. (2007) “White-Collar Defendants and White-Collar Crimes,” 116 Yale Law Journal Pocket Part 286, Retrieved from: HYPERLINK “http://thepocketpart.org/2007/02/21/weissmann_block.html” http://thepocketpart.org/2007/02/21/weissmann_block.html
Cohn, R. A. (1995) Corporate misconduct: the legal, societal, and management issues, Westport, CT: Quorum Books
Friedrichs, D. O. (2002) “Occupational Crime, Occupational Deviance, and Workplace Crime: Sorting Out the Difference,” Criminal Justice, 2,243–256
Holtfreter, K. (2005) “Is Occupational Fraud “Typical” White Collar Crime? A Comparison of Individual and Organizational Characteristics,” Journal of Criminal Justice, 33:353-365
Lane, R. E. (1953) “Why Businessmen Violate the Law,” Journal of Criminal Law, Criminology and Police Science, 44:151-165
