How much does corporate fraud cost you?

Corporate fraud didn't start with Enron, Tyco, and WorldCom and it didn't end with them, either. Fraud is rampant in the technology industry. What most employees, investors, and consumers don't realize is how much it costs them.

Excuse me for stating the obvious, but you'd be surprised how many people think there's some magic pile of dough somewhere that pays for companies to comply with investigations, contest charges, and remedy issues. In fact, the costs are born primarily by the corporation. That means it comes right out of shareholders' and employees' pockets. Consumers also pay, albeit indirectly.

And yes, we're talking about costs that materially impact earnings, balance sheets, and cash flow. We're talking about internal and outside lawyers, accountants, consultants, crisis PR, D&O (directors and officers) insurance, Sarbanes-Oxley compliance, exit packages, and even recruiting costs to replace executives.

Of course, the biggest cost is in terms of loss of market capitalization.

Then there's the unquantifiable cost of management distraction.

How much does this all add up to? Well, let's see.

The Corporate Fraud Task Force claims more than 1,300 corporate fraud convictions since its inception less than six years ago. That includes more than 200 CEOs and presidents, 50 CFOs, and 120 vice presidents. That's a lot of fraud.

Just looking at technology-related companies, federal agencies have successfully brought fraud and related charges against executives of Adelphia, Amkor, Anicom, Apple, AremisSoft, Brocade, Cendant, Comverse, Computer Associates, Dynegy, Enron, Enterasys, Homestore, Imclone, Impath, Integrated Silicon Solution, Juniper, KLA-Tencor, Monster, Network Associates (McAfee), Prudential Securities, Qwest, Refco, Tyco, U.S. Wireless, and WorldCom.

There are also recent allegations against former Broadcom and AOL Time Warner executives, plus ongoing international investigations into Nortel's ex-CEO and CFO, Samsung's chairman, and executives of Siemens AG.

It's hard to quantify the carnage, but it's clearly material on a company by company basis, and over a trillion dollars in aggregate if you include loss of market capitalization.

Whenever I write about fraud at technology companies, I get the sense that there's ambivalence among the IT audience. Frankly, I think that's sad. I'm outraged. In fact, the risk is so high that I no longer invest in individual company's stock, only in ETFs (Exchange Traded Funds).

In any case, whether you're an investor, an employee, or a customer of any company involved in a fraud investigation, like it or not, know it or not, you're paying a corporate fraud tax.

[William Crow]

How much does corporate fraud cost you? About 1/10,000 as much as excessive government spending.

[ewsachse]

What a shill answer. Most excessive government spending is from of corporations that defraud the government when they abuse government contracts. They often bribe crooked legislators and crooked members of the executive branch to get no-bid contracts, and they they reap insane profits from our tax dollars.

[sgtlyon]

Praise the Lord and pass the ammunition!!!

[c|net Reader]

Most Government spending comes from entitlements programs which means the bully extorts money from those that earn it to give to those who haven't. I'd prefer to choose on whom to bestow my money.

Let's not excuse either abuse.

[Kentucky Jeepster]

What a fluff article. Where is the dollar amount? Where is a list of positions that have become a requirement in publicly traded companies since SOX? What about the impact on the jobs of people working in these companies?

Great conversation starter, but I want to hear more about the functions that I support in my role at a Fortune 1000 company. We need real articles and not a brain dump of concepts to leverage a fishing expedition to gather real information for an article. Better luck next time.

[phrogdriver71]

Glad to see that William Crow thinks can use a false argument to think that this type of stealing is right since there is "excessive government spending". I guess it is alright to steal the shoes off a dead guy as he won't be needing them anymore.

As for Kentucky, the author of this article is speculating. He is a journalist and not a gumshoe! Thus he is asking the question in hopes that someone in your position at a corporation might give a little insight and either be a "whistle blower" or an "off the record inside source". Give him some help and he can talk about your functions at that Fortune 1000 company.

[mario83092]

I highly doubt that his comment was insisting the "innocence" of corporate fraud, or even making it seem more righteous than any other type. I believe he was merely stating the fact of which is the greater wrong. Of course his comment is vague, but his fact is true. Excessive spending through congress is causing the inflation of the dollar to reach ridiculous amounts. And what does congress do? ORDER MORE MONEY TO BE PRINTED. That's a great philosophy, sure, for them. Keep fabricating the money out of thin air, because when it circulates back into the hands of the average citizen, it's essentially worthless compared to what it was when in the hands of the Government.

Basic economics tell us that the more there is of a good, the less valuable it is. Stop excessive spending by congress and the reprinting of the money from the US Treasury, and you've created a great way to build "interest" per say, and begin to restore the Dollar's value.

The Bush administration is largely responsible for excessive spending, and during his terms we have become one of the most, (if not the most) in debt than any other country in the world.

A side note is the drug war- 80% of inmates in prison today are involved in drug charges. Approximately 70% of them non-violent, and have no prior history of violence. The current drug czar for the U.S. has an annual fund of about 12.5 million dollars. The Bush administration wants to increase those funds to $225 MILLION. Now, this proves that this country's management on money is backwards as can be. Just think of how much less everyone would have to pay in taxes, income as well as inflation, if we had someone in the position of authority who actually knew anything about money management.

Selah, and do your homework. =]

*Have you googled Ron Paul yet*?

[stobak]

I don't know, is "conversation starter" a bad thing? Is it the same as "fluff?"

In any case, I will do a more quantitative analysis at some point in the not-so-distant future.

Thanks for reading and commenting,
Steve Tobak

[The_Decider]

It find it ironic that you are complaining about it while your blog is dedicated to maintaining the status quo: greed driven business decisions, which is at the root of the fraud issue.

[Tsee-1968031069905097881578618]

There were far more whiners of Sarbanes-Oxley a few years ago. And then the subprime fiasco happened. Yeah, this is what we need to worry. Too many safeguards in place so fewer people can rob shareholders blind.

[c|net Reader]

I'm not quite sure what you are trying to say, but I think you're implying that the solution is Government oversight. I'm sorry to burst your bubble but the Government rarely gets anything right, including regulating and monitoring corporations. I have a radical idea. Let's teach our children good morals so that they become model citizens and improve companies from the inside.