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Tag: William K. Black

Control Fraud as White Collar Crime And William K. Black

 This is fascinating. Essentially William K. Black is modifying out concepts of White Collar Crime (The Lord knows it needs it!).

White collar crime is a concept still burdened by its original definition. These kinds of crimes are no longer centered on such things as embezzlement but on subverting entire nations.

Here Black explains what he means by the concept –

Here’s a fuller treatment by the author.

When Fragile becomes Friable: Endemic Control Fraud as a Cause of Economic Stagnation and Collapse

Individual “control frauds” cause greater losses than all other forms of property crime combined. They are financial super-predators. Control frauds are crimes led by the head of state or CEO that use the nation or company as a fraud vehicle. Waves of “control fraud” can cause economic collapses, damage and discredit key institutions vital to good political governance, and erode trust. The defining element of fraud is deceit – the criminal creates and then betrays trust. Fraud, therefore, is the strongest acid to eat away at trust. Endemic control fraud causes institutions and trust to become friable – to crumble – and produce economic stagnation.

Read More!

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Accounting Fraud – Why Does It Pay So Well?

Can allowing the market to solve all problems really work? Why does accounting fraud work so well? What makes it profitable? Read the following from William K. Black’s column from the Huffington Post.

The “market” also does not deal effectively with externalities (and they can be lethal) and with market power. The neoclassical claim that cartels cannot persist and that potential entry solves prevents all serious ills proved false in the real world. Here, however, I will discuss only why control fraud turns “markets” perverse. Accounting control frauds are guaranteed to report high profits in the early years. This is why Akerlof & Romer (1993) agreed with white-collar criminologists that such frauds were a “sure thing.” I’ve explained why the four-part recipe for optimizing fictional accounting income maximizes executive bonuses — and real losses. In the interest of brevity I will merely mention four ways in which accounting control frauds make markets, and “private market discipline” perverse.

1. The fictional profits fool creditors and shareholders — they are eager to lend to and invest in firms reporting record profits. Rather than discipline accounting control frauds, creditors and shareholders fund their massive growth.

2. The fictional profits and the large bonuses they drive create a “Gresham’s” dynamic in which bad ethics tends to drive good ethics out of the marketplace. The CFO that fails to emulate the fraud recipe will report far lower profits in the near term and will fear losing his job. More junior executives whose compensation is based on the firm’s reported income have perverse incentives to engage in accounting fraud to ensure that the firm “hits the number” and have reduced incentives to blow the whistle on frauds.

3. Lenders engaged in accounting control fraud create “echo” epidemics of fraud. They use their powers to hire and fire and create compensation systems to create perverse incentives in other fields: among their employees, “independent” professionals, and agents (e.g., loan brokers).

4. When several large lenders follow similar fraud strategies they can hyper-inflate financial bubbles.

Accounting fraud is very effective in turning enormours profits for the fraudsters.

This kind of fraud can only be detected by other accountants. Generally speaking an examination of the books is going to take place only after there is suspicion that this is an accounting problem. In these kinds of schemes, that suspicion usually becomes significant at the very end of the fraud.

That’s why it’s important to discourage financial fraud by rigorous ethics training while accountants are in school, legal and corporate protection for accountants acting professonally, and serious penalties for abuse.
James Pilant

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