Corporate Fraud

In 2011, the Federal Bureau of Investigation (FBI) issued 242 indictments and obtained 241 convictions of corporate fraud criminals, resulting in $2.4 billion secured in restitution orders and $16.1 million from fines. By the end of 2011, there were 726 pending corporate fraud cases. Fraud does not just occur in large corporations such as Enron, where over 4,000 people lost their jobs. Any organization is subject to fraud. According to the Association of Certified Fraud Examiners, the typical organization loses 5 percent of its revenues to fraud each year.

Corporate fraud, as defined by the FBI, involves the following activities:

• Falsification of financial information of public and private corporations
• Self-dealing by corporate insiders (e.g., insider trading)
• Obstruction of justice designed to conceal any of the above-noted criminal conduct.

Investopedia's definition states that corporate fraud involves “activities undertaken by an individual or company that are done in a dishonest or illegal manner, and are designed to give an advantage to the perpetrating individual or company.”

Fraud is not isolated to the private sector; both public and nonprofit organizations are subject to fraud, as is illustrated by the fraud perpetuated by vendors who tried to take advantage of E-Rates. E-Rate was established by President Bill Clinton to increase Internet access in schools and libraries. By increasing access, the digital divide between those of high and low socioeconomic status could be reduced. Through E-Rate, schools and libraries are able to acquire the funding needed to connect to the Internet or increase their already existing Internet access.

The Schools and Libraries Division of the Universal Service Administration Company (USAC), which was authorized to monitor the use of E-Rates, failed to provide sufficient oversight. Without oversight or accountability, vendors inflated costs to schools and libraries and sold these institutions unneeded equipment. This fraudulent conduct took place throughout the United States, in San Francisco, El Paso, New York City, Chicago, and Atlanta. The largest of the discovered fraud cases occurred in Puerto Rico, where it was estimated that the former secretary of education misdirected $100 million of the E-Rate funding.

Many individuals can be held accountable for fraud. Even those who are not directly responsible, but may know about the fraud, can be considered liable. The legal theory of scheme liability, maintains that individuals who do not directly commit fraud, but act as secondary actors, can be held responsible and prosecuted for fraud. The Sarbanes-Oxley Act of 2002 was enacted in response to fraud in large corporations like Enron, in which corporate lawyers had some knowledge of financial mismanagement. This law establishes the expectation that instead of maintaining confidentiality, corporate lawyers will communicate up the hierarchy in the organization to report alleged fraudulent behaviors.