December 3, 2003
Cracking down on corporate fraud
Two recent reports issued by the U.S. Department of Justice indicate that the rate of property crimes in the U.S. dropped to a record low in 2002. But LBJ School Professor Bill Black argues that if the Department of Justice counted serious frauds a “property crime” the outcome would be bleak. According to Black, who heads UT Austin’s Institute for Fraud Studies, major white-collar crime has dramatically increased over the past five years, and resulting losses can be measured in the trillions.
“The key point is that neither of our major national measures of ‘property’ crime includes the most serious property crimes,” said Black. “Whether you measure it by number of victims, dollars stolen, financial damages caused (which is frequently far larger than dollars stolen), or some composite index of the above measures the really big property crimes in the U.S. (and worldwide) are fraud.”
Few people possess Black’s level of insight about how corporate fraud happens and why the government fails to prevent it. Black, who served as the director of litigation for the Federal Home Loan Bank Board during the savings and loan scandals of the 1980s, contends that there are many similarities between the most recent wave of fraudulent accounting practices and those that occurred 20 years ago. He argues that if U.S. policymakers would draw from past experience, large-scale accounting fraud could be prevented in the future.
Identity theft, tax fraud, health care fraud and securities/accounting fraud make up the four major categories of fraud. While tax fraud has far greater numbers of perpetrators, securities/accounting frauds cause the most widespread damage. According to Black, virtually all securities/accounting fraud is tied to the element of corporate control. A seasoned criminologist, Black has developed a control fraud theory that explains how CEOs manipulate accounting practices to cover up massive financial losses and how the political climate helps to create a “fraud-friendly environment.”
To assist the U.S. Congress in understanding the complexities of corporate fraud the Congressional Research Service has commissioned Black to lead a team of LBJ School students in a Policy Research Project (PRP) on how corporate governance reforms and legislative, administrative and private efforts can curb fraud and insider abuse. The information and data collected by the PRP will assist the Congress in apportioning funds to areas where they are most needed and in identifying areas at greatest risk of fraud and abuse.
Using an interdisciplinary approach, the team is examining banking, securities, and energy regulators to see how these organizations deal with external fraud issues and how they evaluate risk. The team is trying to determine why the Government Performance and Results Act (GPRA) proved so ineffective in preparing federal agencies to prevent the ongoing wave of control frauds. They will also create a catalog of all sources of existing data on securities and accounting fraud and insider abuse.
To understand why regulation has not been more successful, the PRP team is performing detailed case studies of three major failures: Enron, the California energy crisis and Tenet Healthcare. The idea is to show how fraud can occur in very different contexts and result in very different outcomes -- loss of market confidence, energy blackouts, and in the case of Tenet Healthcare the alleged deaths of more than a hundred individuals. The project will issue its final report to the Congressional Research Service next summer.
Black has a Ph.D. in criminology, law, and society from the University of California at Irvine and a J.D. from the University of Michigan Law School. His professional background includes appointments as Deputy Director of the Federal Savings and Loan Insurance Corporation, Senior Deputy Chief Counsel for the San Francisco Office of Thrift Supervision; Deputy Director of the National Commission on Financial Institution Reform, Recovery, and Enforcement; Senior Vice President and General Counsel for the Federal Home Loan Bank of San Francisco; and Director of Litigation for the Federal Home Loan Bank Board in Washington, D.C.
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