Control fraud
Encyclopedia
Control fraud occurs when a trusted person in a high position of responsibility in a company
, corporation
or state
uses their powers to subvert the organization and to engage in extensive fraud for personal gain.
The concept of control fraud is based on the observation that the CEO of a company is uniquely placed to remove the checks and balances on fraud within a company, such as through the use of selective hiring. These tactics can position the executive in a way that allows him or her to engage in accountancy fraud and embezzle money, hide shortfalls or otherwise defraud investors, shareholders, or the public at large. An example would be when a company publishes accounts showing massive profits, whereas in reality it is insolvent. This will cause the stock to rise beyond its actual value, and those exercising the control fraud will cash in their stocks before the reality is known by others. Additionally, companies can lobby for changes in the law to weaken regulation, and this can extend the fraud.
Control fraud can also occur in a political situation, for example by the leader of a country who can use their position to embezzle public funds and turn the country into a kleptocracy
.
Examples of control fraud include Enron
, the Savings and loan crisis
, Fannie Mae/ Freddie Mac, Lehman Brothers
and Alt-A "liar loans" and Ponzi scheme
s such as that of Bernard Madoff
.
Control fraud, a term coined by William K. Black
, refers to the fraud or the person perpetrating the fraud.
Company
A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...
, corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
or state
State (polity)
A state is an organized political community, living under a government. States may be sovereign and may enjoy a monopoly on the legal initiation of force and are not dependent on, or subject to any other power or state. Many states are federated states which participate in a federal union...
uses their powers to subvert the organization and to engage in extensive fraud for personal gain.
The concept of control fraud is based on the observation that the CEO of a company is uniquely placed to remove the checks and balances on fraud within a company, such as through the use of selective hiring. These tactics can position the executive in a way that allows him or her to engage in accountancy fraud and embezzle money, hide shortfalls or otherwise defraud investors, shareholders, or the public at large. An example would be when a company publishes accounts showing massive profits, whereas in reality it is insolvent. This will cause the stock to rise beyond its actual value, and those exercising the control fraud will cash in their stocks before the reality is known by others. Additionally, companies can lobby for changes in the law to weaken regulation, and this can extend the fraud.
Control fraud can also occur in a political situation, for example by the leader of a country who can use their position to embezzle public funds and turn the country into a kleptocracy
Kleptocracy
Kleptocracy, alternatively cleptocracy or kleptarchy, is a form of political and government corruption where the government exists to increase the personal wealth and political power of its officials and the ruling class at the expense of the wider population, often without pretense of honest...
.
Examples of control fraud include Enron
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...
, the Savings and loan crisis
Savings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
, Fannie Mae/ Freddie Mac, Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
and Alt-A "liar loans" and Ponzi scheme
Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
s such as that of Bernard Madoff
Bernard Madoff
Bernard Lawrence "Bernie" Madoff is a former American businessman, stockbroker, investment advisor, and financier. He is the former non-executive chairman of the NASDAQ stock market, and the admitted operator of a Ponzi scheme that is considered to be the largest financial fraud in U.S...
.
Control fraud, a term coined by William K. Black
William K. Black
William Kurt Black is an American lawyer, academic, author, and a former bank regulator. Black's expertise is in white-collar crime, public finance, regulation, and other topics in law and economics...
, refers to the fraud or the person perpetrating the fraud.
External links
- Schneier on Security: Control fraud
- When Fragile becomes Friable: Endemic Control Fraud as a Cause of Economic Stagnation and Collapse- William K. Black
- Bill Moyer's journal: William K. Black: CSI Bailout
- Executive Compensation and Earnings Management under Moral Hazard, Bo Sun
- Bill Black testifies re: Lehman Brothers