Corporate investigations
| Published date | 01 July 2006 |
| Pages | 348-368 |
| DOI | https://doi.org/10.1108/13590790610678422 |
| Date | 01 July 2006 |
| Author | Niall F. Coburn |
| Subject Matter | Accounting & finance |
Corporate investigations
Niall F. Coburn
Dubai Financial Services Authority, Dubai, United Arab Emirates
Abstract
Purpose – The aim of the research is to explain the requirements for conducting a corporate
investigation and to indicate that corporations must have effective corporate governance and
compliance structures that are flexible and innovative to combat new and emerging frauds.
Design/methodology/approach – The methodology is to give a brief overview of the majorpast and
current frauds, explain the nature of corporate crime and how a corporation should go about conducting
an effective corporate investigation. The paper gives some warnings about new and emerging frauds
and emphasizes lessons have to be learned from large corporate failures, such as Enron and Parmalat.
Findings – If corporations are not vigilant and do not have innovative and adequate corporate
compliance structures, they open themselves to weaknesses that can effectively cause their own
demise.
Practical implications – The paper gives direction on how to conduct an effective corporate
investigation and the relevant steps that should be considered if an investigation is undertaken.
Originality/value – Practical oversight of conducting financial crime investigations and warning
corporations to be vigilant and ensure that there are appropriate corporate compliance structures in
place to deal with emerging frauds or other financial crime.
Keywords Corporate strategy,Corporate governance, Fraud,Crimes
Paper type Technical paper
1. Introduction
I keep six serving honest men, they taught me all I knew. Their names are what and why and
when and how and where and who (Rudyard Kipling, 1865-1936).
This paper on corporate investigations emphasises the need for corporat ions and those
who serve them to be vigilant, conscientious and innovative in operating compliance
programs to combat corporate fraud. Corporations now and in the future will have to
review audit and compliance procedures frequently and have the capacity to conduct
internal investigations in a timely manner where fraud has occurred.
Corporate fraud investigations into individuals and corporations by enforcement
agencies, statutory regulators and internal companies committees have increased in
intensity over the past few years. However, most of the large investigations by
regulators have occurred long after the corporate horse has bolted (Financial Times,
2006a, b; Complinet News Story, 2006; AFR, 2002a, b, c).
Fraud crosses all professional fields, from executives, lawyers, accountants,
politicians and academics (Financial Times, 2006c, d). The most recent PWC survey on
global economic crime shows that 45 per cent of companies worldwide have fallen
victim to economic crime in the past two years[1].
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
This is an updated paper based on Chapter 11 of Mr Coburn’s work, Coburn’s Insolvent Trading:
Global Investment Fraud and Corporate Investigations published by Law Book Co.
Thanks is given to Joyce Maykut QC, Mark McGinness, Christine Murphy and Robyn
Hughes.
JFC
13,3
348
Journal of Financial Crime
Vol. 13 No. 3, 2006
pp. 348-368
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590790610678422
Over one third of corporate frauds were discovered by accident, “making ‘chance’
the most common fraud detection tool”[1]. We have to ask ourselves two questions,
“How much have we learnt about dealing with economic crime and do corporations
have effective structures in place to detect economic crime?”
These revelations, despite the intensity of press reports, are not new. Profits of large
international corporations been shown to be fictitious[2]. Recent surveys in e-commerc e
businesses indicate that executives, in many instances, are misinformed about the
vulnerabilities of their network systems[3]. In particular, accounting frau d has
attracted the most recent attention simply because of the billions of dollars involved. It
shook the confidence of investors and financial institutions on the world markets. We
only have to look at the recent revelations of the Enron court proceedings which reveal
allegations of purposeful “cooking of the books” and charges of conspiracy, fraud and
insider dealing which has caused the second largest bankruptcy in US history[4].
The corporate fraud train has been gathering momentum for some time, particularly
in the USA, Europe, China, Japan and Australia. The historical stations are somewhat
repetitive. From the South Sea Bubble in 1720, to the Pecora investigation into market
manipulation in the USA in 1933 (Pecora, 1939), to the corporate collapses in the 1980’s,
to the current day large fictitious frauds bringing down conglomerate corporate giants
in this millennium. They are all landmarks that forerun countless government papers
and investigations into corporate crime. Although the expression “white colla r crime”
was coined more than 50 years ago by Edwin Sutherland and Donald Cressy[5], it has
taken on a new meaning in 2006. The measurement of corporate fraud has arguably
reached a different dimension. Auditors, business analysts, accountants, lawyers,
bankers and company doctor’s should be independent and working for the advantage
of the body corporate. Instead, they have pleaded guilty to the most significant
corporate frauds in legal history, eroding the very reputation of these professions.
1.1 No amount of legislation can protect against dishonesty
The reality is that no amount of legislation can protect against dishonesty. Where there
are no proper independent internal compliance and investigation procedures within the
body corporate, the organisation will be susceptible to fraud and manipulation by
those that control it.
HIH’s, Enron, Worldcoms and Parmalat do not occur over night and it appears to be
a mentality that frauds can be perpetrated and those involved feel that they cannot be
caught. How has this mentality been brokered within the corporate arenas? We must
be honest with ourselves and start to question; have we learnt anything? Are we doing
anything realistic about it? Why have investors and directors been blindly bullish?
Today is, in many respects, a continued evolution of corporate misfeasance. In 1932,
Roosevelt, while campaigning for the presidential election spoke of “the ruthless
manipulation of professional gamblers and the corporate system”[6].
It is very clear that fraud continues to be a prominent issue internationally and it is
increasingly clear that many companies are still deficient in the corporate governance
stakes.
While no amount of regulation or endless legislative provisions can protect
corporationsor investors from dishonesty or misconduct.However, fraud can be reduced
by a having a strong corporate governance culture that can prevent and deter fraud.
Standardsof ethics must come from within and bereflected in proper internal compliance.
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