How much does corporate fraud cost you?

Corporate fraud didn't start with Enron, Tyco, and WorldCom and it didn't end with them, either. Fraud is rampant in the technology industry. What most employees, investors, and consumers don't realize is how much it costs them.

Corporate fraud didn't start with Enron, Tyco, and WorldCom and it didn't end with them, either. Fraud is rampant in the technology industry. What most employees, investors, and consumers don't realize is how much it costs them.

Excuse me for stating the obvious, but you'd be surprised how many people think there's some magic pile of dough somewhere that pays for companies to comply with investigations, contest charges, and remedy issues. In fact, the costs are born primarily by the corporation. That means it comes right out of shareholders' and employees' pockets. Consumers also pay, albeit indirectly.

And yes, we're talking about costs that materially impact earnings, balance sheets, and cash flow. We're talking about internal and outside lawyers, accountants, consultants, crisis PR, D&O (directors and officers) insurance, Sarbanes-Oxley compliance, exit packages, and even recruiting costs to replace executives.

Of course, the biggest cost is in terms of loss of market capitalization.

Then there's the unquantifiable cost of management distraction.

How much does this all add up to? Well, let's see.

The Corporate Fraud Task Force claims more than 1,300 corporate fraud convictions since its inception less than six years ago. That includes more than 200 CEOs and presidents, 50 CFOs, and 120 vice presidents. That's a lot of fraud.

Just looking at technology-related companies, federal agencies have successfully brought fraud and related charges against executives of Adelphia, Amkor, Anicom, Apple, AremisSoft, Brocade, Cendant, Comverse, Computer Associates, Dynegy, Enron, Enterasys, Homestore, Imclone, Impath, Integrated Silicon Solution, Juniper, KLA-Tencor, Monster, Network Associates (McAfee), Prudential Securities, Qwest, Refco, Tyco, U.S. Wireless, and WorldCom.

There are also recent allegations against former Broadcom and AOL Time Warner executives, plus ongoing international investigations into Nortel's ex-CEO and CFO, Samsung's chairman, and executives of Siemens AG.

It's hard to quantify the carnage, but it's clearly material on a company by company basis, and over a trillion dollars in aggregate if you include loss of market capitalization.

Whenever I write about fraud at technology companies, I get the sense that there's ambivalence among the IT audience. Frankly, I think that's sad. I'm outraged. In fact, the risk is so high that I no longer invest in individual company's stock, only in ETFs(Exchange Traded Funds).

In any case, whether you're an investor, an employee, or a customer of any company involved in a fraud investigation, like it or not, know it or not, you're paying a corporate fraud tax.

 

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