Corporate Fraud Across the Globe

Larry Li
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Corporate Fraud Across
the Globe
Larry Li
Adela McMurray
Corporate Fraud Across the Globe
 Larry Li · Adela McMurray

Corporate Fraud
Across the Globe
Larry Li Adela McMurray
College of Business and Law College of Business, Government
RMIT University and Law
Melbourne, VIC, Australia Flinders University
Adelaide, SA, Australia

ISBN 978-981-19-3666-1 ISBN 978-981-19-3667-8 (eBook)

https://doi.org/10.1007/978-981-19-3667-8

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 To my families, with love, Maria, Zara, and Ryan
—Larry Li

To my parents and children, with love for all of time.

—Adela McMurray
 Preface

A series of illegal corporate scandals have rocked the business world

with the number of corporate fraud cases growing to unprecedented
numbers. It has come to light that many globally respected companies,
such as Toshiba, Volkswagen, Olympus, BMW, Commonwealth Bank of
Australia, and Mitsubishi, are the perpetrators of fraudulent activity, which
shock the business world and hugely impact a firm’s reputation as well
as the respective country’s overall economic and social system. Based on
theoretical foundations and evidence-based case studies, this book iden-
tifies the foundational motivations underpinning corporate fraud in both
developing and developed countries and offers practical solutions in terms
of monitoring and potentially preventing future corporate fraud activity.
Operational strategies including reform provide an effective channel
for a fraudulent firm’s business sustainability yet this notion remains
unexplored in the literature. In this book, we argue that the choice of
appropriate operational strategies is critical as they serve as an effective
channel for fraudulent firms to regain trust from customers and markets,
and importantly to re-establish their reputation and enhance the firm’s
long-term value. We posit that there is no “one-size-fits-all” approach
that the choice of operational strategies during the post-scandal period is
needed to acknowledge the significance of context such as industry type,
economic conditions, legal frameworks, as well as the firm’s fraudulent
characteristics.

vii
viii PREFACE

Corporate fraud spans a large area of research; therefore, the book is

structured into four dominant themes underpinned by several chapters.
Each theme has its own setting and focus. The four themes link corpo-
rate fraud to various macroeconomic and organisational aspects including
variables such as legal framework, business environment, organisational
culture, ethics, governance, accounting standards, and performance. A
feature of this book is that the content provides a collection of case
studies illustrating positive, negative, outlandish, and eccentric aspects of
corporate fraud.
The first theme in the series of the four themes is “The Concept of
Corporate Fraud” and provides the foundation to this field and should
be read first before reading the subsequent chapters. This is because the
first chapter addresses the concept of corporate fraud and how it is defined
and classified into types, and this is then followed by the theoretical and
empirical justification of corporate fraud. The unique feature of this theme
is that the concept of corporate fraud is covered from both the process
and outcome perspectives across various cultures and contexts.
The second theme “Corporate Fraud Across Countries and Indus-
tries” provides original coverage of the corporate fraud literature across
developing and developed countries. To date, this has not been covered
in the literature thus providing novelty for the reader to gain insights
into the diversity of fraud across global boundaries. For example, areas
that are covered are corporate fraud in developing and developed coun-
tries, corporate fraud comparisons across various countries and industries
illustrating the way in which the concept is interpreted and has an
impact, within different cultures and contexts. Finally, and ultimately
the evolution of corporate fraud trends is presented from an innovative
chronological perspective. All topics are relevant to the business context.
The third theme deals with “How to Prevent Corporate Fraud” and
is expanded upon by chapters that address the external factors such as
the legal framework in the business environment. The focus then turns
to internal factors such as organisational culture and governance. The
push and pull of internal and external factors illustrate the complexity
of corporate fraud and in particular scandals. The effectiveness of external
and internal factors varies and largely depends on the social norm, legal
framework, business environment, and the nature of the business.
The fourth and final theme embraces “Bring New Hope to the Busi-
ness” and demonstrates how fraudulent firms reshape their operational
strategies and regain the trust of their customers, investors, and other
 PREFACE ix

key stakeholders. This is important for fraudulent firms in the long term
but unfortunately, this topic is largely overlooked by the literature. The
book addresses this oversight by providing robust coverage in two chap-
ters on developing new operational strategies in organisations and how to
regain customer trust. Read this concluding theme last as it generates a
renewed thinking perspective and a positive note upon which to conclude
the controversial and stigmatised corporate fraud topic.

Melbourne, Australia Larry Li

Adelaide, Australia Adela McMurray
 Contents

Part I The Concept of Corporate Fraud

1 What Is Corporate Fraud? 3
1.1 Introduction 3
1.2 More Definitions 5
1.3 The Early Years of Corporate Fraud 7
1.4 How to Stop History from Repeating Itself? 15
1.5 Concluding Remarks 18
References 20
2 Types of Corporate Fraud 23
2.1 Introduction 23
2.2 Financial Statement Fraud 29
2.3 Corruption 36
2.4 Asset Misappropriations 37
2.5 Concluding Remarks 39
References 40
3 Theoretical and Empirical Justification of Corporate
Fraud 43
3.1 Theoretical Justification of Corporate Fraud 43
3.2 Empirical Justification of Corporate Fraud 52
3.3 Concluding Remarks 61
References 62

xi
xii CONTENTS

Part II Corporate Fraud Across Countries and Industries

4 Corporate Fraud in Developing Countries 71
4.1 Asia Pacific Region 72
4.2 Latin America and the Caribbean Region 79
4.3 Africa 82
4.4 Unique Features in Developing Countries 86
4.5 Concluding Remarks 94
Appendix: Glossary of Terminology (from 2020 Report
to the Nation on Occupational Fraud and Abuse) 95
References 97
5 Corporate Fraud in Developed Countries 103
5.1 United States (US) 103
5.2 West Europe 111
5.3 Canada 118
5.4 More Discussion 121
5.5 Unique Features in Developed Countries 125
5.6 Concluding Remarks 129
References 130
6 Corporate Fraud Comparison Across Industries 135
6.1 Introduction 135
6.2 Percentage of Fraud Across Industries 136
6.3 Fraud Severity Across Industries 141
6.4 Industries with Most Corruption Cases 145
6.5 Industries with Most Asset Misappropriations 148
6.6 Industries with Most Financial Statement Fraud 158
6.7 Concluding Remarks 161
References 162
7 Corporate Fraud Trends 169
7.1 Introduction 170
7.2 Evolution of Fraud 172
7.3 Cyber Fraud 183
7.4 Cybersecurity: Past and Future 188
7.5 Reasons for Rapid Growth of Cybercrime 190
7.6 How to Stop Cybercrime 192
7.7 Concluding Remarks 194
References 195
 CONTENTS xiii

Part III How to Prevent Corporate Fraud

8 External Factors: Legal Framework and the Business
Environment 203
8.1 Introduction 203
8.2 Business Environment 205
8.3 Legal Framework 215
8.4 Revisit the Theoretical Models 223
8.5 Concluding Remarks 224
References 224
9 Internal Factors: Organisational Culture
and Governance 233
9.1 Introduction 233
9.2 Why Internal Factors Matter 234
9.3 Organisational Culture and Fraud 236
9.4 Leadership and Fraud 237
9.5 Internal Control and Fraud 238
9.6 Management Incentives and Fraud 240
9.7 Ownership Types and Fraud 242
9.8 Stakeholders and Fraud 245
9.9 Concluding Remarks 247
References 248

Part IV Bring New Hope to the Business

10 Trust Repairing Post-scandal Priority 257
10.1 Introduction 257
10.2 Theories of Crisis Management 259
10.3 Types of Post-Scandal Organisation 261
10.4 Right Crisis Management 268
10.5 Concluding Remarks 272
References 273
11 Internal Reform During the Post-scandal Period 277
11.1 Introduction 277
11.2 Where to Start? 279
11.3 Observable Warning Signals 283
11.4 Perpetrators’ Department 285
11.5 Internal Control 289
xiv CONTENTS

11.6 The Design of Internal Controls 301

11.7 Concluding Remarks 304
References 305

References 311
Index 353
 List of Figures

Fig. 1.1 Share price of South Sea Company (Source Wikipedia) 8

Fig. 2.1 Perpetrator’s level of authority (%) (Source Association
of Certified Fraud Examiners [1996, 2002, 2004,
2006, 2008, 2010, 2012, 2014, 2016, 2018, 2020]
and author’s computations) 29
Fig. 2.2 Loss caused by level of authority ($ in 000) (Source
Association of Certified Fraud Examiners [1996, 2002,
2004, 2006, 2008, 2010, 2012, 2014, 2016, 2018,
2020] and author’s computations) 30
Fig. 2.3 Gender of perpetrator (Source Association of Certified
Fraud Examiners [1996, 2002, 2004, 2006, 2008,
2010, 2012, 2014, 2016, 2018, 2020] and author’s
computations) 30
Fig. 3.1 Components of Fraud Triangle (Source designed
by the Author, based on the Fraud Triangle Theory
by Cressey [1953]) 45
Fig. 3.2 Chain for Fraud Flow (Source Designed by Authors,
based on the Fraud Triangle Theory by Cressey [1953]) 46
Fig. 3.3 Components of Fraud Diamond (Source Designed
by Authors, based on the Fraud Diamond Theory
by Wolfe and Hermanson [2004]) 47
Fig. 3.4 The Person with Capability (Source Designed by Authors,
based on the Fraud Diamond Theory by Wolfe
and Hermanson [2004]) 48

xv
xvi LIST OF FIGURES

Fig. 3.5 Corruption and Corporate Fraud Prevention (CCFP)

(Source Model Designed by Authors, based on the CCFP
model by Krambia-Kapardis [2016]) 49
Fig. 3.6 Theory of Planned Behaviour (Source Designed
by Authors, based on the Theory of Planned Behaviour
by Ajzen [1991]) 50
Fig. 4.1 Fraud frequency based on position of perpetrator
in Asia–Pacific (Source Association of Certified Fraud
Examiners [2010, 2012, 2014, 2016, 2018, 2020]
and author’s computations) 78
Fig. 4.2 Median loss based on position of perpetrator in Asia
Pacific (Source Association of Certified Fraud Examiners
[2010, 2012, 2014, 2016, 2018, 2020] and author’s
computations) 79
Fig. 4.3 Fraud frquency based on position of fraudster in Latin
America and the Caribbean Region (Source Association
of Certified Fraud Examiners [2010, 2012, 2014, 2016,
2018, 2020] and author’s computations) 83
Fig. 4.4 Median loss based on position of fraudster in Latin
America and the Caribbean Region (Source Association
of Certified Fraud Examiners [2010, 2012, 2014, 2016,
2018, 2020] and author’s computations) 83
Fig. 4.5 Fraud frquency based on perpetrator’s position in Africa
(Source Association of Certified Fraud Examiners
]2010, 2012, 2014, 2016, 2018, 2020] and author’s
computations) 88
Fig. 4.6 Median Loss based on Perpetrator’s Position in Africa
(Source Association of Certified Fraud Examiners
[2010, 2012, 2014, 2016, 2018, 2020] and author’s
computations) 88
Fig. 5.1 Fraud frequency based on position of perpetrator
in United States (Source Association of Certified Fraud
Examiners [2010, 2012, 2014, 2016, 2018, 2020]
and author’s computations) 111
Fig. 5.2 Median loss based on position of perpetrator in United
States (Source Association of Certified Fraud Examiners
[2010, 2012, 2014, 2016, 2018, 2020] and author’s
computations) 112
Fig. 5.3 Fraud frenquency based on the position of perpetators
in West Europe (Source Association of Certified Fraud
Examiners [2010, 2012, 2014, 2016, 2018, 2020]
and author’s computations) 118
 LIST OF FIGURES xvii

Fig. 5.4 Median loss based on the position of perpetators in West

Europe (Source Association of Certified Fraud Examiners
[2010, 2012, 2014, 2016, 2018, 2020] and author’s
computations) 118
Fig. 5.5 Fraud frquency based on the position of perpetrators
in Canada (Source Association of Certified Fraud
Examiners [2010, 2012, 2014, 2016, 2018, 2020]
and author’s computations) 123
Fig. 5.6 Median loss basd on the position of perpetrators
in Canada (Source Association of Certified Fraud
Examiners [2010, 2012, 2014, 2016, 2018, 2020]
and author’s computations) 123
Fig. 5.7 Curruption trend in US, Canada, and Western Europe
(Source Association of Certified Fraud Examiners
[2010, 2012, 2014, 2016, 2018, 2020] and author’s
computations) 124
Fig. 5.8 Employee support program adoption in US, Canada,
and Western Europe (Source Association of Certified
Fraud Examiners [2010, 2012, 2014, 2016, 2018, 2020]
and author’s computations) 125
Fig. 6.1 Trend of corruption (Source Association of Certified
Fraud Examiners [2004, 2006, 2008, 2010, 2012, 2014,
2016, 2018, 2020] and author’s computations) 148
Fig. 6.2 Asset misappropriations trend in banking and financial
service industry (Source Association of Certified Fraud
Examiners [2004, 2006, 2008, 2010, 2012, 2014, 2016,
2018, 2020] and author’s computations) 151
Fig. 6.3 Asset misappropriations trend in manufacturing industry
(Source Association of Certified Fraud Examiners [2004,
2006, 2008, 2010, 2012, 2014, 2016, 2018, 2020]
and author’s computations) 155
Fig. 6.4 Asset misappropriations trend in government and public
administration sector (Source Association of Certified
Fraud Examiners [2004, 2006, 2008, 2010, 2012, 2014,
2016, 2018, 2020] and author’s computations) 157
Fig. 6.5 Trend of financial statement fraud (Source Association
of Certified Fraud Examiners [2004, 2006, 2008,
2010, 2012, 2014, 2016, 2018, 2020] and author’s
computations) 161
xviii LIST OF FIGURES

Fig. 7.1 Three components of fraud (Source Designed by Authors) 174

Fig. 7.2 Four components of fraud (Source Designed by Authors) 177
Fig. 7.3 Common characteristics of a con artist (Source Designed
by Authors) 181
Fig. 7.4 Trend of fraud types (Source PwC’s global economic
crime and fraud surveys in 2011, 2014, 2016, 2018,
and 2020) 184
Fig. 7.5 Five components of fraud (Source Designed by Authors) 185
Fig. 7.6 Common characteristics of cyber fraudsters (Source
Designed by Authors) 187
Fig. 7.7 Evaluation of cybercrime (Source Designed by Authors) 190
Fig. 7.8 Key Roles of anti-cybercrime campaign (Source Designed
by Authors) 192
Fig. 8.1 Levels of social analysis (Source Designed by Authors,
based on the Social Analysis Framework Proposed
by Williamson [2000]) 205
Fig. 8.2 Culture and fraud (Source Designed by Authors) 215
Fig. 8.3 Legal system and fraud (Source Designed by Authors) 222
Fig. 8.4 Five components of fraud (Source Designed by Authors) 222
Fig. 9.1 Sources of tips (Source Association of Certified Fraud
Examiners [2020]) 235
Fig. 9.2 Quality of internal control procedures (Source Designed
by Authors based on the model by Rae and Subramaniam
[2008]) 240
Fig. 9.3 The dilemma of the compensation package (Source
Designed by Authors) 242
Fig. 9.4 Groups of whistleblowers (Source Designed by Authors) 247
Fig. 10.1 Key Stages of Trust Repairing (Source Designed
by authors based on the theoretical framework proposed
by Gillespie and Dietz [2009]) 260
Fig. 10.2 Classification of Post-Scandal Organisations (Source
Designed by Authors based on the Model Proposed
by De Maria [2010]) 269
Fig. 10.3 Principles Affecting the Success of Crisis Management
(Source Designed by Authors) 273
Fig. 11.1 Key Steps of Crisis Management (Source Designed
by Authors) 278
Fig. 11.2 Departments and Fraud Frequency and Severity (Source
Designed by Authors) 290
Fig. 11.3 A Corporate Internal Control (CIC) Model (Source
Designed by Authors) 302
 List of Tables

Table 1.1 Initial detection of corporate fraud 17

Table 1.2 Sources of tip 19
Table 2.1 Frequency and average loss of corporate fraud 25
Table 2.2 Characteristics of victim organisation 26
Table 2.3 Industry of victim organisations 27
Table 2.4 Subcategories of asset misappropriations 39
Table 4.1 Most common corporate frauds in Asia Pacific region 73
Table 4.2 How corporate fraud was detected in Asia Pacific 75
Table 4.3 Common Anti-Fraud controls in Asia Pacific 77
Table 4.4 Most common corporate frauds in Latin America
and the Caribbean 80
Table 4.5 How the corporate fraud initially detected in Latin
America and the Caribbean? 81
Table 4.6 Common Anti-Fraud Controls in Latin America
and the Caribbean 82
Table 4.7 Most common corporate Frauds in Africa 85
Table 4.8 How the corporate Fraud initially detected in Africa? 86
Table 4.9 Common Anti-Fraud Controls in Africa 87
Table 5.1 Most common corporate frauds in the United States 104
Table 5.2 How corporate fraud was initially detected in United
States 107
Table 5.3 Common anti-fraud controls in United States 110
Table 5.4 Most common corporate frauds in West Europe 113
Table 5.5 How the corporate fraud was initially detected in West
Europe 115

xix
xx LIST OF TABLES

Table 5.6 Common anti-fraud controls in West Europe 117

Table 5.7 Most common corporate frauds in Canada 120
Table 5.8 How the corporate fraud initially detected in Canada 121
Table 5.9 Common anti-fraud controls in Canada 122
Table 6.1 Percentage of fraud cases based on industry 138
Table 6.2 Severity of fraud cases based on industry sector 142
Table 6.3 Industry with most corruption cases 146
Table 6.4 Asset misappropriations in banking and financial services
industry 150
Table 6.5 Asset misappropriations in manufacturing industry 153
Table 6.6 Asset Misappropriations in Government and the Public
Administration Sector 156
Table 6.7 Industry with most financial statement fraud cases 160
Table 11.1 Common Internal Control Weakness Contributed
to Corporate Frauds 280
Table 11.2 Behavioural Red Flags Presented by Perpetrators 284
Table 11.3 Perpetrators’ Department and the Percentage of Fraud 286
Table 11.4 Perpetrators’ Department and the Median Loss of Fraud
(US $ in 1000) 288
 PART I

The Concept of Corporate Fraud

 CHAPTER 1

What Is Corporate Fraud?

1.1 Introduction
In recent years, a series of illegal corporate scandals have rocked the
business world with the number of corporate fraud cases growing to
unprecedented numbers. It has come to light that many globally respected
companies, such as Toshiba, Volkswagen, Olympus, BMW, Common-
wealth Bank of Australia, Kobe Steel, and Mitsubishi, are the perpetrators
of fraudulent activity, which shock the business world and hugely impact
on a firm’s reputation as well as the respective country’s overall economic
and social system. This illegal behaviour prompted many publics, clients,
and investors to ask the same question: “What is wrong with the corpo-
rate sector?” Obviously, the existing legal frameworks fail to detect and
prevent corporate frauds in advance. The frequency and severity of corpo-
rate fraud types vary greatly across industry and country. This has a major
impact on their financial performance as the disclosure of scandals differs
significantly from one fraudulent firm to another.
Although corporate fraud is a widely discussed issue by policymakers,
practitioners, and academics, they have not generally accepted a common
definition of corporate fraud—this is why the Corporate Finance Insti-
tute (CFI) refers to corporate fraud as “Corporate fraud consists of illegal
or unethical and deceptive actions committed either by a company or an
individual acting in their capacity as an employee of the company. Corpo-
rate fraud schemes are often extremely complicated and, therefore, difficult

© The Author(s), under exclusive license to Springer Nature 3

Singapore Pte Ltd. 2022
L. Li and A. McMurray, Corporate Fraud Across the Globe,
https://doi.org/10.1007/978-981-19-3667-8_1
4 L. LI AND A. MCMURRAY

to identify”. Consequently, “The victims of corporate fraud are consumers

or clients, creditors, investors, other businesses, and eventually, the company
that is the source of the fraud and its employees. When it is finally discov-
ered, the company committing the fraud is often left in ruins and forced to
declare bankruptcy”.
Corporate fraud has become a household term that can be found in the
Investopedia (www.investorpedia.com), where corporate fraud is defined
as:

The illegal activities undertaken by an individual or company that are done

in a dishonest or unethical manner to give an advantage to the perpetrating
individual or company.

Two key features of corporate fraud are included in this definition.

The first is that corporate fraud is normally conducted by either an
individual or a company in a dishonest way. In fact, multiple decep-
tive approaches can be adopted by an individual or a company to offer
misleading information to public. We will discuss the deceptive approach
details in following chapters. The second feature is that all corporate fraud
cases are conducted to reach underserved advantages or financial bene-
fits. This definition therefore identifies the approaches and motivation
of conducting corporate frauds from accused parties’ perspective. It is,
however, this definition does not mention what will happen if the illegal
activities are uncovered.
Another definition of corporate fraud can be found on Wikipedia.com,
where corporate fraud is treated as corporate crime, specified as following:

corporate crime refers to crimes committed either by a corporation (i.e.,

a business entity having a separate legal personality from the natural
persons that manage its activities), or by individuals acting on behalf of
a corporation or other business entity. For the worst corporate crimes,
corporations may face judicial dissolution, sometimes called the “corporate
death penalty”, which is a legal procedure in which a corporation is forced
to dissolve or cease to exist.

This definition describes corporate fraud from approach perspective, but

it does not mention the reason of conducting corporate frauds. This is
an important issue as this could be the starting point of fraud detection
and prevention. However, this definition mentions the consequence after
a corporate fraud is disclosed, which can be treated as the direct cost of
 1 WHAT IS CORPORATE FRAUD? 5

committing corporate frauds. The cost of corporate fraud is important, as

it will prevent the fraudulent parties to have the second thought before
taking actions.
The definition of fraud varies across jurisdictions. For example,
according to the Association of Certified Fraud Examiners (ACFE) in the
US, fraud is “any intentional or deliberate act to deprive another of prop-
erty or money by guile, deception, or other unfair means ” (ACFE 2014). In
addition, ACFE further classifies fraud into internal and external frauds.
Internal fraud is also called occupational fraud, which is defined as “the
use of one’s occupation for personal enrichment through the deliberate misuse
or misapplication of the organization’s resources or assets ” (ACFE 2014).
In addition, three main categories of internal fraud are corruption
(conflicts of interest, bribery, illegal gratuities, and economic extortion),
asset misappropriation (cash, inventory, and all other assets), and financial
statement fraud (income understatement and overstatement). External
fraud contains illegal activities could deteriorate the value of a company,
including dishonest vendors bill the company for goods or services not
provide, or dishonest customers provide falsified account information for
payment, or external threats of security breaches, hacking, theft of intel-
lectual property, etc. The focus of this book is the internal fraud which
will be discussed in detail in the following chapters. Section 380 (1) of the
Criminal Code of Canada defines fraud as “Everyone who, by deceit, false-
hood or other fraudulent means, whether or not it is a false pretence within
the meaning of this Act, defrauds the public or any person, whether ascer-
tained or not, of any property, money or valuable security or any service”.
There are two critical components of this fraud definition. First, a prohib-
ited act of deception is detected. Second, observable loss caused by the
prohibited act. C35 of the Fraud Act 2006 of England and Wales and
Northern Ireland defines fraud via providing false representation, failing
to disclose information, and abuse of position.

1.2 More Definitions

The academic literature addressing corporate fraud is extensive, and most
studies offer definitions and shed some light on the nature of corpo-
rate fraud. Few studies refer to the measurement of corporate fraud.
Clinard and Quinney (1973) define corporate fraud as “offences committed
by corporate officials for the corporation and the offences of the corpora-
tion itself ” (p. 188). According to Duffield and Grabosky (2001), fraud
6 L. LI AND A. MCMURRAY

is “obtaining something of value or avoiding an obligation by means of

deception” (p. 1), which can be further classified into four categories:

1. Fraud committed by a high-ranking entrepreneurial or insider

against interest of shareholders and creditors, such as corruption.
2. Fraud committed by an insider or outsider against interest of a
government or client, such as insurance fraud or tax evasion.
3. Fraud in face-to-face interactions targeting a consumer, such as a
financial advisor pervade a client to make an unethical investment
decision.
4. Fraud committed against a number of victims through either tradi-
tional or social media, such as deceptive advertising and share market
manipulation.

Coenen (2008) points out that the nature of “occupational fraud”,

“internal fraud”, and “corporate fraud” is fairly similar, because they
all apply to a wide range of misbehaviours conducted by employees or
insiders. In particular, three essential components of a corporate fraud
include a false statement, a victim, and an evidenced loss to the victim. In
details, corporate fraud is something like:

1. Violate an employee’s fiduciary duties to the organisation.

2. Conducted in a secret and concealed way.
3. Bringing direct and indirect benefit to the committers.
4. Damaging employer’s assets, revenue, business opportunities, or
reputation.

Wells (2017) provides a broad definition of fraud, referring to “any

crime for gain that uses deception as its principal modus operandi”.
More precisely, corporate fraud covers a wide range of illegal activi-
ties conducted by executives, managers, and employees, ranging from
accounting scandals to disguised theft. In addition, it is important that
although all frauds involve some forms of deception, four key elements
must be associated with a fraud, including:

1. An evidenced false statement.

2. Acknowledge the fact that the statement was false released.
 1 WHAT IS CORPORATE FRAUD? 7

3. The victim trusts or has no ability to detect the truth of the false
statement.
4. The false state leads to the loss of the victim.

Dyck et al. (2021) point out that it is not easy to define corporate
fraud precisely. As mentioned in their research paper, the US Security
Law defines securities fraud as “To make any untrue statement of a mate-
rial fact or to omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances under which they were
made, not misleading ” (p. 4). The focus of their paper, however, is on the
pervasive of corporate frauds related to publicly traded firms, so authors
treat corporate fraud primarily as misrepresentation. Although the defini-
tions of fraud vary greatly, the key elements of fraud are fairly consistent
throughout all the definitions. These key elements are deception, victims,
and underserved advantages or financial benefits obtained via deception.

1.3 The Early Years of Corporate Fraud

If you think corporate fraud is a modern concept, then think again.
Historically, investors lost billions of dollars from corporate frauds in the
past, and the entire economies had been fundamentally damaged. Unfor-
tunately, history always repeats itself on this matter as most investors
tend to have relatively short memory in the stock market. Few famous
corporate fraud cases in history are presented as follows.

The South Sea Company Bubble (1720)

Arguably, the South Sea Company scandal was one of the most famous
corporate scandals in the history, which shocked the whole British society
in 1720. The share price of South Sea Company boomed over £1,000
and then dropped shapely to less than £100 between 1720 and 1721. The
loss was so significant, and victims covers all level of the British society,
ranging from small investors to celebrities, such as Sir Isaac Newton
(Toms 2019). It is estimated that Newton lost roughly £20,000 or much
more, the equivalent of $4 million today. Consequently, this scandal has
been discussed by public and researchers again and again in subsequent
nearly three hundred years, which also triggered a series of legislative
response to the frauds (Fig. 1.1).
8 L. LI AND A. MCMURRAY

Fig. 1.1 Share price of South Sea Company (Source Wikipedia)

What was the South Sea Company, and what actually happened? The
South Sea Company was originally founded for international trade in
1711, and investors’ confident was dramatically lifted up as King George
I of Great Britain became governor of the company in 1718. In addition,
the company agreed to take over 32 million pounds of Britain’s national
debt in exchange of the monopoly rights to trade with South America, but
never made much from those activities. As expected, the price of South
Sea stock increased dramatically from around £120 in January 1720 to
overall £1,000 in August 1720. At its peak, the market value of South
Sea was around twice the value of all land in England (Chancellor 2019).
After September 1721, the market lost its confidence to the company,
evidenced by the free-falling share price, and reached £124 in December
1721. The crazy price movement of South Sea stock made the invest-
ment losses to countless investors, including British government and Sir
 1 WHAT IS CORPORATE FRAUD? 9

Isaac Newton. The market crash provoked huge public outcry and forced
government to launch an official investigation about the causes of this
event and found out that at least three carbon members and multiple
South Sea directors were involving bribery and share price speculation.
The South Sea Company itself survived until 1853 and sold most of its
rights to the Spanish government in 1750. The South Sea bubble contains
features which were common to many other corporate scandals in subse-
quent years. Although definitions of corporate fraud vary greatly, most
common features include corruption, bribery, embezzlement, and market
manipulation, which can all be observed in South Sea bubble.

The City of Glasgow Bank Scandal (1878)

On 2 October 1878, the City of Glasgow Bank (CGB) stunned the whole
country when its directors announced to close the bank. Just in June
1878, the book reported that the bank has 133 branches with deposits
of £8m, and declared a 12% dividend (Swinfen 2016). As expected,
the whole country was devastated. After months of investigation, it was
revealed that the bank had net liabilities of over £6m (= roughly £500
million at 2005 prices). In addition, the bank involved serious account
misstatements to cover the losses from bad loans and speculative invest-
ments granted by negligent directors. As expected, these terrible business
decisions brought significant losses to shareholders and the whole soci-
eties (Lee et al. 2008; Toms 2019). What’s even worse was that CGB
was not a limited company, therefore, all 1200 shareholders were directly
responsible for the debts of CGB, that means the shareholders would be
held liable for £2,750, per £100 share held, which was a huge sum of
money in those days.
The collapse of CGB had a significantly negative impact on the Scot-
tish society. All CGB shareholders and their families greatly suffered,
and only few shareholders managed to avoid bankruptcy. In addition,
hundreds of small firms were out of business due to this disaster, and
the general public has lost their faith in financial institutions in Scotland.
All directors of CGB were found guilty of falsifying and fabricating the
balance sheets of the bank and were given various imprisonment each.
The CGB scandal called for the urgent need for a better accounting and
audit standard, which led to a rapid increase in using professional audi-
tors. Subsequently, the Institute of Chartered Accountants in English and
Wales was founded in 1880 for promoting the accountancy professions
10 L. LI AND A. MCMURRAY

and improving the quality and trustworthy of this profession in UK (Toms

2019). Another positive result of this scandal was the increased popularity
of limited liability, especially for banks. Fortunately, depositors did not
suffer as other banks accepted their deposits guaranteed by shareholders’
liability.

Enron Scandal (2001)

Enron was the 7th largest company in US before the fraud was discov-
ered, with approximately 22,000 employees globally. In addition, Enron
was nominated by Fortune magazine as “American’s Most Innovative
Company” for six consecutive years between 1996 and 2001. However,
Enron shocked the world when it filed for bankruptcy on 2 December
2001. The price of Enron stock was traded around US $90 per share
before the fraud was uncovered and dropped to 26 cents before delisted
by the NASDAQ. No surprising, investors and Enron employees lost US
74 billion dollar from the biggest bankruptcy recorded (US $63.4 billion
in assets) at the time (Benston and Hartgraves 2002).
The story of Enron Scandal was very simple. Based on the utilisation
of so-called creative accounting techniques, off-balance sheet transac-
tions, and special purposes vehicles (SPVs), Enron was able to hide huge
amount of debt and toxic assets from investors and creditors. For example,
Enron would claim the projected profit on its books from a newly estab-
lished power station before any revenue was generated. If the revenues
from the new power station were not as good as projected figures, then
the company will transfer the asset to the books of a separate entity where
the loss would not be reported on Enron’s financial statement. Though
transactions between Enron and SPVs capitalised by Enron stock, the
company could borrow money from banks without affecting its leverage
ratio on paper. As a result, Enron had successfully hid billions of dollars
of bad debt via accounting tricks and inflated the company’s financial
performance as well as share price.
Arguably, Ms Sherron Watkins was the first Enron employee raised
her concerns of accounting improprieties, which led to a series of events
eventually stunned the world. On 16 October 2001, Enron restated its
previously reported net income for the years 1997–2000 by reducing US
$544 million and reduced its shareholders’ equity by $1.2 billion. On 8
November 2001, Enron admits it has been inflating its income by around
US $586 million since 1997. Another major player involved in Enron
 1 WHAT IS CORPORATE FRAUD? 11

Scandal was Enron’s accounting firm “Arthur Anderson”, which was one
of the Big Five accounting firms at the time. Arthur Anderson was crit-
icised for endorsing Enron’s annual report despite its poor accounting
practices. It was reported that Andersen was paid US $46.8 million
in 1999, $38 million in 2000, and between US $50 and $55million
in 2001 by Enron for its auditing and other consulting services (WSJ
2002). Therefore, it is hard to believe that Arthur Anderson could provide
objective and unbiased auditing services to Enron. Subsequently, Arthur
Anderson was charged for illegally destroying documents relevant to
the Security and Exchange Commission (SEC) investigation, and it was
eventually out of business in 2002.
The fall of Enron has raised everyone’s concern on the quality and reli-
ability of business financial practices at the time. As Mr. Harvey Pitt, the
chairman of SEC, pointed out “under the current quarterly and annual
reporting system, information is often stale on arrival and mandated
financial disclosures are often ‘arcane and impenetrable” (Connell 2017).
Consequently, the Sarbanes–Oxley (SOX) Act of 2002 was passed in
response to the Enron scandal and the collusion between Enron and
accounting firm Arthur Andersen, aiming to offer better investors protec-
tion via improving the accuracy and reliability of corporate disclosures in
financial statements and other documents. It is also worth to mention that
the two key persons in the centre of this scandal were CEO Jeff Skilling
and former CEO Ken Lay. Mr. Skilling was convicted on 18 counts of
fraud and conspiracy charge in 2006 and eventually sentenced to 24 years
in prison. Mr. Lay was found guilty on six counts of fraud and conspiracy
and four counts of bank fraud. He died about a month after the trial,
and his conviction was vacated (Stevens and Haag 2019). Ms Sherron
Watkins was hailed as a whistle-blower of Enron scandal and selected as
one of three “Persons of the Year 2002” by Time magazine.

WorldCom Scandal (2002)

WorldCom was the second-largest telecommunications company in US
before its bankruptcy. In addition, WorldCom has been frequently
mentioned in corporate fraud literature as this company was famous for
inflating its assets by as much as US $11 billion (Siegel 2019). In addition,
the company was found to inflate US $3.8 billion improperly reported
earnings before taxes between 1999 and 2002, which made the biggest
accounting scandal ever in the history. All these deceitful accounting
12 L. LI AND A. MCMURRAY

activities were conducted mainly based on the instruction from the Mr.
Bernard Ebbers, the CEO of WorldCom to beat the market expectation
from Wall Street. Consequently, at the peak of the dotcom bubble, the
market value of WorldCom reached US $175 billion.
If Enron scandal was covered by its complex partnerships and trans-
actions with SPVs, then what WorldCom did wrong was very straight
forward. There were two basic accounting concepts associated with
WorldCom scandal: business expenses and capital expenditures. These two
different types of business cost were treated differently when preparing
the income statement. In general, business expenses, such as business
overhead or direct labour cost, should be considered as the part of busi-
ness cost of the current accounting period and, therefore, are directly
deducted from revenue. In contrast, capital expenditures are funds used
by a company to acquire, upgrade, and maintain physical assets such as
property, plants, buildings, or equipment. The capital expenditures can
be capitalised, that means the total capital expenditures can be allocated
as expenses in the income statement over the period during which phys-
ical assets are expected to provide economic benefits. What happened to
WorldCom was very simple. The company capitalised its business expenses
with the intent of making the company look more profitable. Based
on this approach, the company successfully inflated and exaggerated its
profits by around US $3 billion in 2001 and US $797 million in Q1
2002, reporting a profit of US $1.4 billion instead of a net loss (Kaplan
and Granelli 2002).
Eventually, all these wrongdoings were detected by a group of internal
auditors in 2002 as they could not find any invoices or documentation
to back up a US $500 million charge for computer equipment. This
triggered a deeper investigation of the company’s book where bigger
problems were uncovered. Ms Cynthia Cooper, the formal vice presi-
dent of internal audit unit at WorldCom, played an important leading
role in this process. Cooper and her team briefed the company’s audit
committee and board of directors in June 2002. It is also worth noting
that Arthur Anderson was the external auditor of WorldCom. The rest of
the story looks very familiar. SEC launched its investigation, WorldCom
filed for bankruptcy in 2002, and investors experienced huge loss. Ebbers
was convicted on nine counts of securities fraud and sentenced to 25 years
in prison in 2005, and the former CFO Scott Sullivan received a five-year
jail sentence. Ms Cynthia Cooper was named as one of three “Persons of
the Year 2002” by Time magazine.
 1 WHAT IS CORPORATE FRAUD? 13

Madoff Investment Scandal (2008)

Arguably, the most shocking news during the global financial crisis period
was the collapse of the Bernard L. Madoff Investment Securities. Before
the global financial crisis, Mr. Bernard “Bernie” Madoff was a very influ-
ential and respected figure on the Wall Street. He was the founder and
chairman of the Bernard L. Madoff Investment Securities, which was the
6th largest market maker in 2008. In addition, he was the chairman
of the NASDAQ stock exchange. However, Bernard “Bernie” Madoff
was the person responsible for the largest Ponzi scheme in history. The
Ponzi scheme, which likely run in decades, eventually costed billions of
dollars from thousands of investors. The fund’s last statements indicated
it had US $64.8 billion in client assets. Many investors were cheated
by Madoff, including big instructions, such as Banco Santander, HSBC,
Royal Bank of Scotland, Korea Teachers Pension, and many celebrities,
such as famous victims of this scandals, include Larry King, Steven Spiel-
berg, Kevin Bacon and Kyra Sedgwick, John Malkovitch, Ira Rennert, and
Elie Wiesel (Dangremond 2017; Carlson 2021).
Again, how did he manage to do that? Madoff’s trick was very simple.
He put all clients’ money into a single bank account and used this
account to pay investment returns to existing clients or whoever wishes to
redeem their investment. The superior investment return and his reputa-
tion helped his company attract tens of billions of dollars from investors all
around the world. In addition, Madoff was trying to cultivate an image of
exclusivity of his company by turning clients away, which made him more
attractive to investors. However, the party time for Madoff ended in 2008
when the market was hit hard by the global financial crisis. Many investors
wanted to withdraw their money, but Madoff did not have enough money
to make the payment. Under escalating pressure, Madoff had no choice
but to confess that his advisory business is basically a big Ponzi scheme.
In 2009, Madoff pleaded guilty to charges of eleven federal felonies
and was sentenced to 150 years in maximum security prison and US $170
billion restitution. He passed away in 2021 in federal prison due to nature
causes at the age of 82. Originally, the size of the fraud was estimated
around US $65 billion. Along with the investigation and recovery process,
the total loss of this fraud could be around US $12–$20 billion and
depends on the calculation method. There is no winner from this scandal,
even for Madoff himself. Many Madoff family members have been inves-
tigated, including his brother, two sons, niece, and wife. His brother was
14 L. LI AND A. MCMURRAY

sentenced to 10 years in prison, and one of his sons committed suicide

exactly two years after his father’s arrest.

Volkswagen Emission Gate Scandal (2015)

Volkswagen group was the No. 2 global automobile company by volume
behind Toyota in 2014. It sold vehicles in 153 countries and controlled
11.1% of the global automotive market share (VW 2014). However, VW
only occupied 1.9% of the market in the US, making it number 12 behind
BMW and Mercedes-Benz (VW 2014). Besides the huge success in busi-
ness, VW group has its reputation corporate social responsibility and
green car innovation. For example, it has established a corporate social
responsibility and sustainability coordination office since 2006. Since
2010, VW group began to release its corporate new sustainability reports,
which focus on the company’s success in green innovation, global value
chain, logistics, production, and many other areas. In 2011, the company
launched the “Think Blue. Factory” environmental campaign, aiming to
reduce the company’s waste, energy, and water impact by 25% in 2018
(CarTrade 2013). In 2008, the VW Jetta TDI won the “Green Car of
the Year” award at the Los Angeles Auto Show, which was the first time
a diesel-powered vehicle has won this prestigious award. In May 2009,
the Audi A3 wins “Green Car of the Year” in the US, which is based
on the similar engine (Bay 2015). By 2013, VW group was ranked first
in its sector on the Dow Jones Sustainability Index with a score of 89
out of 100 (Crowe 2013). Along with those great technological break-
throughs and green car awards, it is no surprising to see that the share
price of VW group has maintained very impressive market performance,
which reached at $245 per share in 2015 from $28 per share in 2016.
Everyone was happy, as investors enjoyed impressive return from stock
market, and senior managers and employees of VW group received huge
financial rewards from performance-related bonus.
However, all good stories related to VW group ended on the 18
September 2015. On that date, Ms Cynthia Giles, head of the US
Environmental Protection Agency, publicly announced that VW group
has deceived customers and US regulators in measuring toxic emissions
related to diesel engines. Instantly, shares of Volkswagen have plunged
nearly 50% within few trading days, or roughly US $42.5 billion. But
why diesel engines? In general, there are two main types of combustion
engines widely used: diesel and petrol. Compared to petrol engines, one
 1 WHAT IS CORPORATE FRAUD? 15

of the major advantages of diesel engines is fuel economy. Diesel fuel

contains more energy per gallon than gasoline, and the diesel engines
work more efficiently; therefore, a typical diesel car gets better mileage
and emits fewer carbon dioxide. However, diesel engines emit more
nitrogen oxides (NOx), which causes lungs damage. This is why diesel
cars did not catch on in the US due to very restricted environmental
standard imposed in US government. VW treated this as an opportunity
as the company was strongly motivated to develop a diesel engine meets
the emission standards in US without compromising fuel efficiency (Bay
2015). Since 2009, Volkswagen has sold more than 482,000 so-called
clean diesel cars in US market, including versions of the Passat, Jetta,
Golf, Beetle, and Audi’s A3. Unfortunately, they are not clean at all.
It is hard to estimate the total cost of the VW emission gate scandal,
which could be the most expensive corporate scandal ever. Wikipedia
reports that “as of 1 June 2020, the scandal had directly costed VW group
$33.3 billion in fines, penalties, financial settlements and buyback costs”.
Colvin (2020) reports many other costs associated with this scandal. For
example, up to October 2020, the company has booked US $35 billion
of charges to earnings in fines, litigation costs, and other payouts. In
addition, VW stock was still 35% below its pre-scandal price. VW has
compensated US $1.2 billion to its US dealers, but the number is still
raising. In 2016, VW announced to cut 30,000 jobs by 2021 to improve
its profitability. The indirect cost includes the damage to the VW brand,
and “Made in Germany”, which is difficult to provide an accurate figure.
It is also worth mentioning that the persecution against formal VW direc-
tors is far from over. As Colvin (2020) points out that the trial of Mr.
Rupert Stadler, the formal chairman and CEO of Audi Auto Group, is
scheduled in 2022. The trail of Mr. Martin Winterkorn, the formal CEO
of VW group, on charge of fraud and market manipulation, does not have
a confirmed schedule yet.

1.4 How to Stop History from Repeating Itself?

Corporate fraud is not a new concept, and countless legislative regulations
have been implemented to respond the wave of corporate frauds in the
past. However, significant and massive corporate frauds continue to this
day. Therefore, the effectiveness and functionality of the existing legal
framework and governance system have been questioned. According to
16 L. LI AND A. MCMURRAY

ACFE’s 2020 Report to the Nation, it is estimated that business organisa-

tions globally on average lose 5% of their annual revenue to fraud, roughly
equal to US $4.5 trillion in losses. As expected, this is a huge loss to the
whole society, and the lost revenue could be used in much better places.
So, why it is so difficult to detect and prevent corporate fraud? The
answer is very complicated as fraudulent behaviours, characteristics of
perpetrators, and reasons for committing fraud vary greatly from case
to case. In addition, corporate fraud involves a wide range of fraudulent
behaviours, some of which might be more commonly used than others.
Therefore, there is no simple solution for corporate fraud. There are so
many anti-fraud approaches can be implemented, ranging from intro-
ducing new external anti-fraud act to offering internal employee training
programs. However, arguably effective internal control is the most effec-
tive one, which is supported by the survey results of the information of
the initial detection of frauds conducted by ACFE since 2002.
Table 1.1 presents the information of the initial detection of frauds
surveyed by ACFE since 2002. Obviously, the detection method is an
important element in fraud investigation and prevention, as it can signif-
icantly reduce the frequency and severity of corporate fraud. People
need to think about twice before committing a fraud if an organisa-
tion is associated with effective detection and prevention mechanism,
future deterring misconduct behaviours. In addition, successful cases in
the past could provide an insightful guidance on future fraud detection.
As observed from Table 1.1, the most common method for fraud detec-
tion is tips, representing on average over 41.1% of detected cases, followed
by internal control (26.1%) and internal audit (17.1%). Surprisingly,
the least effective fraud detection approach is external law enforcement,
which only accounts for 2.3% of the detected cases. Why tips matter?
Explanation from ACFE is that Section 301 of SOX Act requires all
public listed companies to have standard mechanism for “the confidential,
anonymous submission by employees of the issuer of concerns regarding ques-
tionable accounting or auditing matters ”. The data presented in Table 1.1
obviously confirms the effectiveness of the mandatory enforcement.
But, where are the major sources of tips? Table 1.2 provides the
answer. It is clear that frauds are detected not purely by accident. In
fact, employee is the major source of tips, accounting for 54.6% of the
tips cases, followed by customers (219%) and anonymous (13.8%). The
message from Table 1.2 is clear, showing that a strong and transparent
Table 1.1 Initial detection of corporate fraud

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Average
(%) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%)

Tip 43 39.6 34.2 46.2 40.2 43.3 42.2 39.1 40 43 41.1

By accident 18.8 21.3 25.4 20 8.3 7 6.8 5.6 7 5 12.5
Internal audit 18.6 23.8 20.2 19.4 13.9 14.4 14.1 16.5 15 15 17.1
Internal control 15.4 18.4 19.2 23.3 31.2 29 31.7 32.6 29 31 26.1
1

External audit 11.5 10.9 12 9.1 4.6 3.3 3 3.8 7 4 6.9

Law 1.7 0.9 3.8 3.2 1.8 3 2.2 2.4 2 2 2.3
enforcement

Source Association of Certified Fraud Examiners (2002, 2004, 2006, 2008, 2010, 2012, 2014, 2016, 2018, 2020) and author’s computations. Total
exceeds 100% because in some cases respondents identified more than one detection method
WHAT IS CORPORATE FRAUD?
17
18 L. LI AND A. MCMURRAY

anti-fraud organisational culture is central for fraud detection and preven-

tion. Employees participate daily business operation, and they need to
know what acceptable and unacceptable behaviour in the workplace is.
For example, code of conduct and ethical standards needs to be part of
employees’ training program. More importantly, employees need to know
how to report unethical or illegal behaviours when something suspicious
gets their attention. The communication channel for reporting fraudulent
behaviours must be established and well maintained, which encourages
employee to anonymously report questionable behaviour to the atten-
tion of the authorised company representative. For example, a hotline
or reporting mechanism is in place within the organisation. In its 2020
report, ACFE claimed that organisations with some form of hotline or
alternative reporting mechanism in place can spot fraud quicker (33% less
time), experience less fraud loss (50% less), and more fraud cases detected
(16% more).
If employees and shareholders are treated as insiders, then it is surpris-
ingly to see that outsiders (customer, vendor, and competitors) jointly
contribute 31.5% tips leading to fraud detection. Therefore, it is impor-
tant to make hotlines or reporting mechanism available to outsiders as
well. Another interesting finding is that 13.8% tips are from anonymous
sources, implying that sometimes whistle-blowers are afraid of being iden-
tified or retaliated against. Therefore, it is important for whistle blowers
to anonymously report fraudulent behaviours, which could significantly
encourage more people to take actions when they observe something
suspicious in the future.

1.5 Concluding Remarks

It is easy to describe a corporate fraud case, but it is much difficult to
detect it before it occurred. In addition, there is a trend that corpo-
rate frauds are more frequently observed in recent years, and the size of
the corporate frauds is getting bigger and bigger. Besides the corporate
frauds cases mentioned in Sect. 1.3, many other massive corporate frauds
at Waste Management, Tyco International, HealthSouth, Freddie Mac,
American International Group, Lehman Brothers, and Satyam Computer
Services are reported by media.
Despite a series of legislative response to the corporate frauds, which
lead to a much transparent, standardbred, and accountable corporate
practices guidance and fraud punishment, the massive corporate fraud
Table 1.2 Sources of tip

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Average
(%) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%)

Employee 61.1 59.6 64.1 57.7 49.2 50.9 49 51.5 53 50 54.6

Customer 20.1 19.7 10.7 17.6 17.8 22.1 21.6 17.8 21 22 19
Anonymous 14.4 12.9 18.1 8.9 13.4 12.4 14.6 14 14 15 13.8
Vendor 11.8 15.7 7.1 12.3 12.1 9.0 9.6 9.9 8 11 10.6
1

Other 1.8 6.5 12.6 5 6 6.4

Shareholder 9.2 3.7 2.3 4.3 2.7 2 2 3.7
Competitor 1.0 2.5 1.5 1.5 1.6 3 2 1.9

Source Association of Certified Fraud Examiners (2002, 2004, 2006, 2008, 2010, 2012, 2014, 2016, 2018, 2020) and author’s computations. Other
category is not included in reports of 2002, 2004, 2006, 2008, and 2010. Shareholder and competitor categories are not included in reports of
2002, 2004, and 2008
WHAT IS CORPORATE FRAUD?
19
20 L. LI AND A. MCMURRAY

continues to this day. For example, the Luckin Coffee scandal revealed in
2020. According to PricewaterhouseCoopers (PwC)’ Global Economic
Crime Survey 2020, globally $42 billion loss has been reported due to
fraud in 2018–2020. In addition, there has been a 35% increase in the
number of companies reporting bribery and corruption, a 28% increase
in the number of reporting accounting fraud, and a 17% increase in the
number of reporting human resource fraud. Therefore, like mentioned in
the survey “Fighting fraud is a never-ending battle”.

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 CHAPTER 2

Types of Corporate Fraud

2.1 Introduction
According to the PwC 2020 Global Economic Crime and Fraud Survey,
corporate fraud remains a challenging issue for modern business and
society. This is due to the fact that nearly half of the survey respondents
had suffered at least one fraud—with an average of six per company fraud
incidents over the past 24 months. Alarmingly the reported loss of funds
due to corporate fraud occurrences totalled approximately US $42 billion.
Therefore, it is fair to say that corporate fraud remains a major concern
for everyone as it often leads to serious financial losses for investors,
institutions, and the general public thus weakening public trust of the
financial system. Subsequently, a country’s economy and overall economic
performance could be jeopardised and deteriorated in the long term.
Therefore, globally a series of legislative responses with stricter corporate
practice guidelines, such as the Sarbanes–Oxley Act and Corporate Gover-
nance Code, have become effective since 2002. However, significant and
massive global corporate fraud continues to this day with examples of
scandals related to Nikola, Wirecard, and Luckin Coffee in 2020. People
might ask why it is so difficult to detect and prevent corporate fraud, as
the existing legal frameworks fail to detect and prevent corporate frauds
in advance. One of the major reasons is that corporate frauds come in
many different forms, therefore, they are difficult to identify, capture, and
prevent. In general, corporate frauds fall into three major categories: asset

© The Author(s), under exclusive license to Springer Nature 23

Singapore Pte Ltd. 2022
L. Li and A. McMurray, Corporate Fraud Across the Globe,
https://doi.org/10.1007/978-981-19-3667-8_2
24 L. LI AND A. MCMURRAY

misappropriations, corruptions, and financial statement fraud (Brugess

2016; Berkman 2018; ACFE 2020). This chapter discusses the common
types of corporate fraud.
Table 2.1 presents the frequency and average loss from three major
corporate fraud types based on the global survey conducted by the ACFE
(1996, 2002, 2004, 2006, 2008, 2010, 2012, 2014, 2016, 2018, 2020).
It is observed that although the figures vary across survey years, with asset
misappropriation being by far the most common type of corporate fraud,
accounting for 87% of reported cases with a median loss of US $114,700.
The second common fraud type is corruption, with 30.5% of the cases
related to corruption with an average loss of US $321,200. Financial
statement frauds represent only 8.1% of the total reported cases, but the
caused loss is the greatest among these three fraud types. As observed
in panel B of Table 2.1, the median loss of financial statement frauds
is US $2,007,200, suggesting that financial statement frauds have more
severe damage to the company compared with other two fraud types. It
is worth noting that the sum of percentage of three categories exceeds
100%, because some cases involved more than one types of fraud.
Table 2.2 demonstrates the characteristics of the victim organisa-
tions. ACFE classifies victim organisations into five categories, including
privately held companies, publicly traded company, government agencies,
non-for-profit organisations, and other. Panel A of Table 2.2 displays the
frequency of victim organisations based on ACFE reports between 2002
and 2020. It is observed that private companies are the victims of 39.3%
fraud cases, followed by the public companies with the 29.3% of the total
fraud cases. In addition, 17.5% of victim organisation is the government
agency, while 11.3% of the cases are related to non-for-profit organisa-
tions. Panel B of Table 2.2 reports the median loss associated with each
organisation type. Similar pattern is observed from the median loss data,
as the highest monetary loss is associated with private companies with a
median loss of US $182,300, followed by public companies with a median
loss of US $156,400.
Victim organisations are also classified based on the industries in which
they operate. The results are presented in Table 2.3. Similar to Tables 2.1
and 2.2, panel A of Table 2.3 reports the percentage of cases related to
each industry, and panel B of Table 2.3 captures the median loss infor-
mation of each industry. According to Panel A of Table 2.3, 16.1% of
cases occurs in the banking and financial sector, followed by govern-
ment and public administration, and manufacturing sectors. These three
 2 TYPES OF CORPORATE FRAUD 25

Table 2.1 Frequency and average loss of corporate fraud

Panel A: Frequency of Asset Misappropriation Corruption Financial

Fraud Type (%) Statement Fraud

1996 81.1 14.8 4.1

2002 85.7 12.8 5.1
2004 92.7 30.1 7.9
2006 91.5 30.8 10.6
2008 88.7 27.4 10.3
2010 86.3 32.8 4.8
2012 86.7 33.4 7.6
2014 85.4 36.8 9
2016 83.5 35.4 9.6
2018 89 38 10
2020 86 43 10
Average 87.0 30.5 8.1

Panel B: Median Asset Corruption (US $ in Financial

Loss Misappropriation 000) Statement Fraud
(US $ in 000) (US $ in 000)

1996 65 440 4000

2002 80 530 4250
2004 93 250 1000
2006 150 538 2000
2008 150 375 2000
2010 135 250 4100
2012 120 250 1000
2014 130 200 1000
2016 125 250 975
2018 114 250 800
2020 100 200 954
Average 114.7 321.2 2007.2

Source Association of Certified Fraud Examiners (1996, 2002, 2004, 2006, 2008, 2010, 2012, 2014,
2016, 2018, 2020) and author’s computations

sectors jointly represent 37% of the reported fraud cases between 2004
and 2020. In contrast, agriculture sector only accounts for 1.4% of cases.
In general, the case distribution throughout industries is fairly consistent
across these reports in different years. Panel B presents the median loss of
victim organisations by industry. It is observed that agriculture industry is
more severely affected by the reported frauds compared to other industry,
with a median loss of US $311,400. However, this result is severely driven
26 L. LI AND A. MCMURRAY

Table 2.2 Characteristics of victim organisation

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Average

Panel A: frequency by types of the Organisation (%)

Private 31.9 41.8 36.8 39.1 42.1 39.3 37.9 37.7 42 44 39.3
company
Public 30 30.3 31.7 28.4 32.1 28 28.5 28.6 29 26 29.3
company
Govern- 24.7 15.8 17.6 18.1 16.3 16.8 15.1 18.7 16 16 17.5
ment
Agency
Not for 13.4 12.2 13.9 14.3 9.6 10.4 10.8 10.1 9 9 11.3
Profit
Other N.a N.a N.a N.a N.a 5.5 7.7 5 4 5 5.4
Panel B:Median Loss ($ in 000)
Private 127 123 210 278 231 200 160 180 164 150 182.3
company
Public 150 100 200 142 200 127 200 178 117 150 156.4
company
Govern- 48 37.5 100 100 100 81 90 109 118 100 88.4
ment
Agency
Not for 40 100 100 109 90 100 108 100 75 75 89.7
Profit
Other N.a N.a N.a N.a N.a 75 127 92 120 100 102.8

Source Association of Certified Fraud Examiners (2002, 2004, 2006, 2008, 2010, 2012, 2014, 2016,
2018, 2020) and author’s computations. Other category is not available in 2002, 2004, 2008, and
2010 reports

by the heavy loss occurred in 2004. For example, only six reported cases
occurred in the agriculture industry in 2004, but these six cases resulted
in the huge median loss.
Similar patterns were found in real estate (with a median loss US
$555,000 in 2014), energy (with a median loss of US $478,000 in 2010),
and construction (with a median loss of huge loss of US $500,000 in
2006).
Next question is who are these perpetrators? ACFE collects infor-
mation of perpetrators based on their level of authority and gender.
Figure 2.1 presents the distribution of cases based on perpetrator’s level
of authority. The data shows that majority of the frauds are committed by
employees, followed by managers. Owners and executives are least likely
to be involved in frauds. However, as shown in Fig. 2.2, frauds committed
Table 2.3 Industry of victim organisations

2004 2006 2008 2010 2012 2014 2016 2018 2020 Average

Panel A: frequency by Industry (% of Cases)

Education 6.1 7 6.5 5 6.4 5.9 6 4.5 4.2 5.7
Utility 2.6 3.3 2.4 2.5 1.8 1.8 1.8 1.3 1.0 2.1
Government and Public Administration 10.5 11.5 11.7 9.8 10.3 10.3 10.5 9.3 10.0 10.4
Insurance 9.1 7.5 5.6 5.1 5.7 4.5 3.9 4.7 4.4 5.6
Service 11.1 11.4 8.2 7.7 7.5 6 5.9 4.0 4.3 7.3
Retail 7.9 7.2 7 6.6 6.1 5.6 4.8 5.0 4.7 6.1
Health Care 7.3 8.6 8.4 5.9 6.7 7.3 6.6 7.3 7.7 7.3
Construction 3.4 3.4 4.6 4.3 3.4 3.1 3.9 4.2 4.1 3.8
Energy 3.2 3.1 1.9 3.2 3.2 3.6 3.4 4.4 4.7 3.4
Banking and Financial Services 11.1 14.8 14.6 16.6 16.7 17.8 16.8 17.0 19.8 16.1
Manufacturing 12.9 9.7 7.2 10.7 10.1 8.5 8.8 9.8 9.5 9.7
Real Estate 2.2 2.9 3.2 3.2 2 1.8 1.9 1.6 2.7 2.4
2

Agriculture 1.2 0.8 1.4 1.5 1.5 2 2 1.5 2.1 1.5

Other 11.4 8.8 17.3 17.9 18.6 21.8 23.7 25.4 20.9 18.4
Panel B: Median Loss ($ in 1000)
Education 31 100 58 71 36 58 62 68 65 61.0
Utility 30 124 90 120 38 100 102 150 163 101.9
Government and Public Administration 45 82 93 81 100 64 133 125 100 91.4
Insurance 172.5 100 216 197 95 93 107 153 70 133.7
Service 139 231.5 139.4 109.3 131.3 149.8 196.9 170 150 157.5
Retail 35.5 80 153 85 100 54 85 50 85 80.8

(continued)
TYPES OF CORPORATE FRAUD
27
 28

Table 2.3 (continued)

2004 2006 2008 2010 2012 2014 2016 2018 2020 Average

Health Care 105 160 150 150 200 175 120 100 200 151.1
Construction 145 500 330 200 300 245 259 227 200 267.3
Energy 101.5 154 250 478 250 450 275 300 275 281.5
Banking and Financial Services 101 258 250 175 232 200 192 110 100 179.8
Manufacturing 125 413 441 300 200 250 194 240 198 262.3
Real Estate 38.5 200 184 475 375 555 200 180 254 273.5
Agriculture 1080 71 450 320 104 242 300 136 100 311.4
L. LI AND A. MCMURRAY

Other 145 610 279.5 268.2 133.8 224.3 176.2 128.5 165.9 236.8

Source Association of Certified Fraud Examiners (2004, 2006, 2008, 2010, 2012, 2014, 2016, 2018, 2020) and author’s computations
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