Page 204 - Encyclopedia of Business and Finance

eobf_C 7/5/06 2:57 PM Page 181

Crime and Fraud

and the Seattle, Washington, Police Department Price Fixing. Businesses may engage in another type of
(http://www.ci.seattle.wa.us/police/default.htm). crime known as “price fixing,” or conspiring with com-
petitors to charge a minimum price for their products.
Walk-in office/factory thefts. Some individuals commit
This practice forces consumers to pay more for a particu-
thefts simply by walking into an office and stealing some-
lar product than would be charged in a “nonprice-fixing”
thing of value. The criminal then walks out of the office
competitive environment. Businesses are rewarded with
or factory with the item and tries to resell the product.
higher profit margins because this practice does not force
Individuals who commit such crimes often try to look as
them to conform to market forces. Price fixing is a viola-
if they belong there (such as a delivery person) in order to
tion of the Sherman Antitrust Act of 1890, which was
get past business security and to not look suspicious to the passed to ensure that a competitive free market exists,
employees. allowing for competitive pricing. The Federal Trade Com-
mission and the U.S. Department of Justice have primary
CRIMES COMMITTED BY jurisdiction over businesses that engage in violations of
BUSINESSES the Sherman Antitrust Act. When a business and its offi-
cers are prosecuted for price fixing, the business often
Occasionally, businesses are sources of crime against con- faces large fines while individual officers usually go to
sumers, the general public, government, and/or stock- prison.
holders. Examples of crimes committed by businesses
include fraudulent reporting, price fixing, and product
Product Misrepresentation. When a business knowingly
misrepresentation.
produces a defective or substandard product and sells it to
the public anyway, the firm has committed product fraud.
Fraudulent Reporting. A business might partake in fraud- Product fraud is extremely serious because consumers
ulent activities by manipulating or misrepresenting busi- depend on safe products in every aspect of daily life.
ness accounting records, profit information, sales data, or Defective or unsafe products can cause serious harm to
other pertinent financial information. This type of behav- both the individual consumer and the general public. An
ior is usually an attempt to hide serious financial problems example of product fraud would be when an automobile
in order to prevent the general public, regulatory agencies, manufacturer produces and markets a vehicle that has
or stockholders from getting poor status reports. Unfavor- shown, in presale trials, to be unsafe. For instance, a vehi-
able financial information can be devastating to a busi- cle may be unsafe when hit from behind or from the side,
ness’s stock value, which, in turn, will likely cause the causing the gas tank to explode because of design flaws.
business to lose a considerable amount of money in busi- The obvious results of such flaws in vehicle design are the
severe injury and/or death of people. Naturally, responses
ness equity. For example, business X might intentionally
to product fraud include numerous lawsuits and lack of
misreport higher profits than were actually accrued to public trust in businesses that knowingly release defective
maintain the stock price and value of the business. If the or poorly designed products.
actual lower profits had been reported, then the stock
would almost surely go down, causing a decrease in the
SUMMARY
value of the business.
Business-related criminal activity is not new. Crimes in
Another reason a business might report inaccurate
business, such as fraud, can be traced back thousands of
financial data is because most corporate officers have some
years. Crimes can be committed both by and against a
form of stock options, and a serious drop in the stock
business. Common crimes that influence the health of
price might be very costly on a personal basis. This type of
businesses and their customers include burglary, embez-
fraud is usually carried out at the top levels of the busi- zlement, fraud, robbery, and shoplifting. Since crimes,
ness. When this type of crime is committed by a business both by and against businesses, are so costly, elaborate
through its officers, serious consequences accrue to both. measures have been put in place to decrease the likelihood
Once the crime is uncovered, regulatory and law enforce- of their occurrence.
ment agencies at both the federal and state levels may
SEE ALSO Cyber Crime; Fraudulent Financial Reporting;
begin an investigation of the alleged fraudulent activities.
Identity Theft; Privacy and Security
If the criminal activities are substantiated and convictions
occur, the business, at a minimum, faces large fines, while
BIBLIOGRAPHY
the officers face long prison terms. In addition, the busi-
Bologna, G. Jack, and Shaw, Paul (2000). Avoiding cyber fraud in
ness faces a humiliating defeat in the arena of public opin- small businesses: What auditors and owners need to know. New
ion that will, in turn, hurt future sales. York: Wiley.

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 181