The Nature and Scope of Fraud and Fakery in International Business - Term Paper Example

 Assess the Nature and Scope of Fraud and Fakery in International Business. Consider Whether any Trends or Patterns Emerge in Reviewing Evidence from the 18th Century to Close to 20th Century Introduction Since the inception of trade and business activities, fraudulent acts have occurred on regular basis (Bologna, 1993). It was back in 300 BC, when Hegestratos, a merchant from Greece, became a party to an insurance policy. Hegestratos obtained a loan and agreed for its payment upon the delivery of cargo through boat. Having entered the agreement, Hegestratos devised a plan to intentionally sink the boat and keep the cargo and amount of loan acquired with himself (Pope, 2012). However, he could not succeed in his plans and drowned with his boat. Although historians consider this incident to be the first known fraudulent act in business, it can be however stated that fraudulent acts simultaneously emerged with the emergence of trade and commerce (Pope, 2012). In this report, the nature and scope of fraud and fakery has been discussed while reviewing the literature and information pertaining to the biggest fraud scandals and how they have been committed internationally. In addition, a review of the development or rather evolution of fraud from 18th to 20th century has also been included in this report, which highlights how fraudulent acts have evolved and adjusted to the changing business environments, legislations and technology. Nature and Scope of Fraud and Fakery Before understanding the nature and scope of fraud and activities related to it, it is important to understand what is meant by the term “Fraud”. In its simplest meanings, fraud can be considered an act of deceiving another with the intention of gaining something as a result. Fraud is illegal because it involves misrepresentation, deception and trickery. It is pertinent to distinguish fraud from errors considered as unintentional (Singleton & Singleton, 2010; Davia, Coggins, Wideman, & Kastantin, 1992; Albrecht, Albrecht, Albrecht, & Zimelman, 2009). As for instance, incorrectly entering a wrong amount in an invoice and receiving or giving incorrect amount by mistake does not account for fraud. In fact, it is the thought of deception which distinguishes a mistake from a fraud. The Oxford Dictionary defines fraud as: “wrongful or criminal deception intended to result in financial or personal gain.” (Oxford Dictionaries, 2014). On the other hand, the government of UK on its official website, has provided a broad definition of fraud in relation to international trade. The definition provided by the government of UK is as follows: “Fraud is taking money or goods by deceiving others. Examples of fraud concerning international trade include: pretending to pay for goods from another country by creating false documents, but not actually paying for them stealing a business identity or creating a fake business stealing ‘intellectual property’ - for example, by importing pirated films or fake trademarked items charging VAT but not paying it to HM Revenue & Customs (HMRC) trading in weapons or their components but pretending they’re something else” (GOV.UK, 2014). Apart from these definitions, another version of the definition for fraud is provided in the Webster Dictionary, which seems to be more explanatory, simple and convincing. The definition is as follows: “In law, the deliberate misrepresentation of fact for the purpose of depriving someone of a valuable possession or legal right. Any omission or concealment that is injurious to another or that allows a person to take unconscionable advantage of another may constitute criminal fraud. The most common type of fraud is the obtaining of property by giving a check for which there are insufficient funds in the signer's account. Another is the assumption of someone else's or a fictitious identity with the intent to deceive. Also important are mail and wire fraud (fraud committed by use of the postal service or electronic devices, such as telephones or computers).” (Merriam-Webster, 2014) From these definitions, it is understood that fraud involves an intent, which is to deceive other(s), and is a deliberate act involving deception, misstatement, embezzlement whether on a small or a large scale (Albrecht, Albrecht, Albrecht, & Zimelman, 2009). In addition to this, there are different types of frauds (Vallabhaneni, 2009). As per the work of Davia, Coggins, Wideman, & Kastantin (1992), there are four different types of frauds, which include the following: Theft of Assets, Fraud by Frequency, Fraud by Conspiracy, and Varieties of Fraud (Davia, Coggins, Wideman, & Kastantin, 1992). Each of these four types has been disussed concisely as follows: Theft of Assets The theft of asset can be viewed in three different ways. First of all, it can be considered as a misappropriation of assets which appears on the accounting books in a manuipulated manner so as to conceal a whole transaction which is fraudulent (Davia, Coggins, Wideman, & Kastantin, 1992). Similarly, another type of theft of assets may be such that it is not reflected in the books, but is merged with other transactions with the intention to keep it hidden (Davia, Coggins, Wideman, & Kastantin, 1992). Lastly, theft of assets can also be such that it does not exist in the books at all (Davia, Coggins, Wideman, & Kastantin, 1992; Vallabhaneni, 2009). Fraud by Frequency Fraud by frequency is also a type of fraud which may be repeated or nonrepeated by the fraudster. In other words, as per this type of fraud, fraud may occur repeatedly or may not be repeated (Davia, Coggins, Wideman, & Kastantin, 1992). Fraud by Conspiracy Fraudulent acts may often be initiated by collusion between various parties. In other words, the execution of fraud is carried out by the arrangement between different parties to the fraud and particularly those who have the ability to commit such act. As for instance, those charged with a certain responsibility are in a position to manipulate things to their or others benefit (Davia, Coggins, Wideman, & Kastantin, 1992). Varieties of Fraud This type may not necessarily be termed as a type of fraud, but in fact it portrays different ways and situations which entice fraudulent acts. According to Davia, Coggins, Wideman, & Kastantin (1992), specialized fraud and garden variety fraud are the categories which can be included in this type of fraud. The first category, which is specialized fraud, can be related to individuals who are working in a particular settings in a business; whereas, garden variety fraud can be related to any individual who is generally working in a business entity (Davia, Coggins, Wideman, & Kastantin, 1992). As far as the scope of fraud is concerned, it is determined by the environment, legislative structure, regulatory frameworks used as detering fraudulent acts and moral and social norms (Davia, Coggins, Wideman, & Kastantin, 1992). As far as business entities are concerned, the scope of fraud is widened where the environment is such that there exists poor ethical culture, lack of control and oversight on the activities of subordinates, low or no accountability, etc. On the other hand, the scope of fraud is narrowed down with mere improvement in the management practices and intentions to carry out their respective duties to the fullest (Davia, Coggins, Wideman, & Kastantin, 1992; Kroll, 2011). The scope of corporate fraud, with respect to a business entity, can also be understood by understanding the internal and external perpetrators (Vallabhaneni, 2009). As noted by Bologna (1993), frauds can be initiated by perpetrators of both type, i.e. internal and external to a business organization. Due to the differences in the interests and stakes of different stakeholders in a business, the aim and scope of the fraudulent acts also vary significantly for internal and external perpetrators (Bologna, 1993). Furthermore, Bologna (1993) also states that the fraud which is initiated by management mostly involves deliberate misstatements in the financial reporting with the objective of seeking appraisal and promotions within the organization. On other hand, fraud initiated by external parties is generally aimed at gaining resources, profit making or defaming an organization (Bologna, 1993). Trends and Patterns in Fraud since 18th Century till 20th Century With the changes and developments in ways of doing business, globalization, legislative frameworks and technology, the ambit and nature of fraud changed significantly over the years and centuries (Kadens, 2011; Kroll, 2011). The developments in the legal and legislative frameworks for curbing fraud were adjusted as per the changes observed in the fraudulent acts. For the purpose of understanding trends and patterns in fraud and fakery from 18th century till 20th century, it is important to look into some of the famous fraudulent acts which happened during this time period. Fraudulent Activities: A Glimpse from the Past The beginning of fraud in England in the 18th century had its roots in the 17th century, when the government of England found itself in a situation where it was difficult to make revenues from merely tax collection and some other source of income for the government had to be developed (Ramage, Fraud and the Serious Fraud Office: Fraud Law: Book Two, 2005b). In this regard, the government established a national lottery in the country. The lottery scheme gave way to gamblers to step in and large scale gambling, which was accompanied with fraud, initiated in England. It was in 1710, that the lottery scheme actually began and the fraudsters found it an attractive way of making easy profits (Ramage, 2005b). The South Sea Company Scam With the passage of time, the nature of fraud evolved and fraudsters started to aim at large scale frauds and opt different means to do so. A famous case of 1720s, which relates to South Sea Company, is an example of how businessmen and investors were lured to invest in a fake company (Singleton & Singleton, 2010; Ramage, Fraud and the Serious Fraud Office: Fraud Law: Book Two, 2005a). The company gained prominence due to political backing and the investment opportunities offered by the company ran through in an advertisement, which is stated as follows: “Such persons as are desirous to be Proprietors may on Thursday next purchase permits… at five shillings each, at Baker’s coffee house in Exchange Alley. N.B. No permits will be delivered for less than £ 1000 and not more than three permits to one person, to prevent their being engrossed by a few, as ‘tis to be feared has been done lately”. (Ramage, 2005a, p. 19) The advertisement was so cunningly placed and was so well designed that a man of ordinary prudence could not have any doubts regarding the genuineness of the offer (Ramage, Fraud and the Serious Fraud Office: Fraud Law: Book Two, 2005a). In fact large sums of money were poured in by investors, as they considered it to be an easy way of making money. In this way, millions of pounds were invested with the company and many investors took loans to invest in the company. The fraud behind the scheme came to limelight when the company went bankrupt. The goods traded by the company could not be traded in any market and it was then that investors found that all their investments became part of a large fraudulent scheme (Singleton & Singleton, 2010). After it was established that the South Sea Company ran its scheme on merely ideas and futuristic ambitions and there were no such realistic investment opportunities. It was after this large scale investment scam that businessmen and investors started to use the world “bubble” in relation to those investment opportunities which were fake or could not be materialized (Singleton & Singleton, 2010). The Bankruptcy Fraud of 1705 in England Similarly, bankruptcy frauds which have been observed in the modern business world of today are also not new, but in fact these types of frauds also way back (Kadens, 2011; Ernst, 2011). It was 1705, when two businessmen from London engaged in a large scale bankruptcy fraud. Apart from the fact that both of them were caught by the government officials, their fraudulent activities resulted in large insolvencies and the government had to introduce new laws by passing them through Parliament in order to deal with that bankruptcy scandal. Overall it took around forty years for the government to cover the scandal and resolve it through appropriate legal means (Kadens, 2011). The most important outcome after the emergence of this bankruptcy scandal was the development of relevant laws and regulatory frameworks to deal with such incidents and instances in future. In addition, the regulators also considered extending the boundaries of the legislations and regulations which existed relating to bankruptcy frauds (Kadens, 2011). The Insider Trading Scandal of 1792 In the early 90s of 18th century, the first ever scandal related to insider trading emerged. During that period America was gaining the reputation of being a newly developed nation and a strong business arena all over the world (Teall, 2012; Bainbridge, 2013). The American government, at that time, issued American bonds which were extremely volatile in value. The extent of volatility was such that even small events appearing in news caused the value of bonds fluctuate sharply. It was this inherent volatile characteristic of the bonds which lured investors to think of something out of the box (Teall, 2012). Ideally, those investors who were aware of upcoming or unrevealed news or events were in a position to manipulate things to their favour. At that time, the Secretary of Treasury in America started the restructuring of financial practices in the country and in wake of that initiated replacement of those American bonds with the bonds issued by the US Bank. On the other hand, large investors got engaged in obtaining information relating to which American bonds were to be replaced by the new bonds (Teall, 2012; Bainbridge, 2013). At the same time, the assistant Secretary of Treasury, William Duer, who had access to the insider information placed himself in a position to make hefty profits by manipulating investments and market through insider information he had. After some time, the bonds were considered as lucrative investment option and many European and local investors showed their interest in investing in the bonds. In the meanwhile, Duer, continued to pile up his investments and even took large loans to make further investments. However, the speculative bubble burst and all investments, including Duer’s, went worthless making thousands to be declared as bankrupt (Teall, 2012; Bainbridge, 2013). Having reviewed some of the historic fraud involving schemes and scams, the latest and one of the biggest fraudulent acts in the recent past can be taken into consideration, which is of Enron. Although Enron scandal came to light in the beginning of the 21st century, it was however initiated in the early 90s (Bierman, 2008; Cohan, 2002; Dharan & Bufkins, 2004; Albrecht, Albrecht, Albrecht, & Zimelman, 2009). The purpose of mentioning Enron’s scandal here is that it can be considered as an example to understand how fraudulent acts since the beginning of the 18th century have developed into more complex and sophisticated scheme of things (Kammerer, 2005; Thomas, 2002). Like any other major fraudulent act being discovered and reported in public, Enron’s case was also taken by many with interest. This resultantly forced the regulatory authorities to ponder how to mitigate the confidence lost and bring the investors back to the arena. In this regard, the famous Sarbanes Oxley Act of 2002 was introduced, which focused on curbing the deteriorating corporate governance practices in the United States (Dharan & Bufkins, 2004; Cohan, 2002; Kroll, 2011; Albrecht, Albrecht, Albrecht, & Zimelman, 2009). The response to Enron, is similar to those shown by governments and regulators in the 18th and 19th centuries when they faced with similar situations. In fact, during the twentieth century, most of the countries developed their respective agencies and institutions whose prime responsibility was to detect any fraudulent activity in the corporate sector of the country. However, no one can assure that there are no fraudulent activities going on, even with such stringent measures been taken by the regulators (Albrecht, Albrecht, Albrecht, & Zimelman, 2009). However, the patterns noted in the fraudulent acts since 18th century to 20th century indicate that the perpetrators have mostly played on with the loopholes in the regulatory frameworks or sometimes due to non-existence of any regulation at all. In addition to this, the trends also indicate that the perpetrators have been well aware of the outcomes of their acts and of the perceptions of parties against whom fraud had been committed (Albrecht, Albrecht, Albrecht, & Zimelman, 2009). Conclusion After having discussed the nature and scope of the fraudulent activities and the trends and patterns in fraud from 18th century till the 20th century, it can be stated that with the passage of time and increasing awareness among general public about fraud and fakery, those who commit fraud have also developed their strategies accordingly. The nature and scope of fraud cannot be limited by stating a handful of definitions and types of fraud. In fact, the scope of fraud has developed since the origin of trade and commerce and will continue to do so in the centuries to come. However, with the introduction of even stricter regulatory frameworks, governments and other regulatory bodies working under governments’ supervision has always made efforts to deal with fraudulent acts. But, as already stated, with the fast changing world and the technology used for doing business, the nature and scope of fraud has been adjusting to such changes at the same time in an effective manner. 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