The New Robber Barons: stealing profits and damaging our economy Martin S. Bressler Professor of Marketing & Entrepreneurship Houston Baptist Universi

Transcription

1 Research in Progress ASBE 35th: Proceedings Page -481-

2 The New Robber Barons: stealing profits and damaging our economy Martin S. Bressler Professor of Marketing & Entrepreneurship Houston Baptist University ASBE 35th: Proceedings Page -483-

3 The New Robber Barons: stealing profits and damaging our economy Abstract Business news is often filled with stories of executives or other employees caught embezzling or committing fraud. These robber barons not only cost companies profits, but also harm our economy. Crimes committed against businesses, whether by employees or outsiders, may even cause some businesses to fail. This paper examines the various crimes committed against businesses and offers some measures to help prevent and reduce the impact of business crime. Introduction Businesses are susceptible to a wide variety of crimes ranging from fraud and embezzlement, to computer hacking and vandalism. Because of this, businesses need to be vigilant in protecting company assets and preventing criminal activity from causing the business to fail. In addition to the crimes noted above, other crimes may include shoplifting, piracy and counterfeiting. Sometimes crimes may be committed by outsiders although in some cases, executives and employees commit crimes against the business. In other cases, businesses unknowingly become party to money-laundering crimes. Business crime is not a new phenomenon. A review of the literature details numerous examples recorded throughout history. The 1995 SBCI survey indicated that 35% of retailers reported customer theft, similar to percentages reported by the manufacturing and wholesaling industries. Overall, 75% of businesses surveyed reported an average 3.5 incidents of crime (Burrows and Hopkins, 2005). The U.S. Chamber of Commerce reports 30% of businesses fail due to costs associated criminal activity (U.S. Chamber of Commerce, 1995). preventive measures should be taken to reduce the incidence and severity of crimes committed against your business The economy may be a factor in the rate of crime committed against business. The National White Collar Crime Center reports the two most recent recessions recorded increased arrests for embezzlement and fraud (Business Week Online, January 12). While larger businesses get the most headlines, smaller businesses may be especially vulnerable to crime because smaller businesses may not have the necessary safeguards to help prevent criminal activity. With the development of the commercial Internet, the number and types of crimes against business has changed. In 1996, (just as the commercial Internet was being developed) the U.S. Small Business Administration conducted a survey of 400 firms and found approximately 13% of businesses surveyed were crime victims. In addition, less than half (48%) of surveyed businesses reported utilizing security measures. Businesses also reported that in ASBE 35th: Proceedings Page -484-

4 many cases crime, particularly employee theft went unreported to the police (Small Business Research Summary, 1997). The total cost of crime to business may be difficult to measure, however, the 2007 report Crime in the United States, reports the value of stolen office equipment alone to be an estimated $656,982,032. Burglaries on average cost businesses $1,989 and each incident of shoplifting costs $205. The difficulty in determining accurate data may be due to the fact that many business crimes go unreported. Small businesses are less likely to report criminal activity in part because many are afraid of negative publicity or loss of investor confidence. Literature Review Types of criminal activity With the commercial development of the Internet, cybercrime activity began to increase. The National Computer Crime Survey reported in 1995 that 67 percent of businesses surveyed suffered at least one cyber attack (Bureau of Justice Statistics, 2008). More than half (60%) the cyber attacks were theft-related; the other incidents involved uploaded viruses to the company computer system. In many cases, (68%) cyber attacks cost the business $10,000 or more (Bureau of Justice Statistics, 2008). Not surprising, computer attacks are on the rise. According to Yueh (2004), businesses reported an increase of 40% in the number of computer attacks from the previous year, resulting in $42 billion in additional costs to business. Accordingly, by 2004, companies spent an estimated $30 billion on information technology security systems to protect corporate websites. That figure represents more than double the amount spent in 2001, just three years previous (Gantz, 2001). Table 1. Crimes committed against businesses External Internal Robbery Theft (money/equipment) Burglary Embezzlement Shoplifting Intellectual property theft Counterfeiting Customer identity theft Piracy Sabotage Money laundering Money laundering Vandalism Fraudulent invoicing Ponzi schemes Computer hacking Falsifying expense reports Payroll fraud ASBE 35th: Proceedings Page -485-

5 Dennis (2008), reporting in a National Federation of Independent Business study, found that within the previous three years 52 percent of businesses became crime victims. In addition, the report cited vandalism the most common crime overall, with shoplifting the most common crime reported by the retail industry. Vandalism is more serious a crime than many business owners realize. According to the U.S. Small Business Administration, the typical incident of vandalism costs $3,370 ( This means that the average small business with $500,000 revenue per year and a 5% net margin would result in a 13.5% lower net profit. Smaller Businesses more prone to crime Despite fewer employees and smaller revenues, small businesses may be more susceptible to business crime. As most businesses are small businesses, nearly half of the U.S. workforce is employed in small businesses. The Association for Certified Fraud Examiners indicates 39% of reported instances of fraud occur in companies with 99 or fewer employees (Bank Technology News). The U.S. Small Business Administration reports 13% of small businesses become crime victims, yet less than half (48%) instituted any preventive measures (Small Business Research Summary). This could be a major reason why crime is a major factor in up to 30% of small business failures (U.S. Chamber of Commerce). In addition, small business ventures with less than $5 million in annual revenues may be up to thirty-five times more likely to become a crime victim than their larger counterparts (U.S. Chamber of Commerce). Unfortunately, small business owners prosecute less than 30% of fraud cases (Larimer, 2006). Many crimes committed against small business go unreported to police for a variety of reasons. In some cases, crimes committed by employees or local persons known to the business owner go unreported as the business owner might not want to press charges for fear of negative publicity or loss of confidence in the business. In other instances, such as vandalism, small business owners might assume that police would be unable to apprehend and charge the vandals. ASBE 35th: Proceedings Page -486-

6 Preventive measures cost significantly less than the cost to remedy crime committed against the business. Even small businesses can reduce the likelihood of becoming a crime victim and the severity of criminal activity with some fairly low-cost actions. Larimer (2006) reported that small businesses suffered greater losses from fraud than larger businesses, $190,000 per incident versus $159,000 for larger businesses. In a study of small businesses Kuratko (2000) found small business owners on average spent $7,805 on security. Stated another way, small business losses amount to approximately twenty-five times the amount spent for preventive security measures. Additional investment for security measures might result in fewer and smaller losses. Discussion Crime Prevention Welsh & Farrington (1995) provide several crime prevention strategies. The first, situational strategy relies upon surveillance techniques including alarms, video monitors or employees. Developmental Strategy examines root causes of crime ranging from juvenile delinquency to poverty and even economic cycles. Community strategies employ social experiments as well as neighborhood watch programs. Criminal Justice programs build partnerships between law enforcement agencies and local communities. Perhaps the best means to prevent business crime would be to focus on crime prevention. In some instances, simply installing security lighting and requiring employees to wear or carry identification badges may help reduce crime. Preventive actions may include external measures such as locks and key control as well as surveillance cameras and security lighting. Policies centering around hiring and employment should include background checks, drug testing, employee identification, and separation of duties; computer defenses that include secure websites, access authorizations through secure passwords, computer firewalls, and secure Internet payments (Bressler, 2007). Conclusion Crime prevention costs considerably less than the actual costs associated with crime. Businesses, therefore, should focus greater effort on crime detection. Unfortunately, crime prevention requires funding which business of all sizes lack in the current economy. Crime prevention training processes and devices are necessary to reduce the economic losses businesses experience each year. Trends indicate crime will not decrease, nor will the cost of crime diminish. Until businesses begin to address crime with better detection systems, many businesses may become unprofitable or fail. ASBE 35th: Proceedings Page -487-

7 Figure 1 A Three-Stage Model for Prevention and Detection of Business Criminal Activity Prevention Lighting Minimal cash on hand Key control Check identification Employee identification Background checks Authorization procedures Locks Pay everything by check and no use of manual checks Do not delegate check signing Outsource payroll Computer firewalls Secure passwords Secure websites Employee training Burglar alarms Surveillance cameras Secure Internet payment Separation of duties Drug testing Alarm systems Equipment tagging Ground-flopor location Security guards or guard dogs Management setting an ethical example and ethics statements Policy and Procedures manuals Detection Unscheduled audits Internal auditors External auditiors AIS software Police Monitoring employees Lifestyle changes Behavior indicators Customer complaints Financial statement analysis Frequently check bank statements Alarm systems Scanning EBay and want ads Reporting hotlines Look for exceptions, such as manual checks Remedies Insurance Prosecution Expert witnesses Employee dismissal Punitive damages Settlements/negotiations Source: Bressler, 2007 ASBE 35th: Proceedings Page -488-

8 References Bressler, L. & Bressler, M. (2007). A Model for Prevention and Detection of Criminal Activity Impacting Small Business. Entrepreneur Executive, Volume 12, Bureau of Justice Statistics, Sixty-seven percent of responding businesses detected cybercrime in U.S. Department of Justice, Office of Justice Programs. September 17, Burrows, J. & Hopkins, M. (2005) Business and crime in Tilley, N. (2005) (Ed.) Handbook of crime prevention and community safety. Devon, Willan Publishing. Crime in the United States Dennis, W. (2008). 411 Small Business Facts, Volume 8, Issue 5. ISSN Gantz, J. (2001). Take a Bite Out of Crime on the Web. Computerworld, February 19, Volume 35, Issue 8, 29. Keeping Tricksters Away 10/31/ Kuratko, D., Hornsby, J., Naffziger, D., & Hodgetts, R. (2000). Crime and Small Business: An Exploratory Study of Cost and Prevention Issues in U.S. Firms. Journal of Small Business Management; July, 2000; 38, 3; ABI/Inform Global pg. 1. Larimer, R. (2006, October 13). American Businesses Lose Nearly $652 billion to Fraud and Embezzlement Each Year. Colorado Springs Business Journal. Levisohn, B. (2009). Experts Say Fraud Likely to Rise. Business Week Online [serial online]. January 12, 2009: Available from: Business Source Complete, Ipswich, MA. Accessed February 18. Small Business Research Summary, 1997, Office of Advocacy, U.S. Small Business Administration, No. 176, March. Welsh, B. & Farrington, D. (2000). Monetary Costs and Benefits of Crime Prevention Programs. Crime and Justice, 27, Yueh, T. (2004). Worms and Viruses-Are You Under a Constant Security Siege? Get Smart about Network Security. 08/01/ ASBE 35th: Proceedings Page -489-