Question

Why do these high-level educated executives like Dennis Kozlowski commit this kind of fraud? What topics can be educated or trained in business schools or companies to prevent this type of fraud? Have you ever witnessed any fraud in the workplace? If so, what was it?

Answer 1

Leo Dennis Kozlowski:

Leo Dennis Kozlowski is a former CEO of Tyco International, convicted in 2005 of crimes related to his receipt of $81 million in unauthorized bonuses, the purchase of art for $14.725 million and the payment by Tyco of a $20 million investment banking fee to Frank Walsh, a former Tyco director.

Kozlowski's spending habits and lavish lifestyle financed with company money grabbed the attention of the press and the public. Kozlowski used Tyco money to furnish his New York apartment and $5 million Nantucket home with a $6,000 shower curtain, a $15,000 antique poodle umbrella stand, a $2,200 gilded wastebasket, and $2,900 in coat hangers. Above all, there was a videotape of Kozlowski's weeklong party for his wife's 40th birthday on the Mediterranean island of Sardinia. It cost $2.1 million, including $250,000 to Jimmy Buffett for a one-hour performance. A Tyco event planner and former Kozlowski mistress charged over $1 million of the tab to Tyco for a management meeting.

Kozlowski's former executive assistant testified that she had agreed to cover his personal expenses with company money while having an affair with him. When she ended the relationship and left Tyco, Kozlowski gave her a severance package that included four years' salary and loan forgiveness on several residences. Some analysts estimated that shareholder lawsuits against Tyco, for mismanagement under Kozlowski, could reach $10 billion or more.

2. What topics can be educated or trained in business schools or companies to prevent this type of fraud?

(i) White Collar Crimes:

Ten years and a lifetime ago, L. Dennis Kozlowski reigned as the archetype of avarice. This helped lead to his conviction in 2005 for looting nearly $100 million from Tyco, for which he served six and a half years in prison. That showy shower curtain was in his corporate residence on Fifth Avenue paid for with Tyco funds and came to symbolize a life of unabashed excess. Mr. Kozlowski wasn’t the only corporate executive of his era who was convicted for fraud and other wrongdoing.

• The Problem

White collar crime includes non-violent, financially-motivated criminal acts that are typically committed by people in positions of power and trust. The fallout of these crimes can be devastating, as they tend to include financial losses for unsuspecting victims. These losses can include savings, retirement accounts and investments which could devastate the victims' financial security. Oftentimes, a single crime can involve multiple victims, with the losses climbing into the millions or even billions.

The fallout can have collateral damage, as oftentimes the good name of the company plummets along with its stock value and ability to do business. This often spreads the loss to shareholders and group investors who have no direct connection to the operation of the company.

• The Solution:

Criminal deterrence is an approach that uses severe penalties such as long prison sentences and hefty fines to deter white collar crimes. The jury is out on how effective this is at curbing white collar crime. One problem with this is that it is responsive instead of proactive. In other words, the damage has been done. Pre-emptive approaches look to change this dynamic. These include training those down in the trenches of financial activity to aid in the prevention of white collar crime.

• Awareness Methods:

Business ethics training is an approach at educating business professionals in many areas of business activities. Its purpose is to enable employees to identify and deal with ethical problems and develop their moral intuitions, which are implicit in everyday choices and actions. Most businesses require their employees to attend training and workshops. Many of these are broad and deal with a wide variety of situations including white collar crime.

Many companies are instituting more concentrated training, specifically in the area of white collar crime. This education encompasses identification of white collar criminal activity by training key employees to help spot activities normally associated with those crimes. Many of these training sessions employ the services of ex-cons who were once business professionals themselves and lost everything by being caught and convicted of white collar crime.

• Training Example:

Walter Pavlo, is an ex-con who embezzled more than $6 million from a telecom firm before getting caught. After serving six years of his ten year sentence, he began working with financial firms and corporations in preventing white collar crime. What he brings to the table is insight into the mind of the white collar criminal, and according to him, it isn't what most people think.

''We have a misperception about what white-collar crime is,' Pavlo said. 'Many people believe it is just bad people, greedy people, and unethical people. I'm not saying their acts do not reflect that, I am just saying a lot of times, they are just good people who make really bad choices.''

Many firms have benefited from his fresh approach, aided by a slew of operational tips on how to internally look for signs of criminal activity:

• Where are employees traveling? Compare this to where contracts have been won.
• Consider opportunities where bribery may be taking place.
• Look at the location of business trips and how much money was spent on these trips. Compare this to where contracts were executed on behalf of a company.
• How much money is given to certain vendors and how frequently?
• Is there a pattern of employees chosen to work on certain contracts?

Tips like these have created a trend in white collar crime prevention by focusing on risk factors inherent in the operations of the business. Business ethics is the set of moral principles that governs the actions of an individual or a group.

(ii) Business ethics:

Business ethics is application of ethical principles to business relationships and activities. When managers assume social responsibility, it is believed they will do it ethically, that is, they know what is right and wrong.

Three types of management ethics or standards of conduct:

• Immoral management:

It implies lack of ethical practices followed by managers. Managers want to maximise profits even if it is at the cost of legal standards or concern for employees.

• Moral management:

According to moral management ethics, managers aim to maximise profits within the confines of ethical values and principles. They conform to professional and legal standards of conduct. The guiding principle in moral management ethics is “Is this action, decision, or behaviour fair to us and all parties involved?”

• Amoral management:

This type of management ethics lies between moral and immoral management ethics. Managers respond to personal and legal ethics only if they are required to do so; otherwise there is lack of ethical perception and awareness.

There are two types of amoral management:

(a) Intentional:

Managers deliberately avoid ethical practices in business decisions because they think ethics should be followed in non-business activities.

(b) Unintentional:

Managers do not deliberately avoid ethical practices but unintentionally they make decisions whose moral implications are not taken into consideration.

(iii) A Good Leader:

Everyone can be a leader, yet only a select few can become a great leader. Regardless if have worked your way up the corporate ladder or just started your own business, the route to leadership is never an easy one.

These thirteen leadership qualities that every good leader should strive for, are;

• Honesty
• Delegate
• Communication
• Confidence
• Commitment
• Positive attitude
• Creativity
• Inspire
• Empathy
• Accountability
• Enthusiastic
• Focus and drive
• Responsible

These qualities are the foundation of a good leadership. While some of these leadership qualities may be more naturally present in the personality of a leader, it is definitely something you can develop and strengthen over time.

3. My Experience:

I came across to witness a fraud in my workplace, when an employee steals company funds, but tries to hide them as payments to vendors. He created fake vendor invoices and change accounting system entries to hide his tracks.

I think this can be prevented by regularly reviewing the detailed expense reports broken down by vendor, amount and purpose. If we stay familiar with our numbers, it’s easier to spot when a payment or accounting entry looks suspicious. If our company is big enough, then separate the functions that employees perform.