3.5. Juggling the Books to Conceal Embezzlement and Fraud

Fraud and illegal practices occur in large corporations and in one-owner/manager-controlled small businesses — and in every size business in between. Some types of fraud are more common in small businesses, including sales skimming (not recording all sales revenue, to deflate the taxable income of the business and its owner) and the recording of personal expenses through the business (to make these expenses deductible for income tax). Some kinds of fraud are committed mainly by large businesses, including paying bribes to public officials and entering into illegal conspiracies to fix prices or divide the market. The purchasing managers in any size business can be tempted to accept kickbacks and under-the-table payoffs from vendors and suppliers.

Some years ago we hosted a Russian professor who was a dedicated Communist. I asked him what surprised him the most on his first visit to the United States. Without hesitation he answered "The Wall Street Journal." I was puzzled. He then explained that he was amazed to read so many stories about business fraud and illegal practices in the most respected financial newspaper in the world. At the time of revising this chapter, the backdating of management stock options is very much in the news. Many financial reporting fraud stories are on the front pages. And there are a number of ...

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