How to Identify Corporate Malfeasance

How to Identify Corporate Malfeasance

How to Identify Corporate Malfeasance

If you are new to the topic of white-collar crime, you may be left wondering what corporate malfeasance is. Corporate malfeasance can cover a variety of crimes committed by those within a company. From accounting shenanigans to shady stock exchanges and chronic mistakes, these can lead to criminal prosecution of the perpetrators for their malfeasance, meaning potential prison time and steep fines. Read on to learn more about corporate malfeasance and some common examples.

What Is Corporate Malfeasance?

Corporate malfeasance refers to management deliberately hiding the company's true financial figures. This deception can cause an accounting scandal that can hurt the company's shareholders.

Corporate malfeasance can describe major and minor white-collar misconduct committed by high-ranking company employees, officers, or business partners. These crimes may hurt the shareholders or the company. 

If you have incurred damages by corporate malfeasance, you are entitled to a settlement via a civil lawsuit. However, proving corporate malfeasance can be difficult. A skilled corporate litigation lawyer can assess your case and explain your legal options. 

5 Examples Of Malfeasance In Business

When you first discover corporate malfeasance, it can be useful to have examples. Here are five corporate malfeasance examples:

  1. Embezzlement of Company Funds
  2. Accounting Scandals
  3. Issuing Deceptive Financials
  4. Insider Trading by Business Professionals
  5. Extortion

1.) Embezzlement Of Company Funds

Embezzlement of company funds is a type of fraud. It occurs when a party intentionally misappropriates the company assets they were entrusted with. The embezzler legally attains the assets and has the right to possess them but then uses the assets for different purposes than intended by the company.

Embezzlers sometimes create bills or receipts for events that did not occur or items that the company did not purchase to disguise the fund transfer as a legitimate transaction. Then the money is used for the embezzler's personal expenses. The embezzler sometimes collaborates with a consultant or contractor. This partner issues the invoices and receives payment but never performs the work they charge for.

Embezzlement can be small or large in nature. It can range from a cashier pocketing a few dollars to company executives falsely claiming millions in business expenses and transferring the money to their personal accounts. Sometimes embezzlement is combined with other fraudulent behavior, like Ponzi schemes. 

2.) Accounting Scandals

Another example of corporate malfeasance is business scandals arising from accounting malpractice. These accounting scandals generally involve either the misappropriation of assets or fraudulent financial reporting.

Asset misappropriation is also referred to as employee fraud or defalcation. It can involve stolen cash, data, or intellectual property. Fraudulent financial reporting is also called earnings management fraud. It involves intentionally manipulating accounting aspects to falsely improve the company's financial statements.

These misdeeds often involve complicated methods for misdirecting funds, falsifying financial statements, or creative accounting. 

3.) Issuing Deceptive Financials

Another example of corporate malfeasance and accounting fraud is the manipulation of financial statements. This type of accounting fraud is used against the company's investors or to avoid regulations. A commonly used term accompanying these deceptive financial statements is to "cook the books." This refers to the accountant altering the facts and figures illegally to portray a false amount of money.

This can be difficult to detect because accounting standards are somewhat flexible and open to interpretation. Three reasons may inspire the company's management to issue deceptive financial statements:

Corporate executive compensation is often directly tied to the company's financial performance.

It is relatively easy to issue deceptive financials.

Because of the relationship between the corporate client and the independent auditor, the chances are low that anyone will detect the financial manipulation. 

4.) Insider Trading By Business Professionals

Insider trading happens when someone uses nonpublic market-moving information to buy or sell a financial asset. For example, a company plans to make an acquisition, but the information is not public yet. An executive uses this information to make a trade based on this knowledge or tells a friend about the information, who then uses the news to make a financial transaction.

Insider trading is a reasonably common and profitable crime that is also difficult to prove. This can make it an attractive option to someone who does gain inside information. It has been estimated that insider trading occurs at a rate of four times the legal prosecutions and is involved in one in five mergers and acquisitions.

Some of the key motivations to commit insider trading include:

  • The number of people in possession of the information
  • The inside information's value
  • Stock liquidity

5.) Extortion

Extortion occurs when an entity tries to obtain assets from a target using coercion or threats. When most people think of extortion, they think of mob bosses and organized crime. However, corporate extortion exists and is a real threat. Under some statutes, corporations can be held responsible for the crime of extortion. However, usually, it is an individual or group of individuals within the company who will be held liable for the crime rather than the entire company, although the corporation may receive fines connected to the corporate extortion charges.

To count as extortion, the following elements must generally be satisfied:

  • The extortionist threatened the victim.
  • The extortionist tried to leverage the threat against the victim to acquire their property or influence their actions.
  • The victim complied with the extortionist's demands due to the threat.

What Firms Can Do When This Crime Occurs

All industries are vulnerable to fraud and corporate crime if the company is not careful. Preventing corporate malfeasance is easier and less expensive than dealing with the aftermath once this crime occurs.

There are steps that corporations can take to prevent corporate malfeasance, like making fraud reporting part of your company culture and running surprise audits. However, if it is too late for prevention, then you should consult a corporate litigation lawyer. They can advise you on the possible legal actions your company can pursue. They can also include a corporate crime clause in your future employment contracts.

Hire An Attorney For Your Malfeasance Case

If you suspect or have knowledge of corporate malfeasance occurring in your company, you should hire an attorney experienced in corporate malfeasance cases. Contact King & Jones to schedule an appointment with a knowledgeable and experienced corporate litigation attorney. We offer strategic representation in corporate disputes and can advise you on your legal options.