By William K. Black.
Tyler Cowen often seeks to defend corporations from what he views as unjust criticism. He does not, however, evidence any understanding of the relevant criminology or economics literature on “control fraud” so his defenses sometimes actually represent indictments of the risks posed by corporations. A good example is blog about libertarianism and the workplace.
He was responding to pieces decrying the treatment of workers. I will discuss three of Cowen’s points. First, at the grocery store where he first worked he observed great abuses of the corporation by the workers.
“What I did observe was massive employee shirking, rampant drug use including what appeared to be on the job, regular rule-breaking, and a significant level of employee theft, sometimes in cahoots with customers.”
Second, he cites the Chamber of Commerce to indicate that worker theft causes large losses.
“When I hear the phrase ‘workplace coercion,’ the first thing I think of is employee theft, estimated by the U.S. Chamber of Commerce at over $50 billion a year.”
Three, Cowen’s current employer, George Mason University (GMU), is also a victim of its workers’ abuses.
“If I ponder my workplace at GMU, I see many more employees who take advantage of the boss, perhaps by shirking, or by not teaching well, than I see instances of the bosses taking advantage of the employees.”
Cowen is giving examples of “agency” abuses that are common in corporations, governments, and non-profits. He does not ask essential analytical questions about the consequences of what he personally observed – “massive” agency problems, often criminal, at corporations despite the strong financial interests of the shareholders to avoid such abuses. Cowen observed these criminal acts by low level employees.
Cowen’s grocery experience should have led him to ask two related questions. How much damage would senior officers’ abuses cause and what would happen if the CEO were using the seemingly legitimate firm as a “weapon” to defraud?
More senior officers are likely to steal through fraud, a much harder form of larceny to detect than the crude types of theft that Cowen so easily observed in the grocery store. The 2012 fraud survey by the Association of Certified Fraud Examiners (ACFE) found:
“Survey participants estimated that the typical organization loses 5% of its revenues to fraud each year. Applied to the estimated 2011 Gross World Product, this figure translates to a potential projected global fraud loss of more than $3.5 trillion.
The median loss caused by the occupational fraud cases in our study was $140,000. More than one-fifth of these cases caused losses of at least $1 million.”
The survey found that more senior perpetrators caused substantially greater losses.
“Perpetrators with higher levels of authority tend to cause much larger losses. The median loss among frauds committed by owner/executives was $573,000, the median loss caused by managers was $180,000 and the median loss caused by employees was $60,000.”
The losses that corporations suffer from control frauds are far larger than the losses they suffer from even senior officers who do not control the firm. Note that the survey found that when the owner or senior executives were the looters the median loss was over three times that of “managers” and over seven time times that of “employees.”
The ACFE survey generally reports only on frauds in which the firm is being looted, but many control frauds add to the firm’s profits. Eight years ago, the estimated damages caused by one form of control fraud that adds to the firm’s profits, the sale of counterfeit goods, was estimated as follows:
“Internationally, the World Customs Organization and Interpol estimate that the annual global trade in illegitimate goods has increased from $5.5 billion in 1982 to roughly $600 billion today, and it continues to grow. Counterfeiting costs U.S. businesses as much as $250 billion every year and results in the loss of 750,000 jobs, according to the Chamber [of Commerce].”
The Chamber of Commerce states that counterfeit good frauds were growing rapidly so the current losses could be far higher.
In sum, Cowen’s observations about “massive” agency problems among employees should be terrifying to him. Cowen is so eager to attack laborers and boost corporations that he fails to understand the implications of the fact that a business that he “honor[s] to this day” was incapable of preventing massive agency problems by low-level workers even though the workers lacked power and their abuses were crude and easily spotted.
For reasons of brevity I will simply recommend reading my prior articles that discuss the implications of control fraud for producing the fraud epidemics that drive our recurrent, intensifying financial crises. I particularly recommend reading my materials on the “Gresham’s” dynamic, modern executive and professional compensation, the accounting control fraud “recipe,” the ability of control fraud epidemics to hyper-inflate financial bubbles, and the key role that control frauds play in creating and entrenching crony capitalism.
When Cowen writes that his Pavlovian response to hearing the phrase “workplace coercion” “the first thing I think of is employee theft” he reveals a great deal about the dogmas that rule him. He thinks of the least damaging of the agency abuses by the least powerful group. He thinks of a crime that is rarely committed through “coercion.”
Cowen does not think about CEOs, the experts in “incentivizing” workers and officers who design and enforce actual “workplace coercion.” The CEOs can hire, fire, promote, compensate, praise or demean, and reassign and deliberately create the perverse incentives that produce a Gresham’s dynamic and fraud epidemics. These forms of “workplace coercion” produce vastly more damaging fraud epidemics than do “employee theft.” At the time Cowen was writing he had before him the twin loan origination fraud epidemics (liar’s loans and appraisal fraud) and the epidemic of fraudulent sales of the fraudulently originated mortgages to the secondary market. Corporations are victimized by the CEOs that lead accounting control frauds – the ultimate form of “employee theft.” That is the message contained in the title of George Akerlof and Paul Romer’s 1993 article about accounting control fraud – “Looting: The Economic Underworld of Bankruptcy for Profit.” These twin epidemics of accounting control fraud by loan originators hyper-inflated the real estate bubble and drove our financial crisis and the Great Recession, yet Cowen’s dogmas blinded him to these crimes of the C-suite and took him instead to 1979 where he revisited his horror at the grocery store slackers that were his co-workers.