1. True or False. Citigroup, Honeywell, Allstate, Verizon and Walt Disney have recently been identified as having the least effective Boards of Directors among the top 1700 U.S. public companies.
True. According to an independent corporate governance monitor, Corporate Library, the Boards of these companies are among the worst 10 U.S. public companies in terms of providing effective oversight. Among other factors, the CEO and executive compensation packages (and how closely pay was tied to performance) were considered in developing the rankings.
2. True or False. Financial statement fraud can result from recording fictitious revenues, concealing liabilities or expenses, overvaluing assets, timing differences, or improperly disclosing information about the business.
True. Any of these five schemes can result in misstated financial statements. Each of these categories of fraud have been used to mislead investors and other stakeholders of Enron, Worldcom, Tyco, Adelphia, Rite Aid, Cendant, HealthSouth and numerous other U.S. public companies over the past few years. Those responsible for perpetrating the fraud (i.e., those that caused the misstatement of the financial statements) are being brought to trial and face significant financial penalties and jail sentences.
3. True or False. The Sarbanes-Oxley legislation passed last year makes it illegal for the first time for U.S. public companies to issue misleading or fraudulent financial statements.
False. The Sarbanes-Oxley legislation requires new certifications by the CEO and CFO of U.S. public companies covering the fairness of presentation of financial statements and the adequacy and effectiveness of internal controls, establishes tougher corporate governance standards affecting Boards of Directors and their Audit Committees, establishes a new policing body and independence standards for auditors, and significantly stiffens the penalties for perpetrating or participating in fraud, among other things. The Securities Exchange Act of 1934 made it illegal to issue misleading or fraudulent financial statements.
4. True or False. Bank of America, Cisco, Coca Cola, Intel and Merck are among the U.S. companies most widely sought as investments which are socially responsible.
True. According to recent research by Ronald Paul Hill, Debra Stephens and Iain Smith (see Corporate Social Responsibility: An Examination of Individual Firm Behavior, 2003), these five firms are among the top 10 investments by the largest socially responsible mutual funds, which screen companies by a variety of criteria. Socially responsible investing has increased significantly in the past several years, and represents 10% of all investment dollars in the U.S. today.
5. True or False. The U.S. Department of Defense Voluntary Disclosure Program allows employees of defense contractors to avoid prosecution if they report their misconduct to the government.
False. In 1986, the U.S. Department of Defense developed the Voluntary Disclosure Program to allow defense contractors to report irregularities. The Program does not allow contractors to avoid prosecution, but notes that voluntary disclosure and complete cooperation “are strong indications of an attitude of contractor integrity even in the wake of disclosures of potential criminal liability.”
6. True or False. Whether it is due to embarrassment or the belief that nothing can be done, only 1 in 100 victims of telemarketing fraud ever files a complaint.
True. Telemarketing offenses are consumer fraud, yet many businesses are affected by office supply and marketing services scams. The hit-and-run nature of phone rooms, the physical distance between the victim and the crook, and the limited resources and priorities of law enforcement agencies make enforcement difficult.
7. True or False. The majority of check fraud in the United States is committed by foreign crime rings, rather than by individuals, employees of businesses, or domestic crime rings.
True. Since the late 1980’s, foreign crime rings have been the cause of a majority of the check fraud in the U.S. More than 60% of all fraud committed against financial institutions is perpetrated by rings from Nigeria, Russia, Vietnam and Mexico. Most of the Vietnamese and Mexican rings operate in California, and the Russian and Nigerian rings are generally centered in the Northeast. While most of these foreign crime rings are involved in drug trafficking and violent crimes, check and credit card fraud are considered “safe” crimes, with the chances of being caught and successfully prosecuted fairly low and the penalties relatively light.
8. True or False. Health care providers perpetrate the majority of health care fraud in the U.S. today.
True. The US General Accounting Office estimates that health care fraud represents 3 to 10% of total health care spending, and providers (doctors, hospitals, etc.) perpetrate a majority of this health care fraud, estimated at over $100 billion today.
9. True or False. The most common denomination of forged traveler’s checks is the $20 denomination.
False. The most common denomination of forged traveler’s checks is the $100 denomination. The thief frequently makes a small purchase, and then gets the majority of the face amount back from the retailer in cash. This fraud occurs frequently in tourist destinations where traveler’s checks are commonly used.
10. True or False. Noncompete agreements are an effective means by which companies can protect trade secrets, and are enforceable when any employee terminates.
False. Noncompete agreements are generally only enforceable when made a part of an employment agreement, and most states consider such agreements unenforceable for “at will” employees. Furthermore, many states consider noncompete agreements to be contrary to “public policy” because they restrict a person’s future employment, and hold that such agreements are, therefore, unenforceable. If otherwise enforceable, noncompete agreements must have a relatively short term (say, only up to 2 years) to be effective in precluding a former employee from working for a competitor.