Sunday, July 10, 2011

Passive Fraud and Corruption



What differentiates fraud from error is the intent underlying the one's act. Therefore, an error is an error if and only if one's act is not accompanied with an intent to defraud. But what differentiates fraud from passive fraud?

"Passive fraud and corruption" is a term I use to describe individuals or entities that are negligent or grossly negligent knowingly or unknowingly while dealing with the environment in which fraud and corruption occur. For example, when a senior executive collude with  the CFO to defraud their company and they do, we call this fraud. However, what if the board of directors of this defrauded company does not conduct its acts in accordance with "duty of care"? Imagine if the board members do not have sufficient and appropriate financial expertise and are not aware about what fraud risks are. I call this board of directors passively corrupted and fraudsters. They participated indirectly in creating opportunities for others inside or outside the entity to use such environment that lacks the minimum required tone at the top.