Business Standard

Crime still pays

Criminal charges aren't corporate death sentences

Related News

aren’t the many people think. The demise of accounting firm made prosecutors skittish about indicting the likes of , which skirted charges with a record $1.9 billion settlement announced on Tuesday. But new research suggests convictions don’t cause company failures. Banks may be special cases, but enforcers should question their assumptions.

Even Andersen’s downfall wasn’t quite what it seemed. The firm settled criminal fraud charges and received a Securities and Exchange Commission censure years before it confessed to destroying documents as Enron’s auditor. Yet, its 2002 conviction, rather than an already iffy reputation, usually gets the blame for its collapse.

Fear of further reducing the ranks of large audit firms probably protects today’s “big four” from prosecution. And, worry over the systemic fallout of a bank failure makes enforcers loath to charge big financial firms. Often, prosecutors use so-called deferred prosecution agreements instead. In exchange for cooperating, paying a fine and reforming business practices, a corporation can avoid a conviction.

Yet, corporate criminal liability isn’t as life-threatening as advertised. A University of Pennsylvania study has found that, of 54 publicly traded companies convicted of US federal crimes between 2001 and 2010, none failed because of the conviction. ’s guilty plea for peddling misbranded drugs, for instance, cost it some $1.6 billion but did not threaten its existence. And plea deals can still allow watchdogs to insist on changes to companies’ behaviour.

No financial firms appeared in the study’s sample, perhaps because prosecutors viewed them as too risky to indict. And there may be reasons for greater concern than with other companies. A guilty plea can jeopardize a bank’s US charter and preclude investments from, say, pension funds - both potentially damaging events. A loss of trust, if it extended across a bank’s varied businesses, might also endanger a bank’s liquidity.

But deferred prosecution agreements have drawbacks. The deterrent value of convictions is lost, and deals can allow prosecutors to extract onerous penalties without proving wrongdoing. Given the new study’s conclusion about other types of companies and banks’ serious wrongdoing, the pros and cons of indictments may be worth a second look.

Read more on:   
|
|
|
|
|
|

Read More

Historical mistake

UK shouldn't quit the EU - it should join the euro


Quick Links

Have Your Say




What are your views on the sacking of two AAP members on charges of graft?

What are your views on the sacking of two AAP members on charges of graft?

Financial X-Ray Rss icon

Inflation unlikely to moderate significantly in 2014-15
Malini Bhupta

RBI might retain rates at current levels, upside risks to inflation rise

Infosys' struggle with growth continues
Malini Bhupta

Revenue growth to continue to face challenges due to weak repeat business and new deal wins

Back to Top