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Schumpeter: The enemy within


BUSINESS has always been plagued by fraud: witness the South Sea Company in the 1710s (which enveloped the British economy in a giant bubble) or Charles Ponzi’s Securities Exchange Company in 1920 (which gave the world the Ponzi scheme) or the Enron and WorldCom scandals in the early 2000s. Ambitious fraudsters are attracted to businesses for the same reason that Willie Sutton, a contemporary of Ponzi, reportedly said he robbed banks: “Because that’s where the money is.”

Some frauds are committed by people at the top such as Bernard Madoff or Allen Stanford. Others are committed by hired-hands lower down the organisation. But all frauds involve abusing people’s trust and diverting corporate resources for personal ends. Fraud by wayward employees, be they high or low, can never be eliminated. Directors and executives can, however, treat it like any other unavoidable risk, and manage it professionally.

Published on The Economist
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