The high-profile and sudden failure of Silicon Valley Bank, which hid huge losses from its depositors, investors, and regulators, highlights the dangers of corporate fraud for our financial system. It confirms the kind of problems highlighted by a recent study published in the Journal of Financial Economics estimating that only one-third of corporate frauds are detected, with an average of 10% of large publicly traded firms committing securities fraud every year. This means that the true extent of corporate fraud is much larger than what is currently being reported. The study also estimates that corporate fraud destroys 1.6% of equity value each year, which equals to $830 billion in 2021.

Consider three prominent examples from the last couple of years. FTX, a trading platform for crypto investors, was accused by the U.S. Securities and Exchange Commission of defrauding its investors by steering money from the company into another venture between 2019 and 2022. The company's majority owner, Sam Bankman-Fried, allegedly used the cash to purchase homes in the Bahamas, invest in other companies, and fund favored political causes. When crypto assets took a significant plunge in 2022, the cash spigot went dry at both FTX and the other venture, leading to federal prosecutors stepping in to issue fraud charges and bankruptcy for the company.

Wirecard, an electronic payments firm based in Munich, Germany, faced the biggest corporate fraud case in German history in 2022, with former CEO Markus Braun and two senior executives facing multiple years in prison if convicted. Another senior executive, Jan Marsalek, is on the run and is reportedly hiding out in Russia. Wirecard declared insolvency in 2020 after authorities discovered $1.9 billion was missing from the company's accounts, amid allegations from German regulators that the money never existed at all.

Luckin Coffee, a China-based company, was embroiled in a legal quagmire stemming from a 2020 fake revenue scandal. Internal financial analysts discovered the company's growth was artificially inflated due to bulk sales to businesses linked to the company's chairman, and management had fraudulently engineered the purchase of raw materials from suppliers. When these investigations became public, investors fled and the company's share price slid.

Fraud occurs in many smaller and mid-size companies as well. In fact, such occurrences may be more common at smaller companies, which have less rigorous risk management and oversight policies.

To mitigate the risk of corporate fraud, companies - big and small - need to have strong risk management and oversight systems in place. This includes having clear policies and procedures for detecting and preventing fraud, as well as regular training and education for employees on how to recognize and report fraud.

One important aspect of risk management is having an effective internal control system. This includes having a system of checks and balances in place to prevent fraud from occurring in the first place, as well as systems for detecting and investigating fraud if it does occur. This can include measures such as separating duties among employees, implementing segregation of duties, and conducting regular internal audits.

Another key is having an effective compliance program. This includes having policies and procedures in place to ensure that the company is in compliance with relevant laws and regulations, as well as having a system in place for identifying and reporting any potential violations.

The recent high-profile case of Silicon Valley Bank highlights the dangers of corporate fraud and the need for stronger risk management and oversight in companies. Unfortunately, corporate fraud is not a new problem and is estimated to be much more prevalent than what is currently being reported. To mitigate this risk, companies need to implement strong risk management systems, including effective internal controls and compliance programs. While smaller and mid-size companies may be more susceptible to fraud, all companies must take proactive steps to prevent and detect fraud. By doing so, they can protect themselves, their investors, and the financial system as a whole.


Dr. Gleb Tsipursky is the CEO of the hybrid work consultancy Disaster Avoidance Experts, and authored the best-seller Leading Hybrid and Remote Teams