INCREASING FIRM VALUE THROUGH DETECTION

Strategic Management Journal
Strat. Mgmt. J., 24: 587–614 (2003)
Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.330

INCREASING FIRM VALUE THROUGH DETECTION
AND PREVENTION OF WHITE-COLLAR CRIME
KAREN SCHNATTERLY*
Carlson School of Management, University of Minnesota, Minneapolis, Minnesota,
U.S.A.

White-collar crime can cost a company from 1 percent to 6 percent of annual sales, yet little is known about the organizational conditions that can reduce this cost. Previous governance research has examined the link between block holders, boards of directors, or CEO compensation and fraud. In this study, these traditional measures of governance are found to have little impact.
Instead, operational governance, including clarity of policies and procedures, formal crosscompany communication, and performance-based pay for the board and for more employees, significantly reduces the likelihood of a crime commission. Copyright  2003 John Wiley &
Sons, Ltd.

INTRODUCTION
The economic impact of fraud is immense. Estimates of the cost of white-collar crime to companies in the United States range from $200 billion
(Touby, 1994) to $600 billion per year (Association of Certified Fraud Examiners (ACFE), 2002).
This is massively greater than street crime losses of $3–4 billion (Baucus and Baucus, 1997) and total economic loss to victims of personal and property crimes of $15.6 billion (Bureau of Justice
Statistics, 1999). Fraud can significantly impact the financial performance of a firm as it can cost a typical company between 1 percent and 6 percent of annual sales (Hogsett and Radig, 1994;
Touby, 1994; ACFE, 2002). White-collar crime alone causes 30 percent of new business failures
(Agro, 1978), without regard to the quality of the firms’ strategy or assets.
Key words: fraud; crime; governance; internal control
*Correspondence to: Karen Schnatterly, Carlson School of Management, University of Minnesota, 321 19th Avenue South, Minneapolis, MN

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