39

2011 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.20720
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J. Ralph Byington and Jo Ann McGee
INTRODUCTION
On March 11,
2011, Japan was hit
by an 8.9 earthquake,
which was followed by
a 30-foot tsunami and
which precipitated a
terrifying nuclear reac-
tor meltdown. Shortly
before these events
occurred, Japan was
named by the Merrill
Lynch survey on fund
management as the
second-most favored
equity market to invest in, with
the United States being first
(Webb, 2011). Immediately fol-
lowing these events, the Nikkei,
the index of stock market activ-
ity most frequently watched in
Japan, fell 17 percent (Finfacts,
2005). However, by May 2,
2011, the Nikkei had recovered
and topped the key 10,000 level
(Nikkei Closes at Post-Quake
High, 2011). The Nikkeis
recovery will lead to increased
confidence in the market for
investors, and according to Eric
Chaney, the chief economist at
AXA Group, as Japan endeavors
to rebuild, there are across-the-
board opportunities for invest-
ment in Japanese companies
(Kelly, 2011). These opportuni-
ties will involve the usual risks
associated with investments.
In 2009, Japan was labeled the
foremost hotbed of fraud in Asia
(Lewis, 2009). Therefore, a part
of this risk is associated with the
existence of white-collar crime
(WCC) in Japan. The purpose of
this article is to make corporate
management aware of the extent
and magnitude of white-collar
crime in Japan and the need to
exercise caution while conduct-
ing due diligence during invest-
ment pursuits in Japan.
WHITE-COLLAR CRIME
OVERVIEW
The term white-collar crime
was coined in 1939 by Edwin
Sutherland during a speech to the
American Sociological Society.
At that time, he was
attempting to distin-
guish between crime
in the streets and the
sort of crime commit-
ted by a respectable
person with a high
social status during
the course of his work
(White Collar Crime,
2007). It did not how-
ever become a major
area of concern for
business until the last
quarter of the twentieth
century. In 1976, Kel-
ley defined white-collar crime
as illegal acts characterized by
deceit, concealment, violation of
trust, and not dependent upon the
application of threat of physical
force or violence (p. 35). More
recently, the Association of Cer-
tified Fraud Examiners (ACFE)
referred to this type of crime as
occupational fraud and abuse
(OFA), and defined it as the
using of ones occupation to per-
sonally enrich ones life by the
deliberate misuse or misapplica-
tion of an employers resources
or assets (ACFE, 2008). This
type of crime has also been
referred to as economic crime
(EC) (PricewaterhouseCoopers,
2007). Whether this type of
offense is called WCC, OFA, or
EC, from the time that it first
Following the devastating earthquake, tsunami, and
reactor meltdown in Japan in March 2011, there
will be many opportunities for US corporations to
invest in Japanese entities. But these investments
will not be without risk. Indeed, in 2009 Japan was
labeled the foremost hotbed of fraud in Asia. So
the authors wrote this article to make corporate
management aware that white-collar crime (WCC)
is one of the risks they will encounterand that
there is a need to exercise caution while conducting
due diligence during investment pursuits in Japan.
2011 Wiley Periodicals, Inc.
White-Collar Crime in Japan
JCAF20720.indd 39 8/19/11 1:19:50 PM
40 The Journal of Corporate Accounting & Finance / September/October 2011
DOI 10.1002/jcaf 2011 Wiley Periodicals, Inc.
that the CFO and other manage-
ment understand the magnitude
and extent of WCC and the
potential impact of WCC from
Japanese sources.
PARALLELS IN WCC HISTORY
IN THE UNITED STATES AND
JAPAN
The history of WCC in
Japan strongly parallels the
history of WCC in the United
States. Some of the similarities
include (1) when WCC came
to the attention of the public,
(2) the correlation between eco-
nomic growth and WCC growth,
(3) the mafias participation in
WCC, and (4) the numerous cor-
porate financial statement frauds
in both countries. WCC
first came to the attention
of the US public early in
the 1970s when it became
apparent that certain politi-
cians had been accepting
bribes and illegal political
contributions. Obviously,
these activities had been
occurring for some time
despite the fact that they
were illegal and considered
to be an unacceptable way
of doing business in the United
States. At approximately the
same time, one source reports
that WCC had been in existence
in Japan for decades. Unlike
in the United States, however,
WCC was considered to be an
acceptable way of doing busi-
ness, albeit illegal (Ferreti,
1975).
In general, analysts have
recognized that WCC increases
in a rapidly developing econ-
omy. This pattern has already
been documented in developed
countries like the United States
and Japan. Basically, what hap-
pens is that economic growth
outpaces governments ability
to prevent WCC through legal
fixing, counterfeiting, embezzle-
ment, insider trading, securities
fraud, forgery, money launder-
ing, kickbacks, payroll fraud,
and tax evasion. The computer
age, however, has expanded
WCC to include identity theft,
computer and Internet crime
(sometimes known as cyber-
crime), credit card fraud, phone
and telemarketing fraud, bank-
ruptcy fraud, healthcare fraud,
environmental law violations,
insurance fraud, economic espio-
nage and trade secret theft (The
Crime Report, 2009). Again,
examples of all of these types
of crimes can be found world-
wide. According to Pricewater-
houseCoopers (PWC), the phe-
nomenon of WCC is the most
problematic issue for businesses
worldwide. It persists without
any apparent abatement and
affects all businesses no matter
what the companys country,
industry, or size. In addition,
despite the efforts of authorities
and the investments in preven-
tion controls by companies, the
level of WCC and the associated
costs have not decreased (PWC,
2007). The ACFE estimates that
the typical organization, on a
global basis, loses 5 percent of
its annual revenue to WCC. It
estimated total worldwide loss
to WCC at $2.9 trillion annually
(ACFE, 2010). Japanese entities
are no exception to the victim-
ization of WCC. It is essential
received attention, it has posed a
growing threat to US companies
domestically.
Originally, WCC became
a concern for the US business
community as a result of the
Watergate investigation. At that
time, it became publicly appar-
ent that certain politicians had
been accepting bribes and illegal
campaign contributions. Dur-
ing the mid-1970s, the focus
of investigations revealed that
WCC had exceeded crime in
the street in terms of the dollars
involved and the number of par-
ticipants (Kelley, 1976). By 1985
the reported loss to WCC had
reached $2 billion a year (Wells,
1985). It has grown exponentially
since then, with losses estimated
at (1) $400 billion in 1996,
(2) $600 billion in 2002, (3)
$660 billion in 2004, and
(4) $652 billion in 2006.
The most recent estimate
places losses at $994 bil-
lion per year in the United
States (ACFE, 1996, 2002,
2004, 2006, 2008).
White-collar crime
knows no boundaries.
The globalization of the
economy has extended this
threat beyond our borders so that
it has become not only a domes-
tic issue, but also a worldwide
issue for US companies. As
early as 1996, the head of Ernst
and Youngs fraud investigation
and risk management division
stated that fraud is truly global
and it doesnt matter whether
the business is in London, New
York, Sydney, Toronto, or Hong
Kong; the risks of fraud are the
same everywhere (Fraud Dis-
coveries Are Chance Happen-
ings, 1996).
White-collar crime manifests
itself in many different forms.
Traditionally, it included fraudu-
lent financial statements, brib-
ery, extortion, bid rigging/price
White-collar crime knows no bound-
aries. The globalization of the econ-
omy has extended this threat beyond
our borders so that it has become
not only a domestic issue, but also a
worldwide issue for US companies.
JCAF20720.indd 40 8/19/11 1:19:50 PM
The Journal of Corporate Accounting & Finance / September/October 2011 41
2011 Wiley Periodicals, Inc. DOI 10.1002/jcaf
enced fraudulent reporting and
the issues that were involved.
The business community
in general is familiar with the
Enron debacle and the other
subsequent financial statement
frauds in the United States that
led to the Sarbanes-Oxley Act
(SOX). The major purpose of
SOX was to restore investor
confidence after these frauds.
The law included numerous
sections, but two of the more
prominent dealt with specifying
that management is responsible
for the companys financial
statements and Section 404
that requires that management
attest to the effectiveness of the
companys system of internal
control. The Japanese had their
own equivalent of Enron with
a company named Kanebo. In
September 2005 four of Price-
waterhouseCoopers certified
safeguards (Silk, 1994). Another
commonality between the US
and Japan is the participation
of organized crime in WCC. In
the United States, the mafia has
been involved in WCC in sev-
eral forms, from financial fraud
to bribery and extortion. The
arrest of Al Capone on charges
of tax evasion, a form of WCC,
is an excellent example of orga-
nized crimes early involvement
in WCC. The Japanese mafia,
known as the boryokudan (vio-
lent ones) to the police and the
yakuza to themselves, has also
been involved in WCC in that
country. In 1988, the yakuza was
observed to be expanding into
WCC in the form of extortions
tied to bankruptcy and insurance
fraud. They were also extending
their WCC activities outside of
Japan. According to the US Fed-
eral Bureau of Investigation crim-
inal division, there were indica-
tions of Japanese WCC actually
emerging in the United States
when there was increased contact
between Japanese and American
corporations (Jones, 1988).
In the late 1990s and
early 2000s, the United States
incurred numerous corporate and
accounting scandals. Included
in these scandals in the United
States were companies such as
WorldCom, Tyco International,
Waste Management, Q-West,
Phar-Mor, and of course, Enron.
In the wake of these scandals,
Japan was wracked by a series
of similar scandals in the mid-
2000s that involved some of
the largest and most highly
respected companies in the coun-
try (Pontell & Geis, 2010). See
Exhibit 1 for a list, taken from
a KPMG report, of some of the
Japanese companies that experi-
Major Cases of Fraudulent Reporting in Japan
Date Company Issue
4/14/06 Livedoor Marketing Delisted for falsifying information
4/14/06 Livedoor Delisted for falsifying information
4/26/06 Chori Supervisory post assigned due to inappropriate accounting
6/20/06 Mikimoto Revealed recording fictitious sales for five years
10/7/06 ADTX Searched on suspicion of overstating sales
11/22/06 Higashinihonhouse Warned by Securities and Exchange Commission for falsifying information
12/6/06 TTG Assessed a penalty for acquiring funds by filing a false security registration
statement
12/17/06 Misawa Home Kyushu Revealed using inappropriate accounting practices
12/18/08 Nikko Cordial Group Supervisory post assigned due to partial misstatement of security registration
1/4/07 Taikisha Supervisory post assigned due to inappropriate cost accounting
1/4/07 IXI Delisted for fraudulent transactions
1/4/07 Tonichi Carlife Group Supervisory post assigned due to system failure and related accounting errors
3/30/07 Internet Research Inst. Supervisory post assigned due to auditor refusal to give audit opinion
(KPMG, 2007)
Exhibit 1
JCAF20720.indd 41 8/19/11 1:19:50 PM
42 The Journal of Corporate Accounting & Finance / September/October 2011
DOI 10.1002/jcaf 2011 Wiley Periodicals, Inc.
aware that it is looking at strong
similarities between what is hap-
pening domestically in terms of
WCC and what has and will be
happening in terms of WCC in
Japan and exercise caution while
conducting due diligence during
investment pursuits in Japan.
REFERENCES
Association of Certified Fraud Examiners
(ACFE). (1996). Report to the nation
on occupational fraud and abuse.
Austin, TX: Author.
Association of Certified Fraud Examiners
(ACFE). (2002). Report to the nation
on occupational fraud and abuse.
Austin, TX: Author.
Association of Certified Fraud Examiners
(ACFE). (2004). Report to the nation
on occupational fraud and abuse.
Austin, TX: Author.
Association of Certified Fraud Examiners
(ACFE). (2006). Report to the nation
on occupational fraud and abuse.
Austin, TX: Author.
Association of Certified Fraud Examiners
(ACFE). (2008). Report to the nation
on occupational fraud and abuse.
Austin, TX: Author.
Association of Certified Fraud Examiners
(ACFE). (2010). Report to the nation
on occupational fraud and abuse.
Austin, TX: Author.
The Crime Report. (2009, May 11).
Retrieved from http://thecrimereport
.org/resource-guide/white-collar-
crime/?page=2
Ferreti, F. (1975, January 23). Increase in
crime statistics causing international con-
cern. New York Times. Retrieved from
http://news.google.com/newspapers?
id=qu4eAAAAIBAJ&sjid=
SCQEAAAAIBAJ&pg=6906,
1929806&dq=the+history+of+
white+collar+crime+in+japan&hl=en
Finfacts. (2005). The Nikkei 225 index per-
formance. Finfacts Reports/Services.
Retrieved from http://www.finfacts
.com/Private/curency/nikkei225
performance.htm
Fraud discoveries are chance happenings.
(1996, August). Internal Auditor, 53(4).
Retrieved from http:/proquest.umi.com
/pqdweb?Did=000000010005654&Fmt=
3&Deli
Haruo, F. (2005, December). No accounting
for ethics. The Japan Journal. Retrieved
from http://www.japanjournal.jp/tjje
/show_art.php?INDyear=05&INDmon=
12&artid=e1d660485ce61f888f55575
32c34e6c3
ferences from region to region,
most fraud schemes were similar
in terms of trends, perpetrator
characteristics, and antifraud
controls no matter where the
frauds happened (ACFE, 2010).
For example, the most common
fraud was the misappropriation
of assets (usually cash), and the
most costly fraud was financial
statement fraud. Other similari-
ties included (1) the most com-
mon form of detection was a tip,
(2) the higher the level of man-
agement, the greater the loss, (3)
external audits are not effective
tools for detecting WCC, (4) the
average duration of most frauds
was 18 months, and (5) the cost
of fraud appears to be reduced if
antifraud controls are in place. It
is possible to generalize at this
juncture to Japan and say that,
based on the findings of this
ACFE survey conducted on a
global scale, WCC in Japan dis-
plays the same WCC character-
istics. However, further evidence
of this observation can be seen in
the results of the KPMG survey
entitled Fraud Trends in Japan.
This survey provided additional
evidence that Japan displayed
these same fraud characteristics
(KPMG, 2011).
CONCLUSION
Because of the events of
March 11, 2011, there will
be more opportunities for US
corporate investment in Japan
than usual. According to Eric
Chaney, the chief economist at
AXA Group, as Japan endeav-
ors to rebuild, there are going to
be across-the-board opportuni-
ties for investment in Japanese
companies (Kelly, 2011). These
investments do not come without
risk, and one of the major com-
ponents of risk involves the exis-
tence of WCC in Japan. Corpo-
rate US management should be
public accountants were arrested
because of their involvement in
the filing of falsified financial
statements by Kanebo in 2001
and 2002 in an effort to conceal
a loss of over 80 billion yen
(Haruo, 2005). In Japan, after
Kanebo and another company
named Seibu Railway Co. issued
falsified financial statements, the
Japanese version of SOX, called
the Financial Instruments and
Exchange Law and nicknamed
J-SOX, was passed on June 7,
2006. There are provisions in
J-SOX similar to provisions in
the US version. In particular,
Sections 302 (which refers to
corporate responsibility for
financial reports) and 404 (which
deals with managements assess-
ment of internal controls) are
similar (Lee, 2011). In summary,
US corporate managers should
be aware that the economic envi-
ronment in Japan is very similar
to the economic environment
in the United States in terms
of WCC. In addition, there are
many similarities between the
fraud characteristics found in
the United States as compared to
those in Japan.
PARALLEL IN WCC
CHARACTERISTICS IN THE
UNITED STATES AND JAPAN
As noted above, WCC is a
global issue. The Association
of Certified Fraud Examiners
conducted a global survey of
WCC that was published in 2010
(ACFE, 2010). The results of
this survey followed the same
patterns that had been observed
in their other fraud surveys that
were conducted specifically
for the United States. Simply
put, what was happening in the
United States appeared to be
happening in the same manner
on a global scale. The ACFE
found that despite slight dif-
JCAF20720.indd 42 8/19/11 1:19:51 PM
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J. Ralph Byington, PhD, CPA, is the dean and a professor of accounting at Coastal Carolina University.
His publications include over 100 journal articles, book chapters, newsletter items, and proceedings. He
is active within the accounting profession, presenting numerous professional programs at the national,
regional, and local levels. He has presented over 250 professional programs to business executives, CEOs,
CFOs, state CPA societies, student organizations, and firms in Georgia, Louisiana, Mississippi, Texas,
New York, California, Illinois, Massachusetts, Florida, Arkansas, and Washington, DC. Jo Ann McGee, DBA,
is an associate professor in the Department of Accounting and Business Law at Louisiana State University
in Shreveport. She has presented professional programs and published in the accounting areas of expertise
in protection against white-collar crime and ethical behavior in company reporting.
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