The criminalization of agency and other fine phrases

Vic discusses a post by Tom K, linked by Steve Bainbridge, concerning the KMPG tax shelter investigation. Vic objects to their use of a phrase I seem to have invented, "criminalization of agency costs." He points out that “tax fraud is not an agency costs problem.”

Vic is right, and I’m glad he pointed it out, because the problem with any criminal indictment of KPMG is worse than criminalization of agency costs.  The government does not seek merely to hold the accountants liable for helping clients with tax fraud, but also to indict the whole firm for the acts of its agents, which would put it out of business. Of course KPMG can’t withstand that result, so it must cooperate. This puts extraordinary pressure on the entire organization, which Tom discusses. I would call this, not criminalization of agency costs but, to coin another phrase, criminalization of agency. 

The distinction is this: with criminalization of agency costs, you are at least going after people who did wrong things.  I would dispute that what they did was criminal, but usually it's a least bad. In the KPMG situation, the criminal liability is vicarious.  When the organization goes into the "slammer"  for the acts of its agents, completely innocent people get hurt.

I have discussed this issue regarding the Andersen indictment here. At some point indicting the entire organization may be appropriate.  But the costs here, including the evisceration of a large business, virtual elimination of competition among major auditing firms, and the questionable tactics Tom K discusses from the threat of indictment, make it very doubtful.

Speaking of inventing phrases, I guess I also get credit for inventing “corporate crime lottery.” I think that also applies  to the KPMG case. Of course tax fraud can be criminal.  Everybody knows that.  And maybe that extends to the accountants that help the fraud.  The lottery here is, when is the organization going to be criminally liable? 

My “corporate crime lottery” phrase came up for discussion recently over at White Collar Crime Blog. The writer pointed out that criminal liability of the organization is rare. I would add: sort of like losing the lottery.  There was also an interesting discussion of the factors relevant to individual criminal liability, including this:

Does the size of the company matter?  It certainly does to the SEC because of its investor-protection mission, and likely matters to the U.S. Attorney's Offices because they are concerned about resource allocation, and a large public company will generate more interest.  Although most offices don't acknowledge a monetary cut-off point for taking a case, they will not pursue small dollar cases with few victims or only a minimal impact.

In other words, the exact same conduct in a small company is not criminal.  To the extent this relates to the harm caused, I can at least see the point, but I’m skeptical.  The accounting for harm is often dubious, looking at market losses that mostly net out.  The netting out relates not just to social harm but to individual harm, because we can assume that most investors hold diversified portfolios.  But what’s worse is that criminal law must operate from norms.  What kind of signal does it send that precisely the same conduct is criminal in a company with, say, more than $100,000,000 revenues but not in one with less than the cutoff? 

More importantly, I'm concerned that the criterion is political rather than the social policies that should determine criminalization, as indicated by the above quote from WCCB.  For example, based on the government's indictment, did Ken Lay, who was basically out of the picture until the very end at Enron, do more harm to the the public and engage in conduct that was more obviously culpable than the principals at Krispy Kreme?  I don't know, but I do know that a government agency doesn't get the same goodies from going after a donut maker that it does from going after these people in Houston who have had movies made about them. When indictment decisions depend on considerations like that, it starts to look like a lottery, at least from the defendants' standpoint.

Finally, why is it that I get to coin all these phrases, at least according to Google?  I don’t think it’s because I’m brilliant – it’s because what we’re talking about here is a relatively new, post-Enron phenomenon.  It’s easy to miss because you can find at least slightly analogous precedents.  The difference is a matter of degree, but it’s a degree that matters.  I don’t think that corporate conduct is getting worse.  But the politicization of the corporation has increased, helped along by the media, in the wake of Enron.  We need to take a hard look at what’s going on and make sure that it’s really crimes and not politics that is landing people in jail and putting whole organizations out of business.