Warren Buffet once said: "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently." Recent events have shown not only the importance of corporate reputation but also the less obvious fact that many reputations are critically overblown - in fact, they are bubbles. That view can be examined in the context of economic crime.

A working definition of economic crime might be: "Deliberate (criminal standard) or negligent (civil standard) actions that destroy commercial value and undermine confidence in corporations and the markets".

This is a more sophisticated way of looking at unacceptable commercial behaviour than current criminal statutes allow. It amounts to much more than fraud, but because this is not widely recognised, is often not sufficiently punished. A common example is the financial impact of relying on audits that state compliance with the letter of accounting Standards but fail to criticise the deceptive spirit of off-balance sheet financing. Does the punishment always fit this economic crime? How true and fair is this?

Now consider another, more substantial, example of economic crime: the rise of the brand. In the current debate on corporate governance and economic crime, the rise of corporate branding has received little attention.

Going back to first principles, a brand was originally a mark of ownership, literally a cattle brand. As the urban economy developed in the eighteenth and nineteenth centuries, ‘brand’ was extended to become an assurance of quality - ‘this type of tinned meat will not make you ill’. Brands as guarantees of quality justifiably began to attract premium prices. Over-selling, or diluting, of brands began to happen when branding was used to sell services rather than goods.

Fast forward to 2002 and ask yourself whether an auditor from a global accounting firm is better than an auditor from a Group A firm? Is a lawyer from a City firm better than one from a regional firm? In general, of course not, but as Barnum & Bailey succinctly put it: "There’s one born every minute". For years, senior executives looked no further than the biggest firms, often the same ones they trained with, in the dubious belief (often disregarding considerations of shareholder value for money) that the more expensive the fee, the better the service received.

So where did that lead us? To unjustified premium fees, ‘bubbles’ where fees paid exceeded the service provided. As a regulatory point, you might ask what role competition policy has played in this arena. Could this be an area where Trading Standards might bring more rigour in future?

Certainly the best way to deal with economic crime is by regulation, but this can only be truly effective when the subtleties of such crimes are visible and the regulators themselves are clear about in whose interest they are operating. New criminal and civil statutes should not be ruled out, especially given the huge amounts of money that are lost, for example, through unwarranted mergers and acquisitions or reckless dot.com gambles (another bubble). Nevertheless, regulation is probably the way forward, and regulators need to work with the grain of the commercial sector, not across it. They need a more creative and fundamental understanding of the whole swathe of economic crimes threatening modern commerce.

A major consideration is consistent, cross-border regulation that mirrors the globalisation of commerce itself. The Sarbanes-Oxley Act is an early example of this new style of regulation, even though its cross-border aspect arises accidentally by virtue of non-us companies having to (grudgingly in many cases) comply with it in order to retain their us listings. Some, famously Porsche, have decided not to bother and in that decision lies an element of caution: while Sarbanes-Oxley seeks to bring some regulatory impetus to audit and corporate governance, it is only formalising issues that have been passed around for years. It is no revolution, a point implied recently by BP’s Vice President for Operations in Europe, who said that these rules on their own will not help restore public confidence in financial reporting.

A good businessman has always implicitly been a good risk manager - thinking long term, identifying factors relevant to the company’s success and adapting accordingly. The idea of the good manager being a good risk manager will not change, but such individuals will remain in the minority. Continuing concern about corporate governance means that there is a need for a formal risk management function in larger commercial entities. This should adopt a more sophisticated and a more global outlook if it is to help confront economic crime in all its aspects.

There are now new risks to deal with. One is the way in which commercial organisations handle information. Other new risks stem from corporate responsibility - from a concern for environmental protection and human rights issues such as data protection or child labour - and are already being addressed by some risk managers.

Wider concepts of economic crime, which derive from the rise of a human-centred view of the commercial world, will not come to wider recognition and acceptance overnight and nor will their regulation. The understandable inertia in cross-border and international bodies makes them slow to respond to new concepts.

Nevertheless, this is the way we are heading. Corporations need to be ‘corporate citizens’ existing in a global commercial community and, as in any community, certain standards of behaviour are expected. Whether this happens by expanding concepts of crime within current regulatory structures or by revolutionising the structures themselves will be interesting to watch.

Steven White is Head of Group Risk at J Sainsbury. Please note that the views expressed here are the author’s own

AT, December 2002/January 2003, page 20-21