Fraud in business on the increase

Company bosses are increasingly committing fraud, according to new research from KPMG.

The global survey found that board members commit nearly one fifth of fraud, an increase from 11 percent in 2007 to 18 percent in 2011. Those committing fraud can be found across all levels including divisional, subsidiary and corporate level.

Board members in CEO or MD’s offices account for an increase in fraud committed, from 11 percent in 2007 to 26 percent across the four-year period.

Entitled Who is the typical fraudster?, the KPMG report focuses on white collar crime and paints a picture of the average fraudster. Its analysis considers 348 fraud cases across 69 countries, taken from KPMG’s own investigations.

Richard Powell, KPMG's EMA forensic investigations network lead, comments: "While our research has shown that corporate fraudsters are typically male, 36 to 45 years old (41%) and often commit fraud against their own employer, what has remained 'unknown' until now, is the extent to which the temptation to commit fraud has infiltrated both the board and executive management across the globe."

The ‘average’ fraudster will work in a finance-related role (32 percent), often for more than 10 years (33 percent), and usually in a senior management or board-level position (53 percent).

Powell added: "In the UK, the survey showed an even higher proportion of fraudsters who had worked for their employer for more than 10 years (57 percent), with 50 percent in senior management or board roles."

Senior employees are more likely to be highly trusted and have the authority to override controls, making them more prone to embezzlement and procurement fraud. False billings by suppliers and overbilling are two common methods of fraud committed by senior staff.

And while the actual frauds are typically quite simple and common, the perpetrators often employ complex methods of concealment. Management review led to detection of just 22 percent of UK frauds and 16 percent of global frauds.

Formal whistleblower reports and anonymous tip-offs revealed 24 percent of detected frauds globally and 34 percent in the UK. A further 8 percent globally and 6 percent in the UK were identified due to customer or supplier complaints, and 6 percent (11 percent in the UK) due to issues raised by third parties including banks and regulators.

The research also found that 'red flag' warnings such as an employee who rarely takes holidays or who leads an excessive lifestyle compared with their income or is secretive or unwilling to provide requested information; or a business area whose performance is not well understood but bucks the trend, are being dramatically missed or ignored by companies, particularly since the onset of the credit crunch.

In 2011, 56 percent of frauds had exhibited one or more prior red flags but only around 10 percent of those had been acted upon, compared to 2007 when 45 percent of frauds had exhibited one or more prior red flags and of those just over half had been acted upon.

Just over 31 percent of the cases involved the payment of bribes or kickbacks or other forms of corruption.

With the UK's Bribery Act fast approaching, there is a much increased emphasis on companies needing to ensure they take steps to avoid their employees and those acting on their behalf whether in the UK or overseas, making improper payments to agents and others.

Men were found to be more likely perpetrators of detected fraud (87 percent) overall; however, women in the Americas (22 percent) and Asia Pacific (23 percent) are almost three times more likely to be involved in fraud than in EMA (8 percent).

The duration of fraud prior to detection is longest in Asia - on average five years - with 16 percent of frauds going undetected for 10 years or more, compared to 4.2 years in North America and 3.7 years in Western Europe.

The average loss varies by geography with Asia Pacific totalling an average of US$1.4 million, the Americas US$1.1 million and EMA US$0.9 million, with the lowest average transaction values being found in India and Eastern Europe.

Powell said: "Given the findings from our survey of red flags not being followed up, coupled with increased recessionary pressures, and the impact of the credit crunch, it seems probable there will be a marked increase in the number of as yet undetected fraud cases which will surface over the next couple of years. If the trends in our survey continue then many of these cases will continue to throw out red flags in the intervening period. While many fraudsters are now using more sophisticated technology to commit and hide their crimes, often the underlying fraud remains quite simple in its execution.

"The challenge is how to see through the 'ordinary' disguise of the fraudster; close the gaps in the corporate armour; enhance fraud prevention and detection; and, spot and respond more often and more rapidly to red flags."