A three-fold increase in major fraud over 15 years, at an average cost of detected fraud of $3 million per organisation, is still not enough to prompt senior management to view fraud as a serious problem.
The bi-annual KPMG Fraud Survey - surveying 281 private and public sector organisations across Australia and New Zealand - estimates $373 million was lost to fraud in the last two years, with 43 percent of organisations surveyed experiencing fraud. The financial services sector was the hardest hit, suffering $322 million in fraud losses.
Despite increasing evidence that fraud is on the rise, only 15 percent of survey respondents see fraud as a key risk for their organisation.
“Fraud, bribery and corruption are not top of mind for senior management. Executives continue to ignore the problem despite knowledge that fraud is on the rise,” says Gary Gill, KPMG’s National Head of Forensic.
“The $373 million figure is of particular concern,” says Mr Gill, “as we believe it is only a fraction of the actual cost of fraud as many incidences of fraud go undetected or unreported.”
Up to 21 percent of survey respondents indicated that their organisation ignored early warning signs of fraud, signalling that merely implementing robust internal controls is not a foolproof way of preventing fraud.
“We see many cases of fraud where management has ignored early warning signs of accounting irregularities, resulting in the problem festering, ultimately leading to a significant loss which could have been averted had they chosen to investigate initial red flags,” says Mr Gill.
The survey shows a significant increase in major frauds perpetuated by insiders, from 65 percent in the 2010 survey to 75 percent in the current survey; and an increase from 23 percent to 29 percent in instances of internal fraud involving collusion. Collusive fraud is fast becoming a significant problem for many organisations, particularly where collusion takes place between employees and external parties, as collusion protracts the time taken to detect the fraud.
“The survey shows it takes an average of 665 days before fraud is detected when collusive behaviour is in play. While the delay in detection suggests that the organisation’s fraud detection strategies require updating, it also indicates that collusive behaviour empowers the fraudsters,” says Mr Gill.
Technology is also playing an increasingly significant role in fraud, changing not only the level but also types of fraud.
“Increased connectivity and social media proliferation has made organisations more susceptible than ever to cyber attacks. Organisations must be as sophisticated in their cyber security as the hackers are in their methods. Cyber security must be a top priority in all risk management strategies,” says Mr Gill.
According to Mr Gill, the threat of bribery and corruption and the damage it can do, and an apparent lack of engagement by senior management in addressing this issue, is another major cause for concern.
The survey data revealed that many organisations still lack a sufficient understanding of their obligations and the risks they face as governments around the world take an increasingly pro-active stance in fighting bribery and corruption through legislation such as the UK Bribery Act and the US Foreign Corrupt Practices Act. This is particularly relevant for Australian and New Zealand businesses with US and UK-based operations.
“Recent cases investigated by local anti-corruption bodies and the number of Australian organisations which have had been required to address bribery allegations demonstrates that bribery and corruption is a problem for Australia’s public and private sectors, and certainly not confined to offshore dealings.”
“In this rapidly changing global regulatory environment, organisations need to demonstrate that they have embedded sufficient risk management practices to mitigate bribery and corruption risks,” says Mr Gill.