- ‘Red flag’ fraud warning signs are being missed and ignored
- Nearly a third of frauds involve bribes or other forms of corruption
Company bosses including those working within the chief executive or managing director’s offices are increasingly committing more fraud, according to a global KPMG survey.
The survey found that globally board members at divisional, subsidiary and corporate level, commit nearly one fifth of fraud – an increase from 11 per cent in 2007 – to 18 percent in 2011. Of the various board roles, those in CEO or MD’s offices account for an increase in committed fraud from just 11 percent in 2007 to 26 percent across the four-year period.
“Who is the typical fraudster?” analyses the pattern of fraud from 348 cases across 69 countries, selected from the thousands of cases which KPMG has investigated for its clients. Many of these cases have never been made public. The report focuses on white collar crime (including financial misreporting) and paints a picture of the characteristics that make up the average fraudster.
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 percent) 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 research found that the ‘typical’ fraudster will work in the finance-function or a finance related-role (32 percent) often for more than 10 years (33 percent) and usually in a senior management role or board role (in aggregate 53 percent).
Richard 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.”
Often long-serving and more senior employees will be better able to override controls and have accumulated a good deal of personal trust, so will be less suspected, and they are most prone to committing embezzlement and/or procurement fraud (these account in aggregate for just over 50 percent of the 348 cases). Examples include false billings by a supplier to fund kick backs to a senior employee; employees accepting bribes from a contractor in exchange for signing off inflated project costs; and supplier collusion with victim company employees leading to overbilling.
While frauds are typically quite simple in concept, they can often involve quite complex means of concealment. Frequently the use of good management review procedures, sometimes coupled with data analytics techniques can help identify potential anomalous transactions or suspicious activity. In the UK, management review led to detection of only 22 percent of the UK frauds in the survey – globally it was even lower at 16 percent.
It is interesting to note that formal whistleblower reports and anonymous tip-offs accounted for 24 percent of detected frauds (34 percent in the UK), whilst a further 8 percent (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 such as banks, tax authorities and regulators etc.
Red flag warning signs
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, some 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.
Richard Powell comments: “The dramatic increase in red flag warning signs of fraud, which are not being noticed or not being properly followed up, is a wake-up call to companies and public sector entities everywhere.
“It is pretty surprising that companies have significantly failed to respond to warning signs, particularly in light of the recession. While cost cutting is critical in many businesses, the need to ensure that areas susceptible to fraud risks are properly identified, understood, and have appropriate controls over them, is paramount. It is important that internal auditors and others know how to recognise a red flag and how to respond, and that there is a culture which encourages reporting of matters of potential concern.”
Bribery & Corruption
Just over 31 percent of the cases in our analysis 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.
Cultural and geographic differences
The survey showed some interesting cultural and geographic differences in the features of the fraud cases investigated, across the different regions surveyed:
- 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 per cent).
- 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 $1.4 million, the Americas $1.1 million and EMA $0.9m, with the lowest average transaction values being found in India and Eastern Europe.
Richard Powell concludes: "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.”
Notes to editors
KPMG’s analysis was carried out in 2011 on a sample of 348 white collar crime cases investigated between January 2008 and December 2010, covering 69 countries.
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Judith Dow, KPMG Corporate Communications
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KPMG Press Office: 0207 694 8773
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