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Fraud in business - especially amongst senior management - is on the increase


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 board members at divisional, subsidiary and corporate level, commit nearly one fifth of fraud - an increase from 11% in 2007 - to 18 % in 2011. Of the various board roles, those in CEO or MD's offices account for an increase in committed fraud from just 11% in 2007 to 26% across the four-year period.

The report 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%) 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%) often for more than 10 years (33%) and usually in a senior management role or board role (in aggregate 53%).

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%), with 50% 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% 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% of the UK frauds in the survey - globally it was even lower at 16%.

It is interesting to note that formal whistleblower reports and anonymous tip-offs accounted for 24% of detected frauds (34% in the UK), whilst a further 8% (6% in the UK) were identified due to customer or supplier complaints and 6 percent (11% in the UK) due to issues raised by third parties such as banks, tax authorities 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% 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% of frauds had exhibited one or more prior red flags and of those just over half had been acted upon.

Just over 31% 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%) overall; however, women in the Americas (22%) and Asia Pacific (23%) are almost three times more likely to be involved in fraud than in EMA (8%).

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 $0.9 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."