Corporate Fraud | WISE Workplace

published - 20 May 2009

Corporate fraud and theft from organisations is on the rise – particularly in this tough economic climate.

As job insecurity grows and people are tightening their belts, the temptation to use company money for personal expenses grows.

The biggest motivation for internal fraud is still gambling – an activity that is known to increase at times of recession. 

A recent *KPMG fraud survey across a broad cross-section of Australian and NZ organisations found a significant increase in fraud in recent times.

The estimated total loss through fraud was valued at more than $301 million last financial year, with employees being responsible for 57 per cent of that loss.

An estimated 89 per cent of the value of major fraud during that period was not recovered.

The report found poor internal controls were the most important factor contributing to major fraud.

Fraud “red flags” were ignored in 22 per cent of the largest fraud incidents.

About 25 per cent of the value of internal fraud is committed by non- management employees, but a staggering 32 per cent is perpetrated by managers, including senior executives and directors.

This is not surprising, as managers have greater access to funds and more opportunity to defraud.

Within the financial services sector, the most costly fraud committed by management level personnel (including directors and senior executives) was the fraudulent use of corporate issued credit cards, representing 67 per cent of the total. This was followed by theft of cash at 14 per cent and fraudulent expense claims at 8 per cent.

Within the non-financial services sector, the most costly fraud associated with managers was false invoicing, representing 45 per cent of the fraud value. Theft of inventory followed, representing 12 per cent of the total value.

When the economy is strong, companies are more likely turn a “blind eye” to misuse of corporate credit cards or inflated expenses.

But when times get tough companies are more vigilant to keep fraudulent activity in check.

Opportunity is the key issue in reducing internal fraud.

Much internal fraud can be prevented through adequate procedures and anti-fraud measures yet some of the biggest cases have occurred in highly regulated environments.

Executives in positions of authority and power with access to funds without question, have the ability to override even the most stringent regulatory measures.

In most cases they are not accountable to others. No-one oversees them or checks or questions their actions and procedures.

Protecting your company from unnecessary loss though internal fraud has never been more critical.

Companies can reduce the risk with these simple measures:

  1. Identify those people or positions in the organisation with the opportunity - access to funds, banking and invoicing.
  2. Review anti-fraud measures and accountability procedures. Ensure adequate procedures are in place. 
  3. Conduct audits to ensure procedures are followed throughout the organisation and regularly ask questions.
  4. Educate staff and managers about appropriate and inappropriate spending.
  5. When you find discrepancy – act, nothing sends a clearer message about appropriate conduct than a case example.

So what should a company do if fraud is detected?

 A company can engage the services of independent external investigators to examine fraud claims. With expertise in forensic accounting and data recovery from computers and digital devices, independent investigators have the specialist skills to trace the money, who was a fault and determine how the system fell down. Initial assessments can be conducted in house if a company has the required skills.

These investigations will help to determine how the system can be improved to prevent ongoing fraud and what action should be taken against an employee involved in fraudulent activity or misconduct.

Serious cases of fraud are often reported to police however police investigations can be slow and don’t address an organizations need for prompt definitive action and a capacity to prevent fraud reoccurring by others.

About the KPMG survey

*KPMG Forensic, in collaboration with the University of Melbourne and the University of Queensland, sent a confidential fraud survey questionnaire to 2,018 of Australia and New Zealand’s largest public and private sector organisations in August 2008. The report findings were based on responses received from 420 organisations.