SENIOR executives are committing more fraud, a survey by global consulting company KPMG has found. A comparison of the results of surveys from 2007 and 2011 indicates an increase in fraud and fraudulent behaviour by senior managers. The global survey by KPMG shows that CEOs were involved in 26 percent of cases, up from just 11 percent in the previous survey. The survey was based on the findings of frauds investigations conducted by KPMG member firms in 2011. One finding, identified as alarming by KPMG, is that companies are continuing to ignore warning signs of fraud. This, and the fact that more than one half of the investigated frauds had run for more than three years before they were detected, suggests that more white-collar fraud may emerge in the future.
The KPMG study follows a 2007 analysis of fraudulent behaviour across the Europe, Middle East and Africa region. Since that report proved so popular, KPMG extended the 2011 survey worldwide. KPMG sought to identify patterns among individuals who have committed acts of fraud and compared the value and duration, as well as many other characteristics.
The 2011 survey is based on 348 cases investigated by KPMG across 69 countries including Slovakia between 2008 and 2010, i.e. covering the start and the main part of the recent financial and economic crisis.
The typical fraudster
The 2011 research found that the ‘typical’ fraudster is a man aged between 36 and 45 who works in a finance or finance-related role, has been with the company in question for more than 10 years, and holds a senior management position. Often such individuals will be better placed to override controls and may have accumulated a good deal of personal trust. They are most likely to engage in embezzlement or procurement fraud.
Viliam Kačeriak, a manager at KPMG’s forensic services department in Slovakia and covers the central and eastern Europe (CEE) region, noted that in Slovakia the typical fraudster most commonly works in the procurement or sales departments. The finance department often plays the role of ‘policing’ these areas.
“We most often register frauds leading to misappropriation of assets, embezzlement and corruption activities,” said Kačeriak, adding that in other regions misstatement of financial results is more common.
In this respect the CEE region bucks the global trend. Fewer frauds occur within the finance function, while most are committed within sales and procurement.
“In central and eastern Europe many multinational companies have tended to transfer trusted expatriate employees from the parent company into key financial positions at their subsidiaries in the region, to provide not only the necessary experience, but also to “police” the subsidiary from within the finance function,” Jimmy Helm, KPMG’s head of forensic in CEE, said, as quoted in the KPMG analysis. “They act as whistleblowers, the initiators of investigations. Often they are further transferred from region to region as the company sets up new operations to ensure the ongoing integrity of the finance function.”
According to the KPMG findings, in eastern Europe some 89 percent of people investigated had been employed at the company in question for more than three years, of whom more than half had been employed for longer than six years, Fifty-two per cent of the frauds had been running for more than three years before they were detected, said Kačeriak.
The results of the survey also showed that a typical fraudster does not work alone: in 61 percent of cases, the fraudster colluded with either an internal or external third party. The CEE cases followed this trend, with 63 percent involving collusion. This characteristic is further supported by a review of reported cases in Slovakia resulting in convictions, which indicates that there was collusion in more than 50 percent of cases.
The survey also found that ‘red flag’ warnings, such as an employee who rarely takes holidays or whose lifestyle appears excessive for their income, are commonly being ignored by companies.
“It is surprising that companies continue to ignore warning signs, particularly in light of the recession,” said Martauzová. “While cost-cutting initiatives associated with the downturn may have played their part in the observed shift, such cuts may prove to be a false economy. While defences are down, the fraudster sees an opportunity to capitalise. The need for companies to be vigilant has never seemed more important.”
The global average indicates that only 23 percent of the frauds detected were publicly reported, and 46 percent were communicated internally. In eastern Europe, less than 30 percent of fraud incidents were reported internally and only 11 percent were reported externally - only in India were less cases reported. Full disclosure to the authorities only occurred in 2 percent of the cases in eastern Europe, compared to the global average of 13 percent.
4. Jul 2011 at 0:00 | Jana Liptáková