KPMG Fraud Survey 2012

Bringing clarity to the problem of fraud

KPMG Forensic’s survey offers a unique window into an often-opaque world. Given the high cost of fraud to public and private sector organisations in Australia and New Zealand, it is imperative to bring some clarity to a problem that tends to flourish in organisational cultures where transparency is poor.

The need for understanding and transparency that facilitates better fraud prevention and management is becoming more urgent as the fraud landscape itself changes in response to a changing global environment.

With the onset of the global financial crisis the incidence of fraud in the financial services industry has increased and may well be one of the reasons behind the changing motivations for fraudsters. At the same time, technology and social media are evolving at lightning speed, posing significant challenges in relation to fraud by increasing the opportunity to collude quickly and the channels available to commit fraud.
In profiling the victims, villains and heroes of fraud, the survey provides Australian and New Zealand-based businesses with an opportunity to understand not only the impact of fraud, but also how it takes root in organisations that are not prepared to battle it.

The survey includes a wide range of information that will be invaluable to all organisations. Our key findings are summarised on pages 4 and 5. However, a few key themes have emerged that warrant focused consideration.

The devastating impact of insider fraud

The 2012 survey indicates that fraud committed by people within an
organisation – the people you tend to trust – is the real concern for Australia
and New Zealand-based organisations. Overseas, the headline cases of fraud
in recent years, including rogue trading and manipulation of interest rates, have mostly been internally perpetrated. The clear lesson is that internal controls need to be more robust.

While perpetrators are more likely to be non-management employees, our survey confirms that organisations cannot afford to be laissez faire about the role of management in fraud. Over the last eight years, more senior executives and company directors in respondent firms have been involved in fraudulent actions, and data from the 2012 survey clearly demonstrates that where managers and senior executives are involved, the loss rises exponentially, so the potential for damage is heightened. For example, in the non-financial sector, management
is only responsible for 1 percent of fraud incidents, but 18 percent of the value of fraud.

This indicates that firms need to take a broad approach to managing their
fraud risks – they cannot afford to simply focus on where the majority of fraud incidents are occurring given the devastating impact staff further up the hierarchy can cause when they choose to commit a fraud.

Beware of third party influence
Organisations cannot focus their fraud risk management on internal culture alone. Survey data reflects the heavy involvement of third parties in fraudulent activity within respondent firms – over the last 12 years, external perpetrators have been responsible for 47 percent of the value of major frauds reported. There is more collusion between employees and third parties than between internal parties, and, in 2012, external parties were responsible for 74 percent of fraud by value
in the finance sector, which includes banks, insurers, fund managers and other financial sector organisations, 69 percent in the non-finance sector and
42 percent in the public sector.
Bribery, corruption and legislative risk
Several local bribery and corruption cases have increased the domestic focus on this issue. A changing global environment is also acting as a catalyst for change.
Australian and New Zealand-based businesses should be reviewing their anti-bribery and corruption arrangements given domestic requirements and relevant overseas legislation, such as the US Foreign Corrupt Practices Act and the recent enactment of the UK Bribery Act. This legislation can have significant implications for Australian and New Zealand organisations with international operations or who are dealing with US and UK-based firms; developing appropriate anti-bribery and corruption programs should be a key priority.
The survey data on third parties reveals there is a real vulnerability for respondent firms in the area of bribery and corruption, with almost three-quarters of respondents indicating they do not require confirmation from foreign agents that they have complied with the agency agreement. The tightening in bribery and corruption legislation overseas creates a real risk of Australian and New Zealand- based firms, in some cases being liable for the corrupt activities of external parties. Consequently, it will be critical for firms operating outside Australia
and New Zealand to address this issue quickly.

The power of collusion

A striking theme of this year’s survey was the increase in collusive behaviour. While most perpetrators still act alone, we are seeing more fraud involving two or more people. This alone is not necessarily the issue; the real problem is the huge impact collusion has on the time it takes to detect fraud – 665 days, by far the longest detection period.
With technology facilitating the proliferation of channels through which perpetrators can collude, organisations will need to create targeted strategies to detect this form of fraud.

Gambling with your company’s future

Understanding the motivation for fraud is always an important element in developing the right kind of risk framework. However, looking closely at the data on motivation is imperative. Personal financial pressure and greed/lifestyle most commonly drive the fraudster. We also note that a small proportion of fraudsters with gambling problems have perpetrated some very large frauds.