Survey Reveals More Organizations Detecting Fraud

Spurred by new government regulations and demands by investors, more companies today are working to uncover fraud, finding it, and taking action against those who commit fraud, according to a new survey by U.S. audit, tax and advisory firm KPMG LLP.

The survey showed that 75 percent of respondents report they have uncovered fraud in their organizations in the last year, compared with 62 percent of executives responding to a similar survey in 1998. Employee fraud occurred the most frequently, although financial reporting and medical/insurance fraud were much more costly. KPMG’s 2003 report surveyed executives at 459 U.S. public companies, with revenues of more than $250 million, and at state and federal government agencies.

“Companies and their boards are more intent on uncovering fraud and misconduct as a direct result of corporate governance legislation and other mandates, including the Sarbanes-Oxley Act, put in place over the past two years,” said Richard H. Girgenti, partner in charge of KPMG’s Forensic practice. “As we read in the newspapers every day, an incident of fraud within a company can bring intense public scrutiny, government investigations, loss of market capital and severe penalties, while sending skittish investors scurrying.”

Despite heightened awareness and broader implementation of fraud detection controls—which could include hotlines so employees can report fraud as well as other whistle-blower, training and additional anti-fraud programs—more than one in five executives surveyed, 22 percent, said they do not plan to implement new controls, even though many companies are still evaluating their internal controls as required by Sarbanes-Oxley.

“This finding was regrettable, and may put these companies at greater risk for not only experiencing incidents of fraud and misconduct, but also for facing higher fraud costs and damage to the company reputation when incidents do occur,” Girgenti said.

The survey found that company management is taking a more active approach in detecting fraud through internal controls and internal audits. The 2003 survey showed a dramatic rise in internal controls, from 51 percent to 77 percent, as the chief means for detecting fraud; followed by internal audit, rising from 43 percent to 65 percent. Conversely, notification by employees, the chief manner in which respondents indicated that fraud was uncovered in the 1998 survey, rose, but less dramatically, from 58 percent to 63 percent.

“The good news is that more and more companies are taking affirmative steps to prevent and detect fraud within their organizations,” Girgenti said.

In fact, 64 percent of companies took legal action by bringing civil or criminal charges against the culprits, compared with just 37 percent five years ago; and 64 percent notified a regulatory or law enforcement agency after finding fraud, compared with 34 percent responding to the previous survey.

The survey also found that collusion between employees and outside third parties – a vendor organization offering kickbacks if a company employee buys its product, for instance – is a growing problem, with almost half (48 percent) of respondents citing collusion as contributing to fraud, compared with 31 percent in 1998.

“These findings underscore the fact that there is a continuing need to be vigilant, that wrongdoers are finding more sophisticated and collusive ways to commit fraud and misconduct, and that the methods to detect these activities must also become more sophisticated in response,” said Girgenti. “Demand for forensic skills has never been greater.”

Despite the increase in fraud, 43 percent of corporate and government executives are predicting a decrease in fraud incidents in the next 12 months, with just 7 percent expecting an increase.

“This statistic suggests that there is optimism that current anti-fraud measures will be effective. However, it also raises some concerns,” Girgenti said. “Companies may be lulled into thinking that they now have a handle on the problem. In reality, fraud and misconduct is a pervasive and insidious problem that requires companies to maintain continuous vigilance in assessing and improving their controls and programs to detect, prevent and investigate its occurrence.”

Among the other findings of the 2003 survey were:

  • The number of companies who said that they were uncovering financial reporting fraud more than doubled (7 percent in 2003 compared with 3 percent in 1998), with the average cost reaching more than $250 million per episode.
  • The cost of fraud to organizations overall is higher. Some 36 percent of companies reported $1 million or more in costs due to fraud in 2003, compared with 21 percent in 1998.
  • Some 60 percent of companies reported being victimized by employee fraud, almost twice the rate of the next-highest category of fraud.

“Fraud and misconduct will continue to be one of the most significant business risks facing Corporate America,” Girgenti said. “To protect investors, employees and their retirement pensions, and the viability of the organization as a whole, companies need an effective anti-fraud strategy, whether it’s to uncover fraud in the mailroom or the boardroom.”

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