Prevalence of corporate fraud and misconduct is high according to KPMG survey

KPMG's 2008-2009 Integrity Survey, the third in a periodic series that began in 2000, published by KPMG Forensic, concludes that little has changed in the frequency and pattern of corporate fraud and misconduct over the years. The survey found however, that "Ethics and compliance programs continue to have a favorable impact on employee perceptions across the board. The percentage of respondents who reported working in an environment in which people feel motivated and empowered to do the right thing doubles (from 43 percent to 90 percent) among employees who work in companies with comprehensive ethics and compliance programs versus those who do not."

Nearly three out of four employees in all industries reported having observed or having firsthand knowledge of wrongdoing, with respondents from the automotive industry and government reporting the highest rates overall and employees in highly regulated industries like insurance and banking reporting the lowest. The prevalence of reports of serious misconduct that could cause a "Significant Loss of Public Trust" was highest, however, in the banking industry.

Many of the most sophisticated fraud schemes are brought to light by whistleblowers, the report says, but the risk remains that reports of serious misconduct may not reach boards and senior management. Most employees (78 percent) said that they would report misconduct to their immediate supervisors. Only 40 percent said that they would report misconduct to the internal audit department, and 35 percent said they would notify the board of directors or audit committee. Respondents showed more comfort with hotlines than in previous surveys.

"Preventing misconduct begins by better understanding its root causes," the report says. More than 50 percent of respondents said that the following were factors that might cause individuals to engage in misconduct. They might:

 

  • Feel pressure to do 'whatever it takes' to meet business targets
     
  • Believe they will be rewarded for results, not the means to achieve them
     
  • Believe the code of conduct is not taken seriously
     
  • Lack familiarity with the standards that apply to their jobs.

A significant number of respondents (66 percent) said that the CEO and other senior management set the right "tone at the top" on the importance of ethics and integrity. Less than half (49 percent) said that senior management "knows what type of behavior really goes on inside the organization."

Since KPMG has begun conducting the Integrity Survey, Congress has passed the Sarbanes-Oxley Act of 2002. Since then, the report says, most companies in the United States are applying the integrated internal control framework developed by the Committee of Sponsoring Organizations which addresses "ethics and compliance program elements in entity-wide components that have a pervasive influence on organizational behavior, such as the control environment."

In our current economic environment, "The need for effective fraud risk management efforts could not be greater, especially as we move through a volatile market in which management's risks and opportunities may be amplified," writes Richard Girgenti, National Practice Leader, KPMG Forensic, in his introduction. "But while pressures may exist to meet revenue targets, managers may be able to leverage their anti-fraud efforts to control costs and reduce losses associated with fraud, waste, and abuse - particularly in circumstances involving significant government funding in private enterprise."

The report offers sample questions that boards and managers may use within their own organizations.

KPMG conducted the survey of 5,000 working adults in four thresholds of organizational size who spanned all levels of job responsibility. Walker Information, an independent survey research firm, validated the manner in which questions were posed, developed statistical samples across demographic categories, tabulated responses, and tested the statistical validity of the survey's findings. They in turn hired National Family Opinion, one of the work's largest panel database firms, to administer the survey.

You can read the entire 2008-2009 Integrity Survey.

 

 

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