Fraud reports are up, cost of wrongdoing rising, says KPMG

More companies are reporting fraud — from theft of office supplies to bid rigging — as a result of new government regulations and investor demands, according to a survey released by audit firm KPMG LLP.

The survey of executives at more than 450 large and medium-size organisations found 75 percent had reported at least one instance of fraud this year, up from 62 percent in 1998, the last time KPMG conducted the periodic study. The firm did its first fraud survey in 1994. “This reflects not so much an increase in the incidence of fraud but increased awareness resulting in uncovering more instances of fraud,” said Richard H Girgenti, a partner in KPMG’s forensic accounting practice. The cost of fraud is higher, too. Thirty-six percent of companies reported losses of $1 million or more due to fraud in 2003, compared with 21 percent in 1998. A rash of corporate wrongdoing in the last several years has created greater sensitivity to fraud in general, and also spurred efforts to root it out, the firm found. However, with corporate governance legislation like the Sarbanes-Oxley Act, companies are confident that instances of fraud will decrease.

There were more cases of employee fraud, but financial reporting and medical fraud were more expensive, KPMG said. The survey, conducted between April and June, polled executives across industries and in US state and federal government agencies. Theft of assets and expense account fraud have more than doubled since 1998. The percentage of companies that said they were uncovering financial reporting fraud also more than doubled, to seven percent in 2003, up from three percent in 1998, with the average cost reaching more than $250 million per episode. “Companies have assumed for years that employee fraud is a very serious factor, but now, with better tools and comparative analysis, it is easier to establish what kind of fraud is occurring,” said Itzhak Sharav, an accounting professor at Columbia Univer-sity’s business school. Most organisations identify collusion between employees and third parties as the most significant factor contributing to fraud. “Where some things might have been considered on the margin earlier, they are now considered more serious,” said Charles Elson, director at the Centre for Corporate Governance at the University of Delaware. “In the late ‘90s, the attitude was that ends justify means. What was then viewed less malignantly is viewed very differently today.”

Matching the increase in detection of fraud, there is a sharp increase in internal controls such as anti-fraud programmes and hotlines for employees who wish to report wrongdoing. Seventy-seven percent of companies have taken such measures, up from 51 percent five years ago. Internal audits are also on the rise, with 65 percent of companies conducting them, up from 43 percent in 1998. “Companies are bolstering internal audit programmes and staff, looking at codes of conduct and strengthening them,” Girgenti said. This has led to more investigations, employee dismissals and legal action, he said. Still, workers remain the best watchdogs, with 63 percent of fraud cases resulting from employee reports in 2003, up from 58 percent in 1998.  Despite the rise in reported cases, 43 percent of corporate and government executives say they expect the incidence of fraud to decline over the next 12 months; seven percent predict there will be an increase. “There is a sense of optimism that the efforts they’ve made will have an impact,”  Girgenti said. “I would raise the caution, though, that the problem of fraud is pervasive and needs constant vigilance.”