Fraud Survey Shows Wide Evidence Of Losses

Sixty-five percent of respondents believe fraud to be a "major problem" in their companies, according to a recent U.S. fraud survey by professional services firm KPMG Peat Marwick LLP. Some 21% of survey respondents reported annual losses of $1 million or more due to fraud.

"These findings tell us that fraud cuts across industry lines in America and is cutting into the bottom line for companies and affecting shareholder value," said Charles Riepenhoff of KPMG's forensic and litigation services practice. "Every company is at risk of being subjected to this kind of behavior, which affects the financial and emotional well-being of the organization. The key to preventing fraud is to understand how it can affect a company, and put controls in place to recognize and stop it from occurring."

The survey demonstrated that organizations frequently need to look no further than their own back yard to find the threat to their growth and profitability. "In hindsight, it is often easy to identify the fraudulent employee. Look for the employee who is spending way beyond his or her means or too closely guards their ongoing interactions with vendors or suppliers," said Riepenhoff. Survey respondents detected such "red flags" as personal financial pressure, abuse of drugs or alcohol, gambling and extravagant purchases.

"In our work we're finding that the complexity of today's business transactions and information systems provides widespread opportunities for sophisticated employees to engage in theft or fraud," added Riepenhoff. "Further, mergers, acquisitions, downsizings and restructurings, though successful in strategic terms, can have a corrosive impact on an employee's loyalty."

The KPMG survey found the most costly types of fraud in American companies are medical/insurance claims fraud, falsified financial statements and credit card fraud. Of the respondents who attached a specific dollar amount to the type of fraud they suffered, the average annual loss due to medical and insurance claim fraud was reported to be $3.2 million. The impact of falsified financial statements cost companies surveyed an average of $1.2 million annually; credit card fraud continued to be a significant problem, with survey respondents reporting an average annual loss of $1.1 million.

KPMG's 1998 U.S. fraud survey was mailed to 5,000 U.S. companies and organizations nationwide. Five hundred respondents returned completed surveys and included internal auditors, security executives, financial executives, CEOs and general counsel.

Fifty-nine percent of companies surveyed by KPMG believe that the occurrence of fraud will continue to increase. Asked why they anticipate an increase in fraud, 63% of respondents cited economic pressures, 62% mentioned inadequate punishment of convicted criminals and 60% highlighted a weakening of society's values.

Explanations for the occurrence of fraud remain consistent with those reported by the 1994 KPMG survey. Survey respondents reported poor internal controls to be the most frequent problem, scoring almost 60%. Management override of internal controls is a distant second at 36%, with collusion between employees and third parties and collusion between employees or management following closely behind at 31%.

KPMG's survey found that an astounding 58% of all fraud detected by surveyed companies was brought to the companies' attention by employees. "When a company's culture recognizes the risk that fraud poses to the organization—and ultimately to each employee—we've found that they take the right steps to put measures in place to help protect the financial future of the company,'' noted Riepenhoff.

Fifty-one percent of respondents cited internal controls as the key to discovering fraud and 43% cited internal auditor review as the key to discovering fraud. Of the companies contacted for KPMG's survey, once the risk that fraud poses to their organization is recognized, 75% of respondents establish codes of conduct, 65% of respondents conduct reference checks on new employees and 48% of respondents require employment contracts. "Effective fraud prevention programs such as whistle-blower hotlines and strict corporate codes of conduct can help organizations protect their employees, their profitability and their future," said Riepenhoff.