A lot of bad apples work for the corporate finance department, but the number is shrinking, says a new study from KPMG. The report, released this month, says the “typical” corporate fraudster is a senior finance executive, and that of the employees who commit fraud, 32% of them work in corporate finance, the highest percentage of any corporate department. Four years ago, 36% of fraudsters worked in corporate finance.

The report is a follow-up study to KPMG’s 2007 research on worldwide corporate fraud, and is based on the analysis of 348 fraud cases the firm investigated over the past four years. Since the last study, new trends and behaviors have emerged, including the statistic that CEOs are the fastest-growing group of fraudsters today. Indeed, of those committing fraud, 26% are chief executives, according to the 2011 analysis, compared with 11% in 2007.

Further, this year’s study found an increase in cases in which fraudsters exploited weak internal controls. The instances of that happening rose from 49% in the 2007 analysis to 74% in 2011. KPMG reasons that the dreary economic climate may be partially to blame, as budget tightening forced some companies to cut costs related to upkeep and monitoring of internal-control processes.

Detecting fraud now takes longer, up from an average 2.9 years from inception to detection in 2007 to 3.4 years in the 2011 analysis. Nevertheless, red flags — an event or set of circumstances that portends fraud risk — were up in 2011, with 56% of the cases preceded by some kind of harbinger, compared with 45% in 2007. But shockingly, just 6% of initial red flags were acted on in the 2011 study, compared with 24% in the previous analysis.

The study also looked at detection mechanisms, with cases of whistle-blowing dropping, accounting for only 10% of detections, while anonymous tip-offs were responsible for uncovering 14% of frauds. In 2007 a full 25% of fraud cases were exposed by whistle-blowers, with complaints from customers or suppliers ranking second in terms of detection, at 13%.

Total fraud losses in the cases investigated by KPMG varied by geography. In the Asia Pacific region, the average loss was $1.4 million, followed by $1.1 million in the Americas and $900,000 in the Europe/Middle East/Africa (EMA) region.

Most fraud cases involved some kind of material misstatements of financial results, theft of cash and/or other assets, and abuse of expenses. But “rarely is an act of fraud a one-off,” wrote the study authors. For instance, financial-statement fraud requires wrongdoers to make multiple transactions to cover their tracks. As a result, fraudsters usually commit multiple acts of malfeasance, with 96% of the fraudsters in the 2011 analysis repeating their offense, compared with 91% in 2007.

Looking at gender, men are more likely to commit fraud, with 87% of them perpetrating detected fraud in the 2011 analysis, up slightly from 85% in 2007 (see typical fraudster profile, below). However, that may be partly a reflection of the workforce in general, as women are underrepresented in senior-management positions, thereby giving them fewer opportunities to commit fraud.

Meanwhile, women in the Americas and Asia Pacific are nearly three times more likely to commit fraud than women working in the EMA region. Again, this may be a result of fewer women holding senior-management positions in “old Europe” and Africa.

In the end, the most powerful motivation for fraud is still greed and personal gain. The impulse can come in different packages, though. For example, attempts to conceal losses or poor performance — often related to pressures to meet budgets and targets, boost bonuses, or hang on to a job — often leads to misreporting of results. Misreporting of assets, such as embezzlement and procurement fraud, also “raises concerns about pressures placed on management to achieve targets,” says KPMG. In all, embezzlement and procurement fraud accounted for 43% of the frauds committed in the 2011 analysis, about the same amount for 2007.

The authors suggest that companies that fall victim to misreporting and other types of fraud “should consider whether they set too onerous targets and exert excessive pressure on employees to achieve them.”

Profile of a Fraudster
• Male
• Between 36 and 45 years of age
• Commits fraud against his own employer
• Works in the finance function or in a finance-related role
• Holds a senior-management position
• Employed by the company for more than 10 years
• Works in collusion with another perpetrator

Source: KPMG, Who is a Typical Fraudster,” 2011

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