Risk Management

Reported Fraud Jumped in Q1, Survey Finds

After a dip through the third quarter of 2010, reported frauds rose to near all-time highs in the first quarter of 2011.
David KatzMay 24, 2011

In what might be a lagging indicator of recession-spawned misdeeds, the percentage of reported corporate frauds compared with all other reported incidents increased to 20.3% in the first quarter of 2011, a rise of more than 60 basis points from the previous quarter, according to data from 1,000 organizations worldwide.

Of the 30,000 ethics-and-compliance-related reports from people at those organizations in the first quarter, more than 6,100 concerned accounting or auditing irregularities, embezzlement, kickbacks, and other forms of fraud. The findings stem from the Quarterly Corporate Fraud Index Network produced by The Network and BDO Consulting. (The broad sample includes reports involving personnel, security, and other matters in addition to fraud.)

After a steady decline over the first three quarters of 2010, the relative incidence of reported fraud rose sharply during the next two quarters, according to the index (see graph below). “This quarter’s [percentage of fraud reporting] is only 10 basis points lower than it was in 2009, one of the worst years for business on record,” says Luis Ramos, chief executive officer of The Network, a governance, risk, and compliance consultancy.

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Why the rise, especially in a period when the economy appears to be recovering? “We’re dealing with reported fraud, not necessarily incidence of fraud,” says Carl Pergola, executive director of BDO Consulting. “Some of the things that may have gotten reported in this quarter might have started several months or several years ago.”

Indeed, some of those incidents might well have occurred in the throes of the financial crisis, when liquidity was especially scarce, Pergola believes. Many companies — largely financial-services firms, but other kinds of companies, too — found themselves holding assets for which there were only sluggish or inactive markets. That made those assets hard to value, offering the temptation to artificially inflate their worth, according to Pergola.

Over the entire course of the 2000s, accounting fraudsters have found fertile ground in an environment that has increasingly involved the use of estimates, says Pergola. Still, the current forms of such fraud, which have tended to focus on the valuation of financial instruments, have changed since the era that culminated in the Sarbanes-Oxley Act of 2002. That period’s frauds involved such things as booking “cookie jar” reserves “and then bleeding those out over time when the company wasn’t doing well,” he recalls.

The incident reports used in the index were received from The Network’s clients via hotlines, Websites, and other means. While the relative incidence of fraud reporting has stayed high after roughly doubling in 2007-08, the total number of calls received by the firm varies from quarter to quarter and among industries, based on clients’ needs and the business climates they face. (The firm is likely to receive more calls from retail clients during and after the holiday season, for instance.)

Fraud by Quarter