Winning the employee fraud battle

A recent study by KPMG Forensic Accounting found that although the most common perpetrators of fraud continue to be management, fraud committed by employees has increased by more than half.

The firm’s fraud barometer shows growth of 60% in the first six months of 2001 in the number of frauds committed by employees, while the number of management fraud cases fell by 7%.

Management fraud now makes up 30% of cases, compared to 32% in 2000 when the Serious Fraud Office convicted three men in the bizarre Ostrich Farming Corporation case.

The three conned 2,700 investors out of £22m by encouraging them to invest in a loss-making Belgian Ostrich farm.

According to KPMG’s barometer, from January to June 2001 the number of fraud cases brought to the UK criminal courts increased by 37.5% compared to the same period last year. So far, 14 cases alleging employee fraud have been brought to the courts, compared to only 11 in the whole of last year.

The barometer shows commercial fraud is up 50% compared with last year at a cost to date of £68.4m, already nearing last year’s figure of £82.2m.

In contrast, frauds involving banking and the public sector have fallen.

Alex Plavsic, a partner at KPMG Forensic Accounting, says the reason why employee fraud has shot up is because there are more opportunities for them to do so, while in the case of management fraud, companies are more accustomed to the idea and thus better equipped to detect it.

Management most likely to commit fraud
‘Management is still the most likely to commit fraud, so companies are getting better at detecting that type of fraud. But they are giving more power to lower levels and people are beginning to abuse that,’ he says.

‘For example, in most companies there are two types of people who tend to commit fraud: superstars and people who have been there for many years and are regarded as “salt of the earth” types.’

Plavsic explains that some employees who are viewed highly in their organisation are given more direct access to revenues, for example, without any checks. This is where a breakdown in security occurs and opportunity for fraud increases.

‘Opportunity creates the thief and companies have to reduce the opportunity to reduce fraud,’ he argues.

PricewaterhouseCoopers also points to employee fraud as a serious problem. In a recent study, the Big Five firm found 42% of organisations in the UK reported frauds in the last two years with 89% of the crimes committed by employees.

It also found the most common cases of fraud are related to embezzlement and breach of trust and occur when the employee identifies an opportunity. Both the Big Five firms found that detecting fraud continues to be a problem. The PwC study says: ‘Accident or chance continues to play a significant role in the detection of fraud. About a third of cases were discovered this way.’

E-district.net
The recent case of e-district.net confirms this. Finance director Eddie Abrams stumbled upon an inflated revenue scam, allegedly by senior staff members, when he was chasing an overdue invoice.

But despite such instances, PwC says a majority of companies believe their existing control systems are effective.

Plavsic says most companies do not have a clear strategy to combat fraud, making it an unmanaged risk: ‘They are good on operational risk but not management of fraud.’

He says the reason for this is that most companies often don’t see the crime.

‘They tend to not think about it as a recurrent issue until it happens to them.

‘When it does happen, they take steps and companies which have had frauds in the past do have a strong strategy to fight it.’

But Plavsic sees hope in the government’s plans. ‘This government is doing more to combat fraud than any previous government has done in the past,’ he says. ‘The SFO is deservedly getting more cash. It has won more cases than ever in the past and has learned lessons from the beginning of the 1990s.’

In the financial sector, Plavsic cites the recent Financial Services and Markets Act, which focuses on controls against money laundering. He also points to the Proceeds of Crime Bill. Through it, the government will set up a process to seize ill-gotten gains so that fraudsters cannot benefit from their crimes.

Plavsic says companies should have a ‘robust’ attitude against fraud, looking at three things when fighting it: ‘They should understand what their key fraud risks are, for example banks should know their key risks are in payment fraud.’

Secondly, he says they ought to ensure that fraud controls actually work, as many companies have policies in place, but never put them into practice.

And thirdly, companies should support whistleblowers, ‘encouraging employees to report frauds to a hotline or to someone they trust within the organisation’.

Plavsic concludes: ‘Companies which don’t take a robust attitude [to fraud prevention] run risks to their reputation, their revenues and their shareholders. Hoping fraud will go away is an attitude that we can’t perpetuate in the future.’

Links

Lean SFO breaks conviction record

Beating the fraudsters at their own game

FAP urges change of fraud strategy