Significant surge in corporate fraud

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The number of European companies falling victim to fraud has increased in the past year, according to the 2013 Kroll Global Fraud Report. Overall, 71 per cent of companies in Europe were affected by fraud in the past 12 months, slightly above the global average of 70 per cent and significantly up from 63 per cent the previous year. There was an increase in every category of fraud covered by the study.

The report reveals that the globalisation of business is increasing exposure to fraud, as organisations seek to expand into riskier markets overseas and use greater levels of outsourcing. One of the sharpest increases was in vendor, supplier or procurement fraud, suffered by 17 per cent of businesses, up from nine per cent last year. Indeed, of those companies in Europe that fell victim to fraud in the past 12 months, more than one in four (28 per cent) experienced fraud perpetrated by vendors or suppliers while 9 per cent suffered at the hands of joint venture partners.

In a year where several companies have been rocked by high profile corruption scandals, the proportion of companies affected by corruption and bribery increased from 10 per cent to 12 per cent. Corruption is by far the most important element dissuading companies from doing business in certain markets, such as Africa, Latin America and India.  Half (50 per cent) of companies based in Europe have cited corruption as the main reason for refraining from expanding into particular markets overseas. In fact entry to new, riskier markets has increased the vulnerability of almost one in three companies (30 per cent) to fraud.

The vast majority of respondents (77 per cent) believe that their firm’s exposure to fraud has increased overall in the past 12 months, up from 56 per cent in the previous survey.

Percentage of European businesses affected by fraud

Type of fraud 2013 2012 Difference
Theft of physical assets or stock 28% 23% +5%
Information theft, loss or attack (e.g. data theft) 25% 18% +7%
Management conflict of interest 21% 13% +8%
Vendor, supplier or procurement fraud 19% 12% +7%
Internal financial fraud or theft 17% 12% +5%
Regulatory or compliance breach 14% 11% +3%
Corruption and bribery 12% 10% +2%
IP theft (e.g. of trade secrets), piracy or counterfeiting 11% 9% +2%
Market collusion (e.g. price fixing) 5% 3% +2%
Misappropriation of company funds 6% * N/A
Money laundering 3% 1% +2%
All fraud 71% 63% +8%

*not covered in 2012 survey

Growing insider threat

The report reveals that overall, of those European companies affected by fraud and where the perpetrator is known, in 69 per cent of cases at least one insider was involved, up from 67 per cent last year. Of these victims of fraud, 31 per cent had suffered at least one crime where one of the perpetrators was in senior or middle management, 38 per cent where he or she was a junior employee and 16 per cent an agent or intermediary.

However, the study also reveals that most fraud is discovered internally. In cases where the fraud was uncovered, well over half (59 per cent) were discovered by management and an internal audit played a role in 46 per cent of cases, compared to just one in eight incidents (13 per cent) where an external audit contributed to its discovery.

Senior employee alertness is key to combating fraud.  However, when senior employees are themselves the perpetrators whistleblowers become a more important way of exposing wrongdoing. A whistleblower was involved in more than one in three incidents (37 per cent) of all cases where fraud was uncovered and in 52 per cent of cases that involved senior or middle management. Despite this, just 45 per cent of companies reported that they have invested in staff training around fraud and the creation of whistleblower hotlines.

Cyber-threats: firms vulnerable to information theft

The study reveals that more companies are highly vulnerable to information theft (23 per cent) than any other category of fraud and four out of five businesses (80 per cent) are at least moderately vulnerable to it. Information theft remains the second most common type of fraud, affecting one in four European businesses over the past year (25 per cent) and executives say that the complexity of their IT infrastructure is the biggest factor increasing their company’s exposure to fraud (cited by 37 per cent of respondents).

This increasing exposure to fraud due to IT complexity is being exploited more by outsiders. As a share of all incidents of information theft, attacks by external hackers more than doubled from 14 per cent to 33 per cent, and 17 per cent of information theft victims suffered as a result of a hacker attack on a vendor or supplier, up from 3 per cent last year.

However, like most frauds, information theft is typically an inside job. Of those who have suffered in the past year where the perpetrator is known, 44 per cent say an employee was to blame.

Tommy Helsby, Chairman, Kroll Advisory Solutions, Eurasia, commented: “Fraud is on the rise again and while increasing regulatory pressure and compliance activity is probably driving increased fraud awareness and detection, undiscovered and unreported fraud is an infection with the potential to grow into a life-threatening corporate disease.

“Perpetrators of fraud are often thought of as faceless hackers in a distant land but our experience shows that to be the exception rather than the rule; the greatest vulnerability is to those who have already got past most of your defences by virtue of being an employee, partner or contractor. It is vital that as well as investing in technology, businesses mitigate the insider threat by focusing on areas like staff screening and due diligence on partners, clients and vendors.”

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