Despite a significant drop in cases this year, executives globally are reporting increased vulnerability to nearly all types of fraud, from corruption and information theft to compliance breaches and collusion, according to Kroll’s annual Global Fraud Report.
Conducted in conjunction with the Economist Intelligence Unit and surveying the sentiments of more than 1,200 senior executives worldwide, the report notes the overall prevalence of fraud around the globe decreased this year to 75 percent from 88 percent last year, with roughly one in four companies hit by physical theft of cash, assets and inventory or information theft, both down from record highs in 2010.
In contrast, management conflict of interest (21 percent), vendor, supplier or procurement fraud (20 percent) and internal financial fraud (19 percent) all saw notable increases. The incidence of corruption and bribery nearly doubled over the past year from 10 percent to 19 percent.
Despite the overall drop, companies are far from relaxed; instead fraud concerns are on the rise, with a 15 percent increase in respondents saying they are moderately or highly vulnerable to fraud. Half of all companies surveyed (50 percent) said they are moderately to highly vulnerable to information theft in particular.
With respect to China, while respondents there reported a drop in the prevalence of fraud to 84 percent from 98 percent in 2010, there are a number of fraud types that are considerably more common this year.
Vendor, supplier or procurement fraud was experienced by 33 percent of respondents in China, well above the global figure of 20 percent. Twenty eight percent of respondents in China were hit by information theft in the past 12 months, a sharp rise from the 16 percent that experienced this in 2010.
Even after the decline in overall fraud incidences, China still has the second highest proportion of companies affected by fraud of any country or region, just falling below Africa’s 85 percent.
Similar to the global trend, companies in China reported that their exposure to fraud has increased, to 84 percent of respondents versus 72 percent in 2010. For corruption, information theft and vendor fraud, the proportion of companies where respondents recognized that they are moderately or highly vulnerable has more than doubled compared to 2010.
“This year’s Global Fraud Report illustrates just how substantially the fraud environment has changed in the past 12 months,” says Violet Ho, Kroll managing director, Greater China. “Today’s schemes are significantly more sophisticated, involving complex structures and collusion which enable fraudsters to cover their tracks. This is a major change from the frequent cases of theft of physical assets which was commonly reported last year. Companies need to match their prevention and detection controls with the evolving risks they face.”
Globally, the study shows that 60 percent of frauds are committed by insiders, up from 55 percent last year. For China we saw a similar increase from 50 percent to this year’s 57 percent, but this year the key perpetrators identified were senior management unlike last year’s junior management, with the former engaging in much more expensive frauds.
“Increasingly, companies are paying greater attention to detecting, investigating and preventing fraud – a fact which is probably related to the overall decrease in the survey," says Tom Hartley, Kroll global head, Business Intelligence and Investigations. "On the other hand, fraud is evolving into more of an insider phenomenon than ever before, a reflection of an increasingly information-based economy. As we look ahead, companies will face the growing challenge of the threat of insider fraud.”
The Economic Cost of Fraud
This year’s survey found that on average fraud cost companies 2.1 percent of earnings in the last 12 months, which is equivalent to a week of revenues over the course of a year. Eighteen percent lost more than 4 percent of revenues to fraud in the year, while 53 companies, or one quarter of that group, lost more than 10 percent of revenues to fraud.
The survey also highlights that half of all companies surveyed (50 percent) said they are moderately to highly vulnerable to information theft, up sharply from 38 percent in 2010. Moreover, IT complexity is the leading cause of increasing fraud exposure, cited by 36 percent of respondents compared with 28 percent last year.
Information-based industries continue to report the highest incidence of theft of information and electronic data. These include financial services (29 percent), technology, media and telecoms (29 percent), healthcare, pharmaceuticals and biotechnology (26 percent) and professional services (23 percent).
One of the major challenges faced by companies defending against information theft is the variety of data being sought by fraudsters.
While proprietary data is the most common target, customer and employee data are also targets for theft. The data category sought the most by fraudsters varies by industry, depending on the value of the data a company is likely to have.
For technology, media and telecoms companies, the most common target category is proprietary data (cited by 36% of respondents), while for financial services companies it is customer information (29 percent).
Companies are unprepared to deal effectively with corruption. According to the survey, only 27 percent of respondents said they are well-prepared to comply with regulations, such as the Foreign Corrupt Practices Act (FCPA) and UK Bribery Act (UKBA).
Of those companies that are subject to one of these two laws, less than half, 43 percent, have trained senior management, agents, vendors and foreign employees to be compliant with one of these laws, and just 39 percent have assessed the risks arising from them.
Furthermore, only 37 percent of companies surveyed believe that their due diligence provides a sufficient understanding of a potential partner’s or investment target’s compliance with these acts.
Last year’s survey found that among companies impacted by fraud, junior employees and senior management were the most likely perpetrators at 22 percent each. This year, for junior employees that figure climbed to 28 percent and remained about the same for senior management (21 percent).
This year, a further 11 percent was committed by an intermediary or agent for the company, meaning that 60 percent of fraud was committed by someone who worked for the company in some way.
However, for the companies that lost the most revenue from fraud, senior executives are more likely to be the perpetrators (29 percent) with junior employees involved in only 8 percent of the cases.