Fraud price tag doubles, says KPMG

MEDIA RELEASE

Monday, 8 November 2010

Fraud price tag doubles, says KPMG

Australia and New Zealand’s top organisations have been hit hard during the Global Financial Crisis with the average reported fraud doubling in two years, reveals KPMG’s Fraud and Misconduct Survey 2010, released today.

The biennial survey, now in its ninth year in New Zealand, tracks actual fraud and misconduct affecting approximately 200 respondents in Australia and New Zealand, including the public and private sectors.

Stephen Bell, KPMG’s National Head of Forensic Practice, says the cost of fraud in the victim organisations surveyed grew from AU$1.5 million (NZ$1.9 million) in 2008 to AU$3.0 million (NZ$3.8 million) per organisation in 2010.

“Not only has the average value of fraud doubled in a short space of time, but the organisations surveyed believe that only one third of frauds are actually picked up. This is particularly concerning as the results capture a relatively small portion of the business population. The real fraud price tag for New Zealand is substantially more.” says Mr Bell.

Mr Bell says the level of fraud reported through the survey increased from AU$301 million (NZ$385 million) to AU$345 million (NZ$441 million).

The financial and insurance services sector remains particularly vulnerable to frauds committed by external parties, typically involving credit card fraud, irregular lending and bogus insurance claims.

While external attackers lifted more than AU$273 million (NZ$349 million) from the financial institutions surveyed, the survey shows insiders were the main offenders in all other sectors.

“The survey results should be a wake-up call for every New Zealand business as fraud is on the rise, with much of it, particularly insider fraud, preventable,” says Mr Bell.

”Ultimately a breakdown in internal controls is enabling employees to make off with the funds. So often KPMG’s investigations expose simple methods used to fleece large amounts of money from organisations that could have been prevented or detected with the right controls.”

Mr Bell says there has been a marked increase in frauds involving the abuse of internet-based electronic funds transfer (EFT) facilities, with most of these frauds attributable to poor controls over access to EFT facilities.

Another favourite is the ‘switch and switch back’, where an employee switches their personal bank account details with that of a vendor, prior to processing an invoice payment. Without controls such as electronic monitoring to detect an account that has been tampered with, it is often impossible to see that the information has changed once the fraudster switches the details back again.

“The survey shows that the typical fraudster is a 38 year old male employee, who has been there five years, often stealing more than his annual income. He knows his way around your systems and the loopholes in your controls, and in many respects he is your ‘average’ employee whom nobody would ever suspect. The warning signs can often be mistaken for a conscientious employee, such as staying back late in the evenings, working on weekends and not taking holidays,” explains Mr Bell.

Whistleblowers were responsible for uncovering around 20 percent of frauds, while fraud warning signs or ‘red flags’ were overlooked in 38 percent of major frauds.

“It’s essential for companies to have a strong ‘whistleblower’ programme. In order to really make this work for your organisation and the employees you’re asking to be your eyes and ears, this should include a whistleblower protection policy and an anonymous external reporting facility,” warns Mr Bell.

“Fraud is incredibly costly, sometimes deadly to business. Once your money has gone it’s extremely difficult to recover, so prevention and early detection is key to managing the risk of fraud in your business,” says Mr Bell.

The survey also found that:

• The most common motive for fraud is greed and the desire to enhance lifestyle

• Gambling and personal financial pressure were also motivators for fraud

• The average time taken to detect major fraud was 399 days (up from 342 days in 2008)

• In 61 percent of the cases surveyed, there was no recovery.

ENDS

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