Who is the typical fraudster

KPMG ANALYSIS OF GLOBAL
PATTERNS OF FRAUD
Who is the
typical
fraudster
Executive summary
kpmg.com/cee
Contents
The survey
Fraud is up, defenses are down
Key findings
Profile of a fraudster
In a position of trust
Where the fraudster works
Time at the organization before
detection
Solo or in collaboration
Motivation for fraud
Gaps in defenses
Reporting of fraud incidents
Warning signs
Red flags not to be missed
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© 2011 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the
KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG
International"), a Swiss entity. All rights reserved.
The involvement of the CEO
in fraud cases has more than
doubled from 2007 to 2011.
This may be a result of the
increased pressure that was
placed on executives to meet
performance targets during the
economic downturn.
The survey
Fraud is up, defenses are down
KPMG Forensic has released its international study “Who
is the typical fraudster – KPMG analysis of global patterns
of fraud.“ This study follows our European 2007 analysis
of fraudulent behaviour, and this time draws on data from
worldwide KPMG practices.
The survey indicates that fraud and misstatement of results
continue to be growing problems.
The 2011 Study seeks to identify global patterns from
individuals that have committed acts of fraud, values of the
frauds committed and duration over which the frauds were
committed.
The 2011 Study is based on data compiled from a study of
348 actual fraud investigations conducted by KPMG member
firms in 69 countries, over the period January 2008 to
December 2010. While it includes some high-profile reported
cases, most of the investigations were not publicised. Only
where “white-collar“ crimes were committed and where the
perpetrator was evident, did we include the investigation in
the analysis.
The results reveal a profile of the typical fraudster, corporate
attitudes towards fraud prevention and red flags not to be
overlooked. Furthermore, it outlines strategies to keep your
business safe.
The 2011 Study highlights the typical fraudster investigated by
KPMG as:
•
A male
•
Between 36 and 45 years of age
•
Commits fraud against his own employer
•
Working in the Finance function or in a finance- related
role
•
Who is a senior member of management
•
And has been employed by the company for a period of
more than 10 years
•
Who most often colludes with others.
© 2011 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the
KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG
International"), a Swiss entity. All rights reserved.
Conversely, responses to fraud are becoming less effective.
Internal controls are now considerably weaker than in 2007
and management review is less robust. Consequently, with
increased economic pressures on individuals, failure to
address red flags and the prolonged time lapse between fraud
inception and detection, there is the substantial likelihood that
currently undetected frauds will emerge in greater numbers in
the next two to three years.
Key findings
Profile of a fraudster
The typical fraudster investigated by KPMG is between the
ages of 36 and 45. This trend is in line with the 2007 survey.
87 percent of the fraudsters investigated, were males. This
compares with the 85 percent of male perpetrators identified
in 2007. We note however that more female perpetrators
were the subject of our investigations in the Americas and
Asia Pacific (22 and 23 percent respectively), than in those
cases investigated in EMA
(8 percent).
In a position of trust
We noted an increase in perpetrators at Board level – up from
11 percent in 2007 to 18 percent in 2011, and a decrease in the
number of cases involving members of senior management,
from 49 percent in 2007 to 35 percent in 2011. A small but
increased proportion of cases involved staff members below
management level – up from 14 percent in 2007 to 18 percent
in 2011.
Notably, the involvement of the CEO in fraudulent activities
increased from 11 percent in 2007 to 26 percent in 2011.
Who is the typical fraudster – Executive summary | 1
Almost 50 per cent of the frauds were
exposed through informal methods,
by accident or through whistleblowers.
The detection of fraud ‘by chance’ is
no substitute to a robust risk – based
set of controls that are regularly
reviewed by the organization.
Where the fraudster works
Solo or in collaboration
32 percent of the perpetrators investigated in 2011 worked for
the finance function of the company, followed by 25 percent
in operations/sales in 2011.
In 2011, 61 percent of the perpetrators investigated, colluded
with other parties (32 percent in 2007). The most common
external parties to collusion were as follows:
Where the fraudster works (excluding those unassigned
to a function)
2011
2007
Finance
Operations/Sales
Procurement
Back Office
Suppliers – 48 percent
•
Customers – 22 percent.
Looking at the demographics of the 2011 Study we noted that
males (64 percent) were far more likely to collude with other
parties than women (33 percent).
Motivation for fraud
Research & Development
Legal
0%
•
10%
20%
30%
40%
Time at the organization before detection
The survey once again highlights the fact that persons in the
employ of the company for an extended period are most likely
to commit fraud. In 2007, 51 percent of the perpetrators had
worked for the company for more than five years before the
frauds were detected, of which 22 percent had worked for the
company for 10 years or more.
In 2011, we found that 60 percent of the perpetrators
investigated, had worked for the company for more than
five years before detection of the fraud, with 33 percent
having worked for the company for 10 years or more before
detection.
On average we found that it took 3 years from fraud inception
to fraud detection.
In the cases investigated, we noted that the biggest driver
of fraud was personal financial gain, followed by fraudulent
financial reporting.
Increased pressure on meeting financial targets, safeguarding
against loss of employment and enhancing bonuses were
most common reasons for the misreporting of results.
Misappropriation of assets (mostly due to embezzlement and
procurement fraud) accounted for 43 percent of the frauds
analyzed in 2011, which mirrors the findings in 2007.
Gaps in defenses
The exploitation of internal controls by fraudsters increased
significantly from 49 percent in 2007 to 74 percent by 2011.
Many frauds continue to be exposed by formal or informal
whistleblowing or tip-off mechanisms. In this respect, the
2011 Survey found that:
How the fraud was exposed
2011
Unclassified
Formal external discovery
methods
Informal discovery methods
Formal internal discovery
methods
0% 10% 20% 30% 40% 50%
2 | Who is the typical fraudster – Executive summary
© 2011 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the
KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG
International"), a Swiss entity. All rights reserved.
Section or Brochure name | 5
How was the fraud exposed?
Reporting of fraud incidents
Formal internal discovery methods
There is a hesitation by companies to publicly disclose details
of fraud, unless required by law or regulation, or where the
materiality or magnitude of the loss impacts on the financial
results for the current period or prior periods already reported.
Principal reasons offered for this hesitation include fears of
loss of investor confidence, reputational damage and possible
regulatory fines.
Management review
15.0%
Formal internal whistleblowing report
10.0%
Internal audit
9.0%
Suspicious superior
8.0%
Other internal control
3.0%
Informal discovery methods
Anonymous informal tip-off
14.0%
Accidental discovery
13.0%
Customer complaint
5.0%
Supplier complaint
3.0%
The 2011 analysis reveals that 77 percent of the fraud
investigations undertaken were not reported to the public.
This reluctance to disclose can further be illustrated in that
internal communication of the matter dropped to 46 percent,
compared to 50 percent polled in 2007. Those cases in which
detailed internal announcements regarding the fraud were
made fell significantly from 35 percent in 2007 to 13 percent
in 2011.
These findings suggest that companies are not taking the
opportunity to leverage learning points or to instill a corporate
culture of zero tolerance towards fraud.
Formal external discovery methods
Regulatory bodies
6.0%
Other external control
4.0%
External audit
3.0%
Effective communication of a fraud incident provides the
opportunity for management to send the organization and
its business partners a clear message that fraud will not be
tolerated.
Unclassified
Other
7.0%
It is concerning to note that nearly half of the frauds were
detected through tip-offs (formal and informal) or by accident.
This would suggest that internal controls are either lacking,
or are not functioning appropriately. Most of the frauds
investigated, involved the exploitation of weak internal
controls.
© 2011 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the
KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG
International"), a Swiss entity. All rights reserved.
Who is the typical fraudster – Executive summary | 3
Companies are clearly failing to
read the warning signs: in
50 percent of cases prior red
flags associated with a fraud
existed but had not been acted
upon – up from 21 percent.
Warning signs
•
Some practices within a function do not appear straightforward, and may even be illegal or unethical.
Companies are clearly failing to read the warning signs: in
50 percent of cases prior red flags associated with a fraud
existed but had not been acted upon – up from 21 percent
in 2007. Ignored red flags are a message to perpetrators that
they can continue operating with impunity. Acts of fraud are
rarely one-offs: 96 percent of fraudsters in the 2011 survey
carried out fraud on a repeated basis – up from 91 percent in
2007.
•
Where matters of financial judgment/accounting
treatment are involved, the business consistently pushes
the limits/boundaries.
•
Senior managers receive large bonuses linked to meeting
targets. A division or department of the business is
perceived as complex or unusually profitable, thereby
diverts the attention of management and the audit
functions.
•
Elsewhere in the industry, companies are struggling and
sales and/or profits are declining. Your business appears
to buck the trend.
•
Increases in profitability fail to lead to increased cash
flows.
•
Complex/unusual payment methods, agreements
between the business and certain suppliers/customers,
may be set up in a deliberately opaque manner to hide
their true nature.
•
A remote operation not effectively monitored by the head
office.
Red flags not to be missed
Here are just some of the red flags to look out for:
•
•
•
•
There are difficult relationships and a possible lack of trust
between the business and the internal/external auditor.
There are multiple banking arrangements rather than one
clear provider–a possible attempt to reduce transparency
over the business’ finances.
Excessive secrecy about a function, its operations, and its
financial results. When questions are asked, answers and
supporting information are often stalled or withheld.
High staff turnover within a function. Employees may be
more likely to commit fraud in a business with low morale
and inconsistent oversight.
4 | Who is the typical fraudster – Executive summary
© 2011 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the
KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG
International"), a Swiss entity. All rights reserved.
In 2011, we found that
60 percent of the
perpetrators investigated,
had worked for the company
for more than five years
before detection of the fraud.
As we have seen, there are certain characteristics that typify
a fraudster. Employee awareness of other behaviors can help
businesses identify frauds earlier. Be alert to the following
employee behavioral red flags:
•
Refuses or does not seek promotion and gives no
reasonable explanation.
•
Has opportunities to manipulate personal pay and reward.
•
Rarely takes holidays.
•
Is suspected to have over-extended personal finances.
•
Does not or will not produce records/information
voluntarily or on request.
•
Persistent rumors/indications of personal bad habits/
addictions/vices.
•
Unreliable and prone to mistakes and poor performance.
Cuts corners and/or bends rules.
•
Tends to shift blame and responsibility for errors. Seems
unhappy at work and is poorly motivated.
•
Surrounded by “favorites” or people who do not
challenge them.
© 2011 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the
KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG
International"), a Swiss entity. All rights reserved.
•
Accepts hospitality that is excessive or contrary to
corporate rules.
•
The level of performance or skill demonstrated by new
employees does not reflect past experience detailed on
CVs.
•
Seems stressed and under pressure.
•
Bullies or intimidates colleagues. Volatile and
melodramatic, arrogant, confrontational, threatening, or
aggressive when challenged.
•
Vendors/suppliers will only deal with this individual. Selfinterested and concerned with own agenda.
•
Lifestyle seems excessive for income.
•
Micro-manages some employees; keeps others at arm’s
length.
Who is the typical fraudster – Executive summary | 5
Contact us
Jimmy Helm
Forensic Lead Partner
Advisory, CEE
T: +420 (222) 123 430
E: jhelm@kpmg.com
Maria Peneva
Partner
Advisory Services, KPMG in Bulgaria
T: + 359 (2) 969 74 24
E: mpeneva@kpmg.com
Michael Peer
Lead Partner
Dispute Advisory, CEE
T: +420 (222) 123 359
E: mpeer@kpmg.com
Richard Perrin
Partner
Advisory Services, KPMG in Romania
T: +40 (372) 377 792
E: rperrin@kpmg.com
Quentin Crossley
Partner
Advisory Services, KPMG in Slovakia
T: +421 (2) 59 98 44 30
E: qcrossley@kpmg.com
Krzysztof Radziwon
Partner
Advisory Services, KPMG in Poland
T: +48 (2) 25 28 11 37
E: kradziwon@kpmg.com
Tamas Gaidosch
Partner
Advisory Services, KPMG in Hungary
T: +36 (1) 88 77 139
E: tgaidosch@kpmg.com
Alex Verbeek
Partner
Advisory Services, KPMG in Czech Republic
T: +420 (222) 123 431
E: averbeek@kpmg.com
Ismet Kamal
Senior Partner
KPMG in Croatia
T: + 385 (1) 539 00 33
E: ikamal@kpmg.com
Stephen Young
Senior Partner
KPMG in the Baltics
T: +371 (6) 703 80 62
E: stephenyoung@kpmg.com
Nevenka Krzan
Senior Partner
KPMG in Slovenia
T: +386 (1) 236 43 00
E: nkrzan@kpmg.com
kpmg.com/cee
Boris Milosevic
Partner
Advisory Services, KPMG in Serbia
T: +381 (11) 205 05 20
E: bmilosevic@kpmg.com
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© 2011 KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.