Survey shows fraud a 'major problem' for U.S. firms

Sixty-five percent of respondents believe fraud to be a "major problem" in their companies, according to a recent survey by professional services firm KPMG Peat Marwick LLP.

The financial impact of fraud is a serious and continuing problem for American companies. Approximately 21 percent of survey respondents reported annual losses of $1 million or more to fraud, according to a release from KPMG.

"These findings tell us that fraud cuts across industry lines in America and is cutting into the bottom line for companies and affecting shareholder value," said Bill Foale, managing director of KPMG's Midwest forensic and litigation services practice, in the release.

"Every company is at risk of being subjected to this kind of behavior, which affects the financial and emotional well-being of the organization. The key to preventing fraud is to understand how it can affect a company, and put controls in place to recognize and stop it from occurring," Foale added.

KPMG's survey demonstrated that organizations frequently need to look no further than their own back yards to find the threat to their growth and profitability.

"In hindsight, it is often easy to identify the fraudulent employee. Look for the employee who is spending way beyond his or her means, or too closely guards their ongoing interactions with vendors or suppliers," Foale said. Survey respondents detected such red flags as personal financial pressure, abuse of drugs or alcohol, gambling and extravagant purchases.

"In our work we're finding that the complexity of today's business transactions and information systems provides widespread opportunities for sophisticated employees to engage in theft or fraud," Foale added. "Further, mergers, acquisitions, downsizings and restructurings, though successful in strategic terms, can have a corrosive impact on an employee's loyalty."

The KPMG survey found the most costly types of fraud in American companies are medical and insurance claims fraud, falsified financial statements and credit card fraud. Of the respondents who attached a specific dollar amount to the type of fraud they suffered, the average annual loss due to medical and insurance claim fraud was reported to be $3.2 million.

The impact of falsified financial statements cost companies surveyed an average of $1.2 million annually; credit card fraud continued to be a significant problem, with survey respondents reporting an average annual loss of $1.1 million, the release stated.

KPMG's 1998 U.S. fraud survey was mailed to 5,000 U.S. companies and organizations nationwide. Five hundred respondents returned completed surveys, and those respondents included internal auditors, security executives, financial executives, CEOs and general counsels.

Fifty-nine percent of companies surveyed by KPMG believe that the occurrence of fraud will continue to increase. Asked why they anticipate an increase in fraud, 63 percent of respondents cited economic pressures, 62 percent mentioned inadequate punishment of convicted criminals and 60 percent highlighted a weakening of society's values.

Explanations for the occurrence of fraud remain consistent with those reported by the 1994 KPMG survey. Survey respondents reported poor internal controls to be the most frequent problem, scoring almost 60 percent. Management override of internal controls is a distant second at 36 percent, with collusion between employees and third parties and collusion between employees or management following closely behind at 31 percent.

KPMG's survey also found that 58 percent of all fraud detected by surveyed companies was brought to the companies' attention by employees.

"When a company's culture recognizes the risk that fraud poses to the organization and ultimately to each employee we've found that they take the right steps to put measures in place to help protect the financial future of the company," Foale said. Fifty-one percent of respondents cited internal controls as the key to discovering fraud, and 43 percent cited internal auditor review as the key to discovering fraud.

Of the companies contacted for KPMG's survey, once the risk that fraud poses to their organization is recognized, 75 percent of respondents establish codes of conduct, 65 percent of respondents conduct reference checks on new employees and 48 percent of respondents require employment contracts.

"Effective fraud prevention programs such as whistle-blower hotlines and strict corporate codes of conduct can help organizations protect their employees, their profitability and their future," Foale said.

KPMG's U.S. fraud survey can be accessed on the firm's Web site,

www.us.kpmg.com.

KPMG's forensic and litigation services practice provides comprehensive investigations and litigation services to companies in virtually every industry. The practice assists organizations in uncovering, investigating and preventing fraud. [[In-content Ad]]