| More companies
uncovering fraud while expanding efforts to stem the
threat
by
John Veihmeyer
For Virginia Business
November 2004
Companies
are uncovering fraudulent activities in their operations
with new vigor and vigilance. This aggressive stance
was spawned by the well-publicized financial-reporting
scandals and collapse of a number of major corporations,
events that shook financial markets and investor confidence.
A recent survey by KPMG, the audit, tax and advisory
firm, reveals that reported fraud is on the rise. But
the survey — which polled more than 450 companies,
and state and federal agencies — also shows that
organizations have countered this threat with new detection
and preventive measures. They are optimistic that their
efforts will lead to a decline in fraud.
The heightened awareness of fraud is a positive step.
A danger exists, however, that misplaced optimism over
current efforts could lead to complacency. That, in
turn, could result in reduced anti-fraud efforts and
increased vulnerability. So the threat of fraud remains
a significant hazard that could ruin a company’s
finances, damage its brand and reputation and send it
into a death spiral of government investigations, loss
of market capitalization and bankruptcy. Continued vigilance
is the key for companies in maintaining their momentum
and building upon success.
The KPMG survey found that 75 percent of respondents
reported that they uncovered fraud in their organizations
in the past year, compared with 62 percent in a 1998
survey. While these results might point to an increase
in fraud, our experience suggests that a greater sensitivity
to fraud is a better explanation. The percentage has
grown as companies have increased their efforts to detect
fraud and to act decisively to prevent it.
This change has occurred in many areas of business.
Many companies have revisited or instituted codes of
conduct that set forth their commitment to integrity
and set up reporting channels such as employee hotlines
for reporting fraud or misconduct.
Implementation of anti-fraud measures has been especially
significant in heavily regulated industries such as
banking, finance, insurance and health care. One local
bank recently hired experienced compliance personnel,
revised its procedures for opening accounts and monitoring
transactions, implemented companywide training for employees
and integrated anti-fraud and compliance controls as
it upgraded IT systems.
In another example, a multinational company with many
subsidiaries has set the tone from the top, instituting
stricter controls and personal accountability to ensure
compliance with regulatory requirements. These controls
include enhanced procedures to ensure compliance with
the Foreign Corrupt Practices Act.
The KPMG survey also indicates that businesses are taking
steps in their accounting practices in response to fraud.
Nowhere is this response as dramatic as in the implementation
of internal fraud-detection controls. More than three-quarters
of companies surveyed — 77 percent — say
they use internal controls as the chief means for uncovering
fraud, compared with 51 percent five years ago.
Another finding saw a sharp increase in the use of internal
audits — from 43 percent in 1998 to 65 percent
in 2003 — as companies upgraded their detection
capabilities to address concerns about fraud. In addition,
they are responding to suspicions and allegations of
fraud by starting formal investigations — 98 percent
of survey respondents say they did so, compared with
94 percent five years ago.
Not only are companies more aware of fraud, but many
also intend to take further action. Some 74 percent
said they plan to launch anti-fraud initiatives in response
to Sarbanes-Oxley, driven not only by stiffer regulations
and penalties but also by a desire to practice good
business ethics. What’s not so encouraging is
that more than one in five companies (22 percent) said
they do not plan to implement new controls and that
36 percent incurred $1 million or more in costs because
of fraud, up from 21 percent just five years earlier.
In the future, many more organizations than in previous
surveys believe that fraud will decline. Forty-three
percent of the responding corporate and government executives
predicted a decrease in fraud in the next 12 months,
and just 7 percent expected an increase. This optimism
is based largely on the respondents’ belief in
the effectiveness of their anti-fraud measures. In reality,
however, misconduct is a pervasive problem, requiring
companies to constantly improve their methods for detecting,
preventing and investigating fraud.
John
Veihmeyer is managing partner of KPMG’s Washington,
D.C., area offices and is managing partner of the firm’s
audit and risk advisory practice in the mid-Atlantic
region, including Virginia.
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