Monday, July 02, 2007

Profile of a fraudster - internal controls, financial loss and reputational risk

I do applaud the work of the KPMG sponsored Audit Committee Institute. It provides a useful resource for audit committee members in the private, public and third sector (and those involved in corporate governance outside audit committees) even if a lot of its work is focused on big private sector entities. In the latest Audit Committee Quarterly published by the Institute there is an interesting article on the profile of a fraudster.

Based on a major study of fraud cases by KPMG International, the research finds that 85 percent of fraudsters are male. The typical fraudster is aged between 36 and 55. By the time he starts enriching himself by illegal means, he has usually been employed by the company for six or more years. He typically works in the finance department and commits the fraud single-handed. In 86 percent of cases he is at management level – and in two thirds of cases he is a member of senior management. Greed and opportunity are his motivating factors.

Some of that isn’t new. But it is a useful reminder of how tighter internal controls, more widely publicised fraud reporting mechanisms and an anti-fraud culture are important. They are normally worth it. Total financial loss caused per fraudster was more than 1m euros in almost half the cases in the study.

Amongst the cases KPMG analysed, in Europe the highest proportion occurred in the public sector (29 percent of cases). That is fairly in line with the rest of the economy given the size of Europe’s public sector. It shows that the professional ethos, caring professions, the relative absence of "profit motive", etc can't entirely innoculate the public sector from fraud and the less desirable aspects of human nature.

The article doesn’t refer on reputational damage but that can be significant - perhaps potentially outwearing financial loss, sometimes aggravating it. An American accountant at a large not-for-profit was convicted of fraud associated with funding a dominatrix. No one likes to drop their coins into a collecting box if it will end up in an accountant being whipped or walked over in stilettos.

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