Internal fraud increased significantly, according to the 2012/2013 Kroll Advisory Solutions' Global Fraud Report released today.
This year's study shows that over two-thirds of corporate frauds are committed by insiders, up for the second year in a row from 60 percent last year and 55 percent in 2010. Fraud continues to hit many global companies with more than six in 10 companies reporting they were affected by fraud last year. The findings are contained in a study commissioned by Kroll Advisory Solutions with the Economist Intelligence Unit of more than 800 senior executives worldwide.
Information theft remains one of the most widespread frauds facing companies. Its slight decline —21 percent of companies are affected this year compared with 23 percent in the last survey—shows that it is more resilient than some other frauds, which saw much greater declines. Moreover, it remains the fraud to which respondents feel most vulnerable. Thirty percent say they are moderately or highly so and cite IT complexity as the leading cause of increased exposure to fraud risk. Surprisingly, it is employees, rather than hackers, who are more to blame for the loss of information. Where there has been a loss, 35 percent of the time the issue is employee malfeasance, more than twice the rate at which external hackers are to blame (17 percent).
This year's study sheds new light on how fraudsters interact when perpetrating frauds. Despite a decline in the overall prevalence of fraud from 75 percent to 61 percent globally, there is a continued rise in insider fraud; a key finding is that fraudsters tend either to act alone or cooperate with peers rather than with members of outside groups such as vendors or suppliers. Those acting alone tended to be insiders - junior employees, senior managers, or agents of the company. The study also found that when a fraud involves more than one type of perpetrator, external parties are more often involved. More than four in ten companies (43 percent) affected by multi-perpetrator fraud reported that suppliers were involved, while 37 percent of the same group reported that vendors participated.
"We are encouraged that global organizations have taken action in response to the myriad of external threats, leading to the overall decrease in the prevalence of fraud impacting these entities," said Tom Hartley, President and Chief Executive Officer of Kroll Advisory Solutions. "This year's survey demonstrates that companies must remain vigilant in addressing internal threats, particularly as they relate to the protection of confidential intellectual property and electronic data."
The study shows that the Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act are having an impact on reducing corruption. More than half (52 percent) of companies said they conducted a thorough assessment of risks to their organization, up from 26 percent last year, and more (55 percent) also trained senior managers appropriately and integrated corruption issues into their due diligence activities (50 percent). The marked rise in compliance activity has coincided with a fall in the prevalence of corruption from 19 percent to 11 percent during the past year. Such compliance regimes may also be opening up investment opportunities for companies. Of the companies that took all of the above steps, 20 percent were dissuaded by fraud from investing abroad, while the figure was 31 percent for those companies who have not taken those steps.
Other key findings include:
• Concern about fraud is dropping faster than fraud itself. Consistently and across all industries and geographies, fraud concerns have abated. In particular, the number of respondents saying that they were moderately or highly vulnerable to information theft has fallen from 50 percent to 30 percent, even though only two percent fewer companies reported being hit by this fraud. These findings suggest many companies have become overconfident about their vulnerability to fraud, which likely increases their risks. Companies that lose the most to fraud are those that are less likely to have fraud controls in place.
• Emerging markets continue to report high levels of fraud: Africa retains its position as the region with the largest fraud problem. Despite some improvement in the fraud environment, the decline in overall fraud prevalence, from 85 percent to 77 percent, was less marked than in other regions. Outside of Africa, India has the highest number of companies affected by fraud of any region or country (68 percent), followed by Indonesia (65 percent). Eight of the 10 frauds covered in the survey were more widespread in India than they were globally. Indonesia experienced the highest rate of information theft (35 percent) among countries surveyed.
• Developed markets also report significant levels of fraud. Following Indonesia, the U.S. and Russia tied at 26 percent for the highest rates of information theft compared with the global average of 21 percent. Even though the overall prevalence of fraud has decreased in Europe, the percentage of companies affected by at least one fraud, 63 percent, is slightly higher than the global average. And while the number of businesses in the United States hit by at least one fraud was down (to 60 percent from 65 percent last year), the decline was significantly less than the global average.
• Fraud varies across industries: Companies in the manufacturing sector saw a substantial increase in the incidence of fraud, with 87% affected. Moreover, eight of the 10 frauds tracked for this survey became more common this year among manufacturers. Manufacturing also experienced the highest levels of theft of physical assets (50 percent), corruption and bribery (29 percent), management conflict of interest (27 percent), vendor or procurement fraud (23 percent) and IP theft (13 percent). The financial services sector had the highest level of internal financial fraud (25 percent) and regulatory or compliance breach (16 percent) of any industry, and the second largest rate of IP theft (10 percent). Of all the companies surveyed, those in the consumer goods sector recorded the second lowest overall number of companies affected by fraud (51 percent) and the lowest average losses (0.4 percent of revenue).