Down Economy and Increased Regulation Impact Corporate Fraud
Two news studies, by The Network and KMPG, examine the impact of the economic downturn and new regulations on both the act of fraud and how it's reported to management.
By Catherine Dunn|August 23, 2011 at 12:00 AM
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“Oh, what a tangled web we weave when first we practice to deceive.” Only now, with a down economy and an uptick in new compliance measures, that web has grown even more tangled—as shown by two new reports on fraud. The studies, issued by The Network and KPMG, illustrate how Sir Walter Scott’s famed line (circa 1808) applies to modern-day white-collar crime. While the reports each dive through different sets of data, some common themes emerge—including how the economy influences both the act and the reporting of fraud, and what new legislation means for compliance efforts. Set for release on Tuesday, “2011 Corporate Governance And Compliance Hotline Benchmarking Report” collates five years worth of incidents called in or submitted via the Web to The Network, a third-party solutions clearinghouse for compliance matters. “The number one [trend] we continue to see is fraud-related incidents reported in the workplace,” says The Network CEO Luis Ramos. Fraud, in these cases, runs the gamut from theft in the workplace and misstatement of financial information to straight-up malfeasance, such as an employee taking an improper discount at a retail store. The Network and survey partners BDO Consulting draw from a recent preponderance of data: 564,438 reports made since 2006. Ramos says that the 2002 Sarbanes-Oxley Act kick-started growth in compliance-program infrastructure. Prior to that legislation, a minority of U.S. companies had compliance programs—and those that did were mainly trying to prevent theft. For example, eight years ago only a handful of companies employed a chief compliance officer; today, approximately 80 percent of Fortune 500 companies have someone in that position. Over a third of the cases in The Network’s data were reported to management previously, signaling that reporters are trying to call more attention to an issue that has perhaps gone ignored, says Ramos. About 50 percent of incident reports that The Network has received are anonymous. “What that number tells us is that there’s still a belief by employees. . . that there will be repercussions” for speaking out, Ramos says. As for why The Network continues to see steady reporting of fraud incidents, Ramos says the economic downturn plays a not-so-obvious role. Certainly, one facet is that, “as times got tougher, people resorted to doing things they might not have done under better economic circumstances.” But another reason, Ramos posits, is that co-workers are more likely to report incidents, rather than avert their eyes, when concerned about job security. The line of thinking is, “If I don’t tell someone about this, this could impact my company’s financial health and affect my job,” Ramos explains. Similarly, a new report by the audit and tax consultancy KPMG observes that organizations should bear in mind the effects of financial pressures, both global and personal: “In more austere times, formerly trustworthy employees affected by adverse changes in personal circumstances might be more tempted to commit fraud when they spot an opportunity.” In KPMG’s 2011 study, “Who is a Typical Fraudster?”, a follow-up to their 2007 fraud report, a composite sketch emerges of those most likely to commit fraud:
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