Fraud mostly an inside job

Illustration: Sara Tyson

Employers would be wise to keep a close eye on staff, particularly new managers, according to an international study of corporate fraud by Ernst & Young LLP.

The survey, which polled directors and managers at major companies around the world, found that 85% of serious incidents of fraud are perpetrated by employees, more than half of whom are managers. Furthermore, 85% of the managers committing the largest frauds have been in their jobs for less than a year.

"The numbers would indicate there is a disturbing rise in the amount of fraud by managers," says Nick Hodson, partner and head of Ernst & Young's investigative and forensic accounting team. "Two years ago, only a third of fraud arose from the ranks of management — a jump of more than 20%."

More than two-thirds of the companies that were surveyed had been victims of corporate crime. While half of the fraud losses were less than US$100,000, 13% were greater than US$1 million.

Other findings of the study, conducted every two years, indicate that 64% of respondents think external auditors should have a responsibility to detect fraud, and 88% of companies are satisfied with the forensic accounting services they received to deal with fraud. Furthermore, a majority of organizations (52%) now have formal fraud prevention policies in place, compared with just one-third that established such plans two years ago. But even companies with prevention policies are still at risk, says Hodson.

"Having a policy doesn't mean it will work. Enron had policies. People need to be educated and held accountable to guidelines, or actual behaviour is unlikely to change," he says.