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      September 2009
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The fraudster next door

A new survey shows that fraud perpetrators can come in all shapes and sizes

By James Hunter

*This is an expanded version of a summary originally published in the September 2009 issue of CAmagazine.

Fraud and deceit are topics of perennial human interest. In the first half of 2009, there has been a resurgence of tales of fraud and greed internationally. Canada is not immune to fraud and we have seen our own made-in-Canada fraud problems, both large and small.

Bad habits and personal need, along with opportunity and greed, can ignite the motivation to commit fraud in even the most hearty of economic environments. Now, as companies and individuals find themselves strapped for cash and credit in these challenged economic times, investors should be increasingly aware that fraudsters can come in all shapes and sizes. In the 2009 survey Profile of a Canadian Fraudster, KPMG Forensic exposed the common characteristics of fraud perpetrators. On the surface, the typical fraudster may appear to be not all that different from an average person or your next door neighbour.

Who commits fraud?
With heightened awareness and growing curiosity, the questions arise: Who commits fraud? What characteristics should we be looking for? In responding to KPMG Forensic’s survey, senior Canadian executives provided some insight.

Almost three-quarters of fraudsters were men and 69% were between the ages of 30 and 49. While global fraud survey observations corroborate that a predominant proportion of fraud perpetrators are male, this statistic may not necessarily mean that men are generally more dishonest than women. This result may well be reflective of a continuing reality in Canada that men make up a higher proportion of the corporate workforce. Also, the age range of 30 to 49 is the general age when an individual will often be under the greatest financial pressure personally or professionally, and therefore may possess the greatest incentive to defraud.

Sixty-nine percent of frauds were reported to have been perpetrated by internal staff. Within this category of internal frauds, 62% were carried out by individuals below the level of management, while 22% were carried out by senior executives. Suggesting a positive correlation to this observation, the survey respondents indicated that fraud perpetrators were less likely to have achieved a university degree or a professional designation (only 26% of fraudsters were reported to have obtained this level of education, compared with 40% having not earned a post secondary degree). Persons at more senior levels and those with professional designations may well have more to lose if caught committing fraud, such as higher salaries and loss of professional reputation. These observations were further corroborated through noting that most perpetrators had been with the defrauded company for only three to five years—not having the experience to have reached the senior executive level.

Respondents also indicated that most companies were defrauded by members of their operations department (45% of reported perpetrators). Only 14% of frauds occurred in accounting and 5% in finance functions. These results may be surprising to some, as many believe that individuals who work in the accounting or finance departments have the greatest opportunity to commit fraud. While this may be true for certain types of frauds, the majority of reported frauds (63% of reported frauds related to the theft/diversion of cash and theft of assets) do not require financial reporting savvy to circumvent key controls.

How should companies respond?
Most individual frauds in Canada are small. Where reported, 71% of respondents said losses were less than $100,000. While this may not be a significant amount for the large companies surveyed, the impact of the fraud likely exceeds the simple dollar value. Perhaps more significant than the theft and accumulated cost of investigating and determining the appropriate response to the identified fraud is the intangible damage to the company’s reputation and the morale of the fraudster’s co-workers and supervisors.

The risk of fraud cannot be ignored; Canadian companies spend a great deal of time and effort looking at internal controls. Even with this increased attention, a determined individual or group that decides to defraud a large company will generally be able to find a way to subvert the existing system of controls.

In 73% of reported frauds, the perpetrator was working independently. With this, perhaps one of the greatest controls to mitigate the risk of fraud is effective segregation of duties between transaction initiation, review, authorization and recording functions. As the number of individuals involved in defrauding the company grows, so too does the challenge in detecting it.

As a result of the Sarbanes-Oxley legislation, which was introduced in 2002 in the US, companies are looking at entity-level controls to help prevent and detect fraud.

The following three entity-level controls can collectively have a major impact on the detection and prevention of fraud:

In addition, other important steps that can be taken to prevent and detect fraud in a company include:

Now more than ever, corporate Canada cannot afford to wait for a Ponzi scheme or more tales of corporate greed to occur before they take the problem seriously. Shareholders are demanding more accountability in these times. Fraud will probably not decline in the foreseeable future. For this reason, focused efforts on diligence in the area of fraud prevention and detection should be a priority, even when first impressions of colleagues, customers, and suppliers appear to promote trusting business relationships.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.

James Hunter, CA.IFA, is national leader of KPMG’s forensic practice.