Fraud may be down but threat still looms from within

Written by  Posted Date: December 10, 2012
Canadian companies continue to other regions and countries in the world. Source: Kroll Global Fraud Report.
Canadian companies continue to other regions and countries in the world. Source: Kroll Global Fraud Report.
Incidents of white-collar fraud appear to be on the decline both globally and in Canada, but some senior executives may have a false sense of security when it comes to the potential threats to their organizations.

Kroll Advisory Solutions’ sixth annual Global Fraud Report for 2012-13 shows in Canada the percentage of companies surveyed that were affected by fraud dropped to 47 per cent in 2011-12 compared to 70 per cent of those surveyed in 2010-11.

Globally, the proportion of companies that suffered an incident declined to 61 per cent in the current survey from 75 per cent last year.

“From our perspective we look at the longer term trends rather than focusing on year-to-year, but it is obviously good news that there was a rather significant decline. It’s an indication that a lot of companies have put resources into addressing fraud,” said Peter McFarlane, managing director with Kroll in Toronto.

More than 800 senior executives were polled worldwide in July and August for the survey, commissioned by Kroll and carried out by the Economist Intelligence Unit, from a range of industries. The biggest threat still remains from inside an organization with 67 per cent of all fraud cases committed internally, up from 60 per cent last year. The average percentage of revenue lost to fraud was 0.6 per cent, down from 0.9 per cent last year.

The overall decline can be attributed to increasingly strict regulatory requirements putting pressure on companies to keep better tabs on what’s happening in their organizations, says Mark Morrison, a partner with Blake Cassels & Graydon LLP in Calgary.

“This certainly reflects what we see. Fraud prevention and compliance awareness has become a focus for most companies over the last several years,” says Morrison.

The areas of frequent loss include theft of physical assets or stock (24 per cent) and management conflicts of interest (14 per cent).

Areas where companies consider themselves moderately or highly vulnerable to risk include information theft, loss or attack (28 per cent), theft of physical assets or stock (28 per cent), and intellectual property theft (23 per cent).

The most widespread factor leading to greater fraud exposure was IT complexity with 31 per cent saying they feel it’s the biggest driver of increased exposure to their company. However, that is down slightly from last year’s number of 33 per cent.

Three specific areas of fraud did increase slightly in frequency:
• theft of physical assets;
• management conflicts of interest; and
• regulatory or compliance breach.

For each of these, the prevalence in Canada is now at or above the global average. However, for all of those frauds the levels of perceived vulnerability have dropped.

Canadian respondents were among the most likely to report growing collaboration between companies is increasing exposure to fraud. They are also less likely than average to be planning to invest in partner due diligence measures (33 per cent compared to 38 per cent for all countries).

The report cites an example of a Canadian company looking for a consulting firm to advise on procurement policies and controls, and to assist in reorganizing the purchasing department. It hired a consulting firm without conducting background checks. Once hired the consulting company quickly changed vendors on key supply contracts. Senior management eventually realized there was a problem and an investigation revealed false and inflated invoicing through related vendors and false expense reports. A search of public records also revealed allegations of fraud against the firm in another jurisdiction.

“That’s an example of how important it is to understand who you’re doing business with,” says McFarlane. “If you form a relationship with a contractor you have to understand who they subcontract with and ensure they are doing business with appropriate people. That’s been a learning curve in terms of how far some responsibilities extend. Where do you draw the line in terms of how far along the chain you go?”

Morrison says that kind of situation is typically happening with medium-sized organizations in high-growth mode, not established large multi-nationals.

“It’s unusual to see that in large companies. Where I think you see more of that kind of risk is in mid-size companies that are growing but haven’t put sophisticated measures in place to monitor things like who, exactly, they’re doing business with. This is a high-risk group,” he says.

McFarlane says in-house counsel seem to be getting more involved in visiting high-risk jurisdictions outside Canada to get a first-hand understanding of the challenges that exist in addressing some of the compliance obligations.

“Doing that kind of thing helps develop a relationship on how to address those challenges in a way that is compliant with the relevant legislation,” he says.

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Jennifer Brown

Jennifer Brown is the editor of Candian Lawyer InHouse.

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