HR Will See Impact of Increasing Corporate Fraud

By Aliah D. Wright Sep 26, 2008

Corporate fraud is on the rise, and, despite new laws to curb such abuse, this trend will significantly impact human resource professionals, says an expert in business intelligence with Kroll, a risk consulting company.

According to the recently released Kroll Global Fraud Report, the average company loss to fraud has increased by 22 percent and it has largely been driven by the credit crunch and troubled economic climate attributable to the subprime mortgage nightmare.

On average, businesses have lost $8.2 million to fraud in the past three years, compared with the 2007 figure, which stood at $7.6 million. The figures come from a study Kroll commissioned from the Economist Intelligence Unit based on a survey of 890 senior executives worldwide.

What Types of Fraud?

The fastest-growing types of fraud were information theft (27 percent, up from 22 percent) and regulatory and compliance breaches (25 percent, up from 19 percent). A closer look revealed that more than four out of five companies surveyed (85 percent) have suffered from corporate fraud in the past three years, up from 80 percent in the 2007 survey. For large companies, the proportion suffering from fraud rose to 90 percent, according to the study.

Blake Coppotelli, senior managing director of business intelligence and investigations for Kroll, told SHRM Online in a telephone call from his offices in New York that the reasons why fraud is increasing are twofold.

“Companies around the world are taking greater risks in order to keep up with their revenue requirements … and so with the increased risk associated with these opportunities, there is an increased fraud risk,” he said.

According to the report, the construction and natural resources sectors suffered the most incidents of fraud, attributable in part to an industry shift to higher-risk areas and the continuing rise in oil prices. Health care, pharmaceuticals and biotechnology saw an increase in problems with corruption and theft of stocks or assets, while travel, leisure and transportation reported increases in information theft or loss and regulatory and compliance breaches.

When it comes to breaches in compliance, HR is in the middle of the fray, having to manage compliance because of Section 404 of the Sarbanes-Oxley Act of 2002, which requires U.S. public companies and their independent auditors to show the Securities and Exchange Commission (SEC) that their financial numbers are accurate and that they have processes in place to ensure that accuracy.

And the cost of complying isn’t cheap.

According to the Financial Executives International’s seventh Sarbanes-Oxley (SOX) compliance survey, the average 2007 SOX compliance cost was $1.7 million.

Cost is the least of HR’s worries, however.

“Over the next five years, it’s going to be increasingly difficult for human resources to get their arms around the fraud risk,” Coppotelli said. “With each new focus, HR has that much more of a complicated responsibility and task ahead of it. It has become a very complicated compliance world, and HR now has to extend its experience and capabilities into areas that they would not have to ordinarily concentrate on.”

HR Solutions

According to Coppotelli, “HR has to do the following: They have to work with internal audit, general counsel [and] outside legal counsel and work with third-party fact-finders in order to make sure they have the necessary information at their disposal to do their job.”

He recommends that HR managers and directors keep “ahead of the curve, and at the same time, when situations arise that involve allegations of fraud, they have to have resources they can depend on to help them and guide them through those events.”

Coppotelli also recommends that they work with internal ethics officers, forensic accountants, attorneys and auditors to “manage all of the different arms and different parts of the risk that are out there that they face.”

Managing risks is only part of the solution, however.

“Individual workers need to see and believe in their organization’s ethical code of conduct,” says Professor Marty Val Hill, SPHR, of the Woodbury School of Business at Utah Valley University, who sits on the Society for Human Resource Management’s Ethics Special Expertise Panel. “They need strong leaders in HR and executive roles who demonstrate defensible, ethical conduct which is beyond reproach. Organizations that adopt high standards, widely utilize ethical frameworks as decision-making tools, and enact reward structures that recognize only achievements which are achieved through ethical means face fewer compliance crises than their mainstream counterparts,” Val Hill said.

He added, “Instead of creating an us [management] vs. them [workers] mentality, companies can focus their training efforts on evangelizing corporate ethics and cultural norms that empower employees to quickly and consistently judge which choices are harmonious with their corporate cultures.

“Once an HR professional, economist, corporation or society concedes the point that people will only comply because they are forced into it, we may as well give up the battle altogether,” Val Hill said. “Although oftentimes we may need to have a fraud examiner or forensic accountant waiting in the wings, this must never become our primary strategy for improved compliance.”

An Austere Outlook

Unfortunately, the future looks bleak.

“There’s no question fraud will increase over the next three to five years, Coppotelli said. “I think it’s going to be due to the adapting of fraudulent activities to new methods of committing fraud.” As a result, new laws will crop up, forcing HR executives to be more vigilant in detecting and safeguarding against such fraud, he added.

“Federal authorities—the SEC, Department of Justice and the U.S. attorney’s office will apply regulations in new and unique ways in order to stem corporate improper activities and make sure there is more corporate accountability,” Coppotelli said.

This might make HR’s job even more challenging—especially given today’s climate in which the federal government is willing to step in and aid those who might have committed corporate malfeasance in the subprime mortgage debacle.

“I think the whole subprime issue has yet to be fully addressed in terms of malfeasance,” Coppotelli said.

He said that years from now, as the market stabilizes, “I think you’ll see the federal government taking a more active and forceful role because of the subprime issues.”

Val Hill said that “employees and the general public are being held to a higher standard of accountability than some large lenders. Most individuals are held accountable for violations that are detected or made public in the press. The more important question is whether your own organization rewards noncompliance when it is unseen and profitable.”

For some, economic issues aren’t the cause of the increase in corporate fraud. It is strictly a matter of the lack of accountability.

“I don’t really believe it is the economy that is causing the increase in fraud and ethics violations,” said Brenda Cossette, SPHR, HR director for the City of Fergus Falls, Minn. “If you simply scan the news media in recent years, starting with President Clinton’s ethics issues, you will see that the public in general [our society] doesn’t condemn someone for fraud or lying.

“Now you add the WorldCom and Enron collapses, and you see that the outrage isn’t great enough in our society to really punish these folks. Many of these offenders have walked away with fortunes in spite of their fraudulent deeds.”

Aliah D. Wright is an online editor/manager for SHRM.


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