Not a Member? Get access to HR news and resources that you can trust.
HR professionals share their advice for minimizing worker stress and boosting retention.
Is your employee handbook ready for the changing world of work? With SHRM’s Employee Handbook Builder get peace of mind that your handbook is up-to-date.
Virtual SHRM-CP/SHRM-SCP Certification Prep Seminars kick off September 12 and fill up fast!
Expand your influence and learn how to become an effective leader. Join us in Phoenix, AZ | OCTOBER 2 - 4, 2017
The incidence of corporate fraud in every category measured has increased in the past year, according to Kroll’s
2013/2014 Global Fraud Report. Overall, 70 percent of companies were affected by fraud in fiscal year (FY) 2013, up from 61 percent in FY 2012.
The report revealed that economic globalization is increasing businesses’ exposure to fraud as they seek to expand into riskier overseas markets and outsource more work. The sharpest increase in FY 2013 was in vendor, supplier or procurement fraud, but other areas of concern include information theft, cybercrime and insider fraud, according to the report.
“Yet measures to guard against fraud continue to be constrained by budgets and corporate policy,” said Tom Hartley, CEO of Kroll, a corporate-risk consulting firm based in New York City.
Kroll’s annual fraud survey, carried out by the Economist Intelligence Unit, polled 901 senior executives worldwide from a broad range of industries and functions in July and August 2013. Respondents were senior executives, with 53 percent at the C-suite level. Almost half of participants (49 percent) represent companies with annual revenues of more than $500 million. They include 25 percent from Europe, 24 percent from North America, 23 percent from the Asia-Pacific region, 14 percent from Latin America, and 14 percent from the Middle East and Africa.
“[T]he measure of a good company is not whether or not you’ve suffered a fraud, it’s how you prepare for it, how you deal with it and how you move on afterward,” Hartley said. He recommended that business leaders use a quality risk-mitigation strategy that includes vendor screening, whistle-blower programs and employee training. “Most would say that they are now in a better position because of the fraud and the way they dealt with it,” he said. “So it’s not just about avoiding fraud, which is almost inevitable, it’s also about how you respond.”
Complacency Biggest Danger to U.S. Companies
The report found that the United States has a fraud incidence rate below the overall average—66 percent, compared with 70 percent globally—and a rate of lost revenue due to fraud that is also slightly under the norm at 1.2 percent, compared with 1.4 percent for respondents as a whole.
However, the situation is not ideal: For eight of the 11 types of fraud covered in the survey, the reported incidence within the United States is within 2 percent of the global mean. Significant increases in the past year have taken place in the prevalence of management conflict of interest (21 percent, compared with 16 percent in the 2012 survey), regulatory and compliance fraud (17 percent, up from 7 percent), intellectual-property theft (12 percent, up from 8 percent), and money laundering (5 percent, up from 1 percent).
The incidence of information theft in U.S. companies declined from 26 percent in the 2012 survey to 20 percent, but 23 percent of respondents reported feeling highly vulnerable to this crime, up from just 7 percent last year.
The biggest danger to U.S. companies is complacency, Kroll concluded. The report found that U.S. firms are less likely than average to be planning further investments in anti-fraud strategies and are less likely to have anti-fraud protections in place. For example, 64 percent of American respondents said their firm has invested in financial controls, whereas the global figure is 71 percent.
Brazil’s Growing Problem
Fraud grew faster in Brazil than anywhere else in the world in FY 2013. Specifically, 74 percent of those surveyed reported that their company was affected by at least one fraud incident in the past year (up from 54 percent in FY 2012), and businesses in Brazil lost, on average, 1.7 percent of revenues to such crimes (up from 0.5 percent). And, outside of Africa, Brazil also had the highest incidence of theft of physical assets (37 percent) of any region or country covered in detail in the survey, as well as above-average rates of management conflict of interest (26 percent, compared with 20 percent overall) and vendor or procurement fraud (23 percent, compared with 19 percent overall).
Intellectual-Property Theft Still a Challenge in China
China’s fraud incidence rate ticked up slightly from 65 percent in FY 2012 to 67 percent in FY 2013; however, the proportion of those reporting an increase in fraud exposure at their firm has jumped from 69 percent in the 2012 survey to 80 percent in this year’s poll.
The survey data also suggest the need for greater attention toward an old problem in China—that is, extensive intellectual-property theft. According to the survey results, this type of theft remains a significant challenge for companies operating in China, with 15 percent of respondents reporting that their organization was affected by it in FY 2013, a marked rise from the 8 percent reported in FY 2012.
Unscrupulous suppliers, dismissed staff and disgruntled employees are all common perpetrators of intellectual-property theft, Kroll warned.
On the positive side, 62 percent of China-based respondents reported that their company plans to invest more in intellectual-property protection in the coming year—the most of any country surveyed.
Corruption Found to Be Rife in India
India’s fraud problems are multifaceted, with seven types of fraud affecting more than 15 percent of companies. In FY 2013 the country had an above-average incidence of theft of physical assets (33 percent of companies affected, compared with 28 percent for respondents overall), corruption (24 percent, compared with 14 percent), and internal financial fraud (22 percent, compared with 16 percent). It also had a slightly above-average incidence of information theft (24 percent, compared with 22 percent).
“Indian companies understand that they operate in a high-corruption environment,” Kroll said. Thirty-seven percent of respondents acknowledge that their firm is highly vulnerable to corruption, up from 32 percent in FY 2012 and well above the survey average of 20 percent.
More broadly, 86 percent acknowledge at least some vulnerability to corruption.
Insider fraud was found to be particularly prevalent in India. Sixty-nine percent of respondents at companies that suffered fraud in FY 2013 and that knew who the perpetrator was said a junior employee played a leading role, while 89 percent pointed to an unspecified insider.
Lack of employee engagement may be a culprit here. The survey found that high staff turnover was the second most common factor behind Indian companies’ increased fraud exposure, cited by 29 percent of respondents.
Whistle-blower Programs Needed in the Gulf States
The Persian Gulf states had one of the lowest fraud rates in FY 2012, at 49 percent. This time around, however, the results were substantially different. The overall incidence of fraud (72 percent) was slightly above average, but the increase from the region’s 2012 figure was more than twice as great as that experienced in the rest of the world.
The FY 2013 incidence rates experienced by the Gulf states include information theft (35 percent), vendor or procurement fraud (30 percent), market collusion (28 percent) and management conflict of interest (24 percent). The regional average financial cost of fraud (1.6 percent) is also above the survey mean.
Accordingly, respondents are worried: 89 percent said fraud exposure has increased in FY 2013, a significant rise from 54 percent in FY 2012. More than 20 percent of respondents believe that their firm is highly vulnerable to every fraud covered in the survey except money laundering.
“These concerns are leading a higher proportion of Gulf companies to invest in information security and financial controls than the average of their peers elsewhere,” the report said. However, where these companies choose to invest is notable. Executives from the Gulf region were the most likely of any respondents to report that vendors (46 percent) or customers (46 percent) were involved in perpetrating fraud; nevertheless, only 46 percent of Gulf companies plan to invest in client or vendor due diligence in 2014, not far above the survey average of 42 percent. Also notable, a mere 2 percent of Gulf companies reported that a fraud came to light via a whistle-blower in FY 2013, compared with 22 percent globally.
“This suggests a fruitful area to improve fraud defenses, but only 41 percent of Gulf companies will be investing in staff training and whistle-blower programs in the next year, less than the global mean of 43 percent,” the report said.
Africa Retains Unenviable Distinction
Sub-Saharan Africa remains the region of the world with the most widespread fraud problem. Not only was its overall incidence (77 percent) the highest in the survey, but the figures for theft of physical assets (47 percent), corruption (30 percent), regulatory or compliance breach (22 percent), internal financial fraud (27 percent) and misappropriation of company funds (17 percent) were all unfortunate benchmarks.
As a result, the region’s level of fraud loss (2.4 percent) is also a chart-topper.
At least one type of fraud is less widespread: Information theft, at 19 percent, dropped noticeably from 34 percent in FY 2012.
The number of African companies affected by corruption rose to 30 percent from 20 percent in FY 2012. Another alarming finding: 33 percent of respondents said government officials played a leading role in the crime.
The continent also has the highest level of fraudulent involvement by senior or middle-management employees (41 percent) and by junior employees (51 percent).
A region’s reputation for gross levels of fraud has a substantial impact. It comes as no surprise, therefore, that 13 percent of all respondents said that in this fiscal year they were dissuaded from operating in Africa, and 11 percent said this of Latin America, based on their experience or perception of fraud in those regions.
Roy Maurer is an online editor/manager for SHRM.
SHRM Online Global HR page
Keep up with the latest
Global HR news
You have successfully saved this page as a bookmark.
Please confirm that you want to proceed with deleting bookmark.
You have successfully removed bookmark.
Please log in as a SHRM member before saving bookmarks.
Your session has expired. Please log in again before saving bookmarks.
Please purchase a SHRM membership before saving bookmarks.
An error has occurred
Recommended for you
HR Education in a City Near You
SHRM’s HR Vendor Directory contains over 3,200 companies
[/_catalogs/masterpage/SHRMCore/Main.master][Title][SHRM Online - Society for Human Resource Management]