Fraud on the increase

More than half the half of the companies interviewed for a new survey have suffered a 'significant' fraud in the last year. And the overwhelming majority of these are committed by recently-promoted managers.

Ernst & Young's global survey of 400 companies, 'Fraud: The Unmanaged Risk', reveals 55 per cent of companies said they had suffered a significant fraud in the last year, with nearly 20 per cent suffering more than 10 frauds.

Nearly half were frauds of more than $100,000 with 13 per cent exceeding $1 million.

The biggest offenders were company managers, who were responsible for 55 per cent of frauds – employees were only responsible for 30 per cent of frauds. Some 85 per cent of managers committing the largest frauds had been in their post less than one year.

John Smart, an Ernst & Young forensic services partner specialising in fraud, said: "Transient staff, the growing complexity of organisations and the internet are all fuelling this dramatic increase in risk. As trusted, long-established middle management is downsized around the world, the eyes and ears of the company are becoming blind and deaf to potential misdemeanours."

"Fraud also tends to increase during an economic downturn so companies across the globe should watch out for their surviving senior management – especially those new to management who pose a particular threat," he added.

According to Ernst & Young, the urgent questions non-executives should ask their fellow directors include:

• Are the profit figures reasonable? Do they tally with reality?
• Are there gaps in the company's controls that would allow fraudsters to succeed?
• What is the culture of the company? Does it reduce or increase the risk of fraud?

However, the survey reveals that there has been an improvement in recovering losses, with just over half of defrauded companies reporting that they had been recompensed for their losses – a positive increase since 2000 when only 29 per cent of losses were recovered. But most of this upturn has not been at the expense of the fraudsters themselves. According to the survey, many companies had improved recovering money from their insurers, banks and suppliers.

In a sign that companies are now taking fraud seriously, 58 per cent of companies now have a corporate governance code and 68 per cent have a code of conduct – up over the last two years from 33 per cent. But still only 45 per cent think their fraud policies are understood by their staff.

David Sherwin, a partner specialising in fraud investigations at Ernst & Young, said: "It's all very well companies having a code of conduct in place – the real question they should be asking is "Does it actually work?" It's the day-to-day practical barriers to combat fraud that really count. After all, even Enron had a code of ethics.

"With nearly one large company in seven across the world suffering reported fraud to the tune of at least $1 million a year this is a problem that can have potentially fatal consequences for any business."