Fraud Symptoms

In 2010, Indian media reported an unprecedented level of scams and frauds. The last but the least was the Citibank fraud where a rogue operator diverted client funds in personal stock trading accounts. Though most frauds are small and only few threaten organization’s existence (Satyam, Madoff, Enron), fraud risks are increasing across the globe.  Kroll Global Fraud Report 2010 states that in India, 88% of the respondents specified that their organization was a victim of fraud. In 48% of the cases, the key perpetrators were employees. Globally, the fraud percentage increased during the year and for every 1 billion US dollars of sales, the fraudsters share was 1.7 million dollars.

The long-term damages of fraud are significant and in some cases organizations face bankruptcy, delisting of stock exchanges and criminal charges.  COSO report “Fraudulent Financial Reporting 1998-2007” analysis the US public companies. During the period 1998-2007, 347 alleged cases of fraudulent financial reporting were identified. In the period, 1987-1997 only 294 public company cases signified fraudulent financial reporting. This shows an increase of 18% over the earlier period.   In the 1998-2007 period, the total misrepresentation of financial statements amounted to nearly US$ 120 billion across 300 odd cases. That is, an average of US$ 400 million per company in 1998-2007 to an average of US $ 25 million in the period 1987-1998.

This highlights the need for organizations to address fraud risk. To do so, we need to understand the symptoms of frauds in an organization. Some aspects highlight the organizations propensity for high fraud risk. The list below gives 15 major symptoms of fraud. The list is not in sequential order of importance. Each point mentioned below contributes to increasing fraud risks.

  1. Insatiable hunger of Chief Executive Officer
  2. A weak Chief Financial Officer
  3. Board’s failure to exercise judgment
  4. Growth strategies based on giving financial numbers
  5. Insufficient focus on organization culture and processes
  6. Unmanageable geographic distribution
  7. Ineffective human resources function
  8. Breaches on internal controls
  9. Ineffective internal audit function
  10. Lapses in  information assurance
  11. Deviant fraud risk management function
  12. Unethical compromises by external auditors

A single or combinations of these factors contribute towards increasing fraud risks. Understanding these and evaluating the organization against the parameters give early warning signals. These help in implementing fraud prevention measures.

In the coming weeks I will cover each on them individually. I will give examples from known fraud cases- Enron, WorldCom, Barings, Satyam, etc. The information will facilitate a corporate employee to find red herrings and take appropriate action. The risk managers can use the information about symptoms while assessing fraud risks of their organization.

Look forward to getting your ideas and thoughts on the same. If you wish me to cover any additional areas, please do not hesitate to get in touch with me.

References:

  1. Kroll Global Fraud Report 2010 (Economic  Intelligence Unit Survey Results)
  2. COSO Fraudulent Financial Reporting 1998-2007- An Analysis of U.S. Public Companies (Authored by Mark S. Beasley, Joseph V. Carcello, Dana R. Harmanson & Terry L. Neal)