Average fraud case costs business owners $2 million, new report shows

Businesses must implement stringent measures to detect and stop fraud when it first appears, otherwise it will spiral out of control and end up costing millions of dollars, the author of KPMG’s Fraud Barometer warns.

The latest findings from the fraud barometer show that while the number of prosected fraud cases dropped from 81 to 56 in the six months to June 30, the average value of each fraud case is still well over $2 million.

KMPG forensic partner Gary Gill says these frauds spiral out of control and become “supercases” because businesses have not implemented enough measures to detect fraud and stop it while they still have the chance.

“The bottom line here is that it just takes too long to detect these things happening. When fraud happens, it usually starts small, and then gets bigger and bigger over time. You need to nip it in the bud before it becomes serious.”

The barometer found that for the fifth consecutive year, the monetary value of fraud cases coming before the courts in the half-year to June 30 exceeded $100 million.

Major cases included a $27 million accounting fraud in South Australia, a $15 million forgery case and $27 million tax evasion case in Western Australia and “more accounting frauds coming to court compared to other states” in Queensland.

KPMG also noted the Clive Peeters accounting fraud case in Victoria, although this was noted on the last Fraud Barometer in the six months to December 2009.

Gill says larger fraud cases are only being uncovered now due to companies spending more time examining their financial positions due to the harsh economic environment.

“These are all cases which have been operating for a number of years, and are only now being discovered. One of the consequences of the current economic environment is that people are becoming more aware of their financials, and then when they focus on that, these variances and frauds are appearing.”

The most prominent form of fraud was by far accounting fraud, taking up $41 million of large fraud losses. Some of the biggest fraud cases over the past year were committed by accounting or payroll professionals.

Other major types of fraud included theft of client money, investment scams and outright deception, Gill says. The most affected companies were commercial businesses, ranging from family owned businesses to listed firms, with the majority of fraud committed by internal staff.

Gill claims the big lesson here is that businesses aren’t doing enough to stop fraud before it becomes serious. He believes extensive use of accounting software, among other methods including a whistle-blower scheme, will reduce fraud.

“This is all about prevention and control. Make sure you understand where the risks are in your business, introduce adequate controls and have a focus on detection. When something unusual happens, then you can investigate.”

“Some of these controls include using forensic data software, harsh control on payroll accounts, the use of the whistle-blower system, preferably handled outside the organisation, and making sure you know where the responsibility lies in your organisation for these types of things.”

Gill also points out frauds have continued to remain rampant due to low wages growth and staff feeling trapped in their current roles. Over the past 18 months, many employees have chosen to remain in their current job rather than look for something else due to the downturn and the assumption a harsh job market would provide no prospects for better employment.

“This could be a factor. When people are unhappy and so on in their current roles, the satisfaction of their job goes down and these types of situations can occur.”

“This also plays into the nature of the frauds, which were virtually all perpetrated by people inside. We are seeing a lot of fraud in relation to payment systems, procurements, payrolls and so on.”

Gill says employees in both management and non-management roles are the most significant perpetrators, and that fraud is more prevalent among managers than lower-end staff. “They know their way around the systems,” he says.