Nation’s Economic Woes Likely to Spur Climb in Fraud

A senior manager of a national fraud survey says tough economic times in the next three to five years will contribute to a rise in corporate fraud in coming years.

“We’ll see a marked increase in fraud,” said Blake Coppotelli, senior managing director of the business intelligence and investigations division of Kroll, a New York-based risk consulting company.

Kroll released its annual the Kroll Global Fraud Report on September 15.

“Corporations, because of the state of the world economy,” Coppotelli said, “are going to have to get into higher-risk opportunities in order to make their bottom lines.”

Companies with high employee turnover and weak internal controls are more vulnerable to fraud, he said, while high-risk business ventures also lead to more business fraud. And the burgeoning fraud problem, he predicted, will lead to more government regulation to get a handle on it.

As that happens, Coppotelli said, company human resources departments will have to be sure they’re in compliance with internal ethics policies and external regulations to protect themselves.

Bruce Dravis, a Sacramento attorney who has written and lectured extensively on corporate governance issues, said getting a handle on corporate fraud through government regulation is typically a reaction to specific types of fraud. He points to the federal Sarbanes-Oxley Act, which was passed in reaction to the management fraud at Enron that led to the company’s collapse.

Regulations aimed at curbing specific fraud may or may not be effective, he said. “The question is, how do you know you’re asking the right questions” when forming regulations to crack down on a specific fraud, Dravis said.

“Fraud is a very difficult problem because it involves someone actively doing something bad,” he said. “Even audits don’t always detect fraud. If someone has structured fraud to avoid detection, it can be a long time before it comes to light.”

Dravis said that as long as there are crooks, there will be fraud. “Can you ever prevent run-of-the-mill fraud from occurring in all cases? I kind of doubt it,” he said.

The Kroll survey found that corporate fraud this year—mainly information theft and regulation noncompliance—continues to be on the upswing. Eighty-five percent of companies surveyed by Kroll have been hit by corporate fraud in the past three years, up from 80 percent in last year’s survey. And 90 percent of larger companies surveyed were plagued by fraud.

Meanwhile, the average company loss to fraud has increased by 22 percent, a trend blamed on the credit crunch and tough economic times. Companies on average lost $8.2 million to fraud in the past three years. That compared with a loss of $6.7 million in last year’s survey.

Industries with the most instances of fraud have been construction and natural resources. That has been blamed on higher oil prices and an industry shift to higher-risk areas.

Health care, pharmaceuticals and biotechnology saw increases in corruption and theft of stocks and assets. The travel, leisure and transportation categories reported increases in regulation noncompliance and information theft or loss.

Only two of 10 types of fraud tracked in the survey—money laundering and contracting fraud—declined from last year, but by only 1 percent each.

Regionally, the survey found less widespread fraud in North America and Western Europe and more fraud in the less economically developed areas of the Middle East and Africa.

Kroll commissioned the survey from the Economist Intelligence Unit to conduct its second global survey on fraud and its effect on business during 2008.

Some 890 senior executives were surveyed worldwide. A third of them were based in North and South America, 30 percent in Asia Pacific, more than a quarter in Europe and 11 percent in the Middle East and Africa.

Ten industries were covered, with no fewer than 50 respondents from each industry.

Sixteen percent were from the professional services industry, 13 percent from financial services and 11 percent from technology, media and telecommunications companies. Forty-two percent of the companies polled had global annual revenue of more than $1 billion.

—Mark Larson