Fraud Report 2009

Recent cases

• Madoff - $54bn (£38bn)• Allen Stanford - $8bn (£5.6bn)• Kazutsugi Nami, Japanese Ponzi scheme

$2.5bn (£1.76bn)• US Ponzi schemes

– Nadel $300m– Schrenker – “Chicago suburban businessman ... Tens of millions

of dollars”• Satyam $1bn• Langbar £365m 2

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Closer to home – BBC News Feb 2009

• “Charity manager jailed for fraud” - £500,000

• “Arrests over £3m mortgage fraud”

• “Fraud police arrest city trader” – investment fraud running into millions of pounds

• “Man steals from firm to buy toys” - £780,000

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White collar crime theories

• Interactionist theory– Sutherland’s theory of Differential Association

• Self control theory– Gottfredson and Hirschi's (1990)

• Rational choice theory• Origins of Motivation• Culture of competition

– Coleman (1987)• American dream theory

– Choo and Tan (2007)

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Opportunity

Motivation Rationalisation

Fraud Triangle

• Cressey’s Fraud Triangle helps explain the human process for committing fraud

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Fraud Triangle – Motivation/Pressure

– Compulsive behaviours• Gambling, alcohol, illegal drug use

– Financial debts• Credit cards, loans

– Family problems• Divorce, problems with children

– Work pressures • High targets

– Greed

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Fraud Triangle - Opportunity

• Opportunity is the perception by someone believing they can commit a fraud without getting caught.

• Management controls and influences “opportunity” more than any other factor in the Fraud Triangle.

• Management tools are employment checks, internal controls, internal audits.

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Fraud Triangle - Rationalisation

• Justification for fraud:

– “They owe me” or “I earned it”– “I need it more than they do”– “It’s only fair”– “I am only borrowing it”

• Rationalisation is a form of denial. The person is not accepting reality.

• Rationalisation is the hardest area for management to influence or control.

International Survey precedents

• KPMG (2007)– 70% of fraudsters were between ages of 36 and 55– 85% were male– 67% acted within 1 to 5 years– 68% acted alone– Detected by:

• Whistle blowing 25%• Management review/internal control 31%

KPMG (2007) Profile of a Fraudster Survey 2007

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International Survey precedents

• Bussman and Werle (2006)– 41% were aged between 31 and 40– 87% were male – Detected by:

• Tip off 29%• Internal audit 25%

Bussman, K.D. And Werle, M.M. (2006) Addressing Crime in Companies, British Journal of Criminology, 46, 1128-1144.

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Background

• There were 69 respondent organisations• Survey focused on assessing the level of

employee fraud, and• Evaluating the basic control procedures in

place to reduce the risk of fraud occurring• Almost one-third of respondents had

discovered a fraud in the last 2 years

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Sample profile

• 57% were service companies and most were private limited companies

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• 40 per cent had no fraud prevention measures15

• Two thirds of organisations perceive fraud as a risk to their industry

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• 31 per cent only regard prevention as “slightly important”

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• 43 percent internal controls and audit • 29% tip-offs 18

Costs of fraud

• BDO Stoy Hayward Fraud Track team noted that in 2008 reported fraud in the UK was up 14 per cent on the previous year

• Actual fraud in the UK much higher, the Home Office estimate for cost in 2003/04 was £16bn

• Survey fraud cases showed a wide range of fraud types from cash skimming to financial statement fraud and asset misappropriation

• Average value £74k range £500 to £1m • Average total cost was £435k with a high of

£4m 19

Costs of fraud

• Other studies show that up to 50 percent of a business’ sales can be taken in the worst cases

• Less than 20 per cent of defrauded sums is recovered

• In this study only 36% of the cases were reported to the police

• Concern over organisational reputation given as the main reason

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• Average age of 37 with less than 5 years service

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22Male Female

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

86 percent male

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Risk Management Measures

• 60 per cent have a standard risk management policy in place

• 66 per cent have pre-employment screening• 62 per cent conduct regular risk and threat

assessments

• Only 30 per cent have implemented a fraud awareness programme

• 34 per cent have any educational programme on fraud

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Risk Management Measures

• The ACFE study in the USA found:– In companies with specific fraud training, median

levels of fraud were reduced by 52 per cent– Companies who had instituted an anti fraud policy

showed a 49 per cent reduction

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Survey key findings

• Two thirds of businesses perceive fraud to be a risk in their industry

• Less than one third have a fraud awareness programme or any educational programme relating to the threat of fraud

• Nearly 70 per cent believe fraud will increase in the near term mainly as a result of the economic downturn

• 40 per cent do not have fraud prevention measures in place

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Survey key findings

• Almost one third of organisations had discovered a fraud in the last two years

• Discovery mainly through internal audit and tip-offs

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Contact details

• Richard Trafford

023 92 84 4121 richard.trafford@port.ac.uk

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Questions ?