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Internal Fraud On The Rise, Kroll's Annual Global Fraud Report Reveals

Study shows that 60 percent of frauds are committed by insiders, up from 55 percent last year
NEW YORK, Oct. 18, 2011 – Fraud remains predominantly an inside job, according to the Kroll Annual Global Fraud Report released today. This year’s study shows that 60 percent of frauds are committed by insiders, up from 55 percent last year. Overall, fraud concerns among executives around the globe rose approximately 15 percent led by information theft and corruption and bribery. The findings are contained in a study commissioned by Kroll with the Economist Intelligence Unit of more than 1,200 senior executives worldwide.

Half of all companies surveyed (50 percent) said they are moderately to highly vulnerable to information theft, up sharply from 38 percent in 2010. Moreover, IT complexity is the leading cause of increasing fraud exposure, cited by 36 percent of respondents compared with 28 percent last year. Information-based industries continue to report the highest incidence of theft of information and electronic data. These include financial services (29 percent), technology, media and telecoms (29 percent), healthcare, pharmaceuticals and biotechnology (26 percent) and professional services (23 percent).

Despite heightened levels of concern, the overall prevalence of fraud decreased this year to 75 percent from 88 percent last year. Roughly one in four companies were hit by physical theft of cash, assets and inventory or information theft, both down from record highs in 2010. In contrast, management conflict of interest (21 percent), vendor, supplier or procurement fraud (20 percent) and internal financial fraud (19 percent) all saw notable increases. The incidence of corruption and bribery nearly doubled over the past year from 10 to 19 percent.

“This year’s study provides a reason for both optimism and concern,” said Robert Brenner, Vice President Americas, Kroll Business Intelligence and Investigations. “While the overall volume of fraud has declined, the types of problems on the rise – management conflict of interest, financial fraud, corruption and bribery --pose greater risks of serious financial and reputational damage to an organization. Companies are paying attention and investing more in detection and prevention of fraud generally. However, they continue to lag in their attention to laws such as the FCPA and UK Bribery Act that are intended to root out bribery and corruption. Developing the necessary culture and controls across ever more global operations will be one of the challenges going forward.”

For the second straight year, fear of fraud is dissuading nearly half of companies surveyed from becoming more global. Forty six percent of respondents indicated that fraud had dissuaded them from pursuing business opportunities in at least one foreign country. Corruption and bribery are the leading factors in that decision, cited by 62 percent. The biggest impact has been on emerging economies, with fraud deterring 15 percent of businesses from operating in Africa, 10 percent in China and 9 percent in India.

Companies, however, seem unprepared to deal effectively with corruption. According to the survey, only 27 percent of respondents said they are well-prepared to comply with regulations, such as the Foreign Corrupt Practices Act and UK Bribery Act. Of those companies that are subject to one of these two laws, less than half, 43 percent, have trained senior management, agents, vendors and foreign employees to be compliant with one of these laws, and just 39 percent have assessed the risks arising from them. Furthermore, only 37 percent of companies surveyed believe that their due diligence provides a sufficient understanding of a potential partner’s or investment target’s compliance with these acts.

Other key findings include:

The economic cost of fraud: How expensive is fraud to companies? This year’s survey found that on average fraud cost companies 2.1 percent of earnings in the past 12 months, which is equivalent to a week of revenues over the course of a year. Eighteen percent lost more than 4 percent of revenues to fraud in the year, while 53 companies, or one quarter of that group, lost more than 10 percent of revenues to fraud.

Combatting information theft poses new challenges for industries: One of the major challenges faced by companies defending against information theft is the variety of data being sought by fraudsters. While proprietary data is the most common target, customer and employee data are also targets for theft. The data category sought the most by fraudsters varies by industry, depending on the value of the data a company is likely to have. For technology, media and telecoms companies, the most common target category is proprietary data (cited by 36 percent of respondents), while for financial services companies it is customer information (29 percent).

Fraud largely remains an inside job: Last year’s survey found that among companies impacted by fraud, junior employees and senior management were the most likely perpetrators at 22 percent each. This year, for junior employees that figure climbed to 28 percent and remained about the same for senior management (21 percent). A further 11 percent was committed by an intermediary or agent for the company, meaning that this year, 60 percent of fraud was committed by someone who worked for the company in some way. However, for the companies that lost the most revenue from fraud, senior executives are more likely to be the perpetrators (29 percent) with junior employees involved in only 8 percent of the cases.

The fifth Kroll Annual Global Fraud Report includes a full detailed industry analysis across a range of fraud categories and regions. To obtain a copy please visit www.kroll.com/fraud.

Notes to editors Please click the Kroll 2011-2012 Kroll Global Fraud Report fact sheetfor key findings and graphics, including a detailed look at the industries, regions and types of fraud covered in the report.

Methodology

Kroll commissioned The Economist Intelligence Unit to conduct a worldwide survey on fraud and its effect on business during 2011. A total of 1265 senior executives took part in this survey. Nearly a quarter of the respondents were based in North America (23 percent) and Europe (24 percent), 28 percent from Asia-Pacific region, 15 percent from the Middle East and Africa, and 11 percent from Latin America.

Ten industries were covered, with no fewer than 50 respondents drawn from each industry. The highest number of respondents came from the financial services industry (17 percent). One half of the companies polled had global annual revenues in excess of $500 million.

About Kroll

Kroll, the world's leading risk consulting company, provides a broad range of investigative, intelligence, financial, security and technology services to help clients reduce risks, solve problems and capitalize on opportunities. Headquartered in New York with offices in 52 cities in 29 countries, Kroll has a multidisciplinary team of more than 2,800 employees and serves a global clientele of law firms, financial institutions, corporations, non-profit institutions, government agencies, and individuals. Kroll is an Altegrity company. Kroll's website is http://www.kroll.com.

About The Economist Intelligence Unit

The Economist Intelligence Unit (EIU) is the world's leading resource for economic and business research, forecasting and analysis. It has provided accurate and impartial intelligence for companies, government agencies, financial institutions and academic organisations around the globe 1946. The EIU is headquartered in London, UK, with offices in more than 40 cities and a network of some 650 country experts and analysts worldwide. It operates independently as the business-to-business arm of The Economist Group, the leading source of analysis on international business and world affairs. More information is available at www.eiu.com.

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