Fraud risk being ignored by middle market UK companies: KPMG

The UK’s middle market is failing to recognise the levels of fraud risk that their businesses are exposed to according to research conducted for KPMG Forensic. The latest poll reveals that just a quarter of companies have a fraud response plan and two-thirds of businesses don’t have a dedicated policy on fraud.

KPMG’s latest quarterly survey of Middle Market businesses (classed as having turnover of between £5 million and £500 million) shows that two-thirds of companies don’t believe that fraud levels are rising, despite the fact that the latest KPMG fraud barometer shows that it is continuing to rise year on year.

The results also show that that there is confusion in this sector on how to actively control fraud risk. 76 percent of respondents agreed that managing the risk of fraud is an important issue for them, but when questioned in depth about what measures they have in place to prevent fraud or how they react if a fraud is discovered, the results demonstrate how weak the sector is in taking proactive preventative measures.

Hitesh Patel, Director of Fraud Investigations at KPMG Forensic said “Many middle market companies have not developed sufficiently effective systems and controls to help prevent fraud from occurring. Part of the reason for this is that they are subject to less stringent regulations, and partly it is because the owners who often manage the business mistakenly believe that they understand all that is going on and have a ‘finger on the pulse’ of the organisation, even though fraud by its very nature is often concealed. These factors play into the hands of the fraudsters, many of whom are long standing trusted employees in a position of authority who can engineer weak systems that they can exploit.”

“Almost three-quarters of the companies that we surveyed said that a formal code of conduct or ethics constituted their anti-fraud programme but this is not going to stop the determined fraudster. A company needs to demonstrate that it has a robust response plan and effective controls in place to act as a deterrent, and that it takes the issue seriously by acting decisively if it discovers fraud. It is important that their anti-fraud stance becomes part of the company’s culture, otherwise fraudsters will take advantage and work around their weak systems. It is more effective to spend time developing systems to prevent fraud than dealing with the damaging fall-out from a successful fraud which in extreme cases can lead to the collapse of a business.”

Theft was highlighted by over a quarter of the respondents as the fastest growing problem for middle market businesses. Fiddling expenses was the second fastest growing problem (15 percent), but almost a quarter of respondents were unable to identify the biggest threat for their organisation.

Only 5 percent of respondents listed accounting manipulations and processing fake invoices as a growing problem for them.

Hitesh Patel warns “Most companies identify theft as a key area to target. One of the growing areas of theft however which they may not have considered is that of intangible assets - intellectual property in particular - which can have severely damaging effects. It is interesting to see that nearly half of our respondents said that they have a rigorous recruitment screening plan in place to help in their protection against fraud, but it’s essential that this is more than just a check on references which is an ineffective deterrent for a resourceful fraudster."

“What is surprising from these results is that so few respondents listed fraud from the finance department as a problem. Analysis by KPMG Forensic last year showed that the finance department is the most likely business area that the fraudster worked in or was responsible for (42 percent of cases). In the smaller business where dividing roles among people to act as a control is not as easy, it is essential to have robust controls on the finances of a business – this is often a key target area for a fraudster.”

Three quarters of the respondents said that they were not aware of any fraud happening in their company over the last year and when asked how they would deal with the discovery of an incident over half said that they would leave it for senior management to consider. 28 percent said that they would follow the procedures set out in their fraud response plan.

Lack of management time was cited as the biggest barrier to managing a company’s fraud risk by 27 percent of respondents, while 17 percent put it down to lack of skilled resources.

Hitesh Patel concludes: “The middle market needs to devote time and resource to really get to grips with the issue of fraud and how it could affect them. If they do become a victim of fraud, particularly where senior employees are involved, a great deal of their time will be spent resolving the problem, stemming the flow of leakage and protecting any damage that might result to their reputation.”

“Now is the time to really attack the issue. With personal debts the highest on record and a slide in the economy putting individuals under pressure, the temptation to work around loose controls and take advantage of weaknesses in a company’s defence against fraud will be high, and the middle market needs to be more prepared then ever to protect themselves from this growing threat.”

www.kpmg.co.uk

•Date: 6th September 2005 • Region: UK• Type: Article •Topic: BC general
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