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 4

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) 5

6 Opportunity MotivationRationalisation Fraud Triangle Cressey’s Fraud Triangle helps explain the human process for committing fraud

7 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

8 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.

9 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

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,

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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 13

Sample profile 57% were service companies and most were private limited companies 14

40 per cent had no fraud prevention measures 15

Two thirds of organisations perceive fraud as a risk to their industry 16

31 per cent only regard prevention as “slightly important” 17

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 20

Average age of 37 with less than 5 years service 21

22 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 24

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 25

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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 29

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 30

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Contact details Richard Trafford   33

34 Questions ?