KPMG Spots Red Flags for Identifying Fraudsters

Wednesday, August 17, 2011 Print Email

KPMG has released a report in which the firm identifies the key traits of employees who could be committing fraud against their employers.

The report, "Who Is a Typical Fraudster," is based on 348 cases that the firm analyzed and investigated for clients across 39 countries between 2008 and 2010. The report found that the warning signs were missed by companies in over half the cases.

Philip D. Ostwalt, who leads the Forensic Services Investigations Network for KPMG LLP, said the firm’s analysis identified the typical fraudster as a 36- to 45-year-old male in a senior management role in the finance unit or in a finance-related function; and an employee for more than 10 years who usually would work in collusion with another individual.

“Knowing the common traits of a fraudster can help employers be better prepared to prevent damaging incidents fr om happening in their organizations,” said Ostwalt.

The firm said to beware of a senior employee who is known as an aggressive workaholic, and seems stressed, yet rarely takes vacations. The employee declines promotions, and zealously protects his business unit from outside scrutiny while personally handling choice vendors.

The report found that 56 percent of the frauds that KPMG member firms investigated had shown one or more red flags that should have brought management attention to the issue. However, in only 10 percent of those cases did management act before opening a full investigation.

The red flags of fraud include:
• A business unit thrives despite competitors struggling with declining sales and profits.
• Excessive pressure is exerted on senior managers and employees to achieve unusually tough profit targets and business goals.
• Complex or unusual payment methods and agreements occur between the business and certain suppliers/customers.
• The business may have multiple banking arrangements rather than one clear provider–a possible attempt to reduce transparency over its finances.
• The business consistently pushes the lim its and boundaries regarding matters of financial judgment or accounting treatment.
• There is excessive secrecy about a function, its operations and its financial results, and the unit is not forthcoming with answers or supporting information to internal inquiries.
• Increased profitability fails to lead to increased cash flows.

In addition, the KPMG analysis found that a fraudster’s traits include:
• Volatility and being melodramatic, arrogant and confrontational, threatening or aggressive, when challenged.
• Performance or skills of new employees in their unit do not reflect past experiences detailed on resumes.
• Unreliability and prone to mistakes and poor performance, with a tendency to cut corners and/or bend the rules, but makes attempts to shift blame and responsibility for errors.
• Unhappy, apparently stressed and under pressure, while bullying and intimidating colleagues.
• Being surrounded by “favorites,” or people who do not challenge the fraudster, and micromanaging some employees, while keeping others at arm’s length.
• Vendors/suppliers will only deal with this individual, who also may accept generous gestures that are excessive or contrary to corporate rules.
• Persistent rumors or indications of personal bad habits, addictions or vices, possibly with a lifestyle that seems excessive for their income, or apparently personally over-extended in their finances.
• Self-interested and concerned with their own agenda, and who has opportunities to manipulate personal pay and rewards.

Companies should consider whether their internal controls and other processes remain relevant as market conditions and internal growth goals change, recommended Ostwalt.

“Senior management must endorse and support a robust ethics and compliance policy that advocates doing the right thing, provide an easy way for employees to report an issue without fear of retaliation, and conduct appropriate due diligence such as vendor screening and background checks on new hires and those being promoted to material positions,” Ostwalt said. “It can be helpful to conduct pulse checks on how all employees view ethics and compliance within the organization. In addition to monitoring potential risks through communications and feedback from employees, senior management must be aware of the unique fraud risks to their company and industry, in addition to analyzing cases brought to their attention for trends on potential future issues or that demonstrate a breakdown in their internal controls processes,” said Ostwalt.

Investigations of the fraudulent activity resulted in disciplinary action in 40 percent of cases; enforcement actions (includes regulatory, legal and police) in 45 percent of cases; civil recovery in 23 percent of the cases; resignation or voluntary retirement in 17 percent of the cases; out-of-court settlements in 6 percent of the cases, and no action or sanction in 3 percent of the cases.

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