Trust, Fraud and Business

I was recently doing some research and came across some startling facts from KPMG contained in The 2007 KPMG Fraud Report for Europe, Middle East and Africa.

I thought that only crooks committed fraud.

I was in the “business”, I committed major fraud myself and I met a large number of fraudsters who operated in a number of different ways while in prison.

But I always thought that we (the fraudsters) were the exception, the scrapings at the bottom of the barrel of society if you will, those whose moral confusion and adaptable personal integrity allowed them to commit fraud.

But I was wrong.

Facts from the report establish that in 86% of the cases investigated the fraud was perpetrated by management. Of this figure 11% were board members, 49% were senior management and 26% were management.

If you relate this to the general figures that estimate that 85% of companies will fall victim to fraud, losing up to 6% of turnover a horrific picture of corporate integrity starts to emerge.

Relate this further to the fact that fully one third of bankruptcies are as a direct result of fraud and theft.

And it is estimated that only 48% of fraud is discovered (or reported) and of that 48% only 40% of the perpetrators are sentenced.

The report also highlighted the fact that trust was always the major risk factor in fraud.

Those in a position of trust were committing fraud almost at will, having the ability to cover it up.

What do these figures say about business?

Remember these figures are from 2007 when times were good, who knows what they are now that times are tough.

We are good at explaining these things away, of making excuses.

The report highlights rationalisation as the major factor in fraud.

This is borne out by one of my experiences in jail with a fellow sentenced for fraud. He was horrified with the label of fraudster and maintained that he was only a businessman who operated in “the gray area of business”.

You try and figure that rationalisation out, I never could.

His attitude is, I would imagine, quite common in business.

Anyone in business who studies this report can no longer say that “they” are committing fraud.

It is us; it seems that we are rotten to the core.

On a personal note at least I feel better after reading the report.

I have no reason to feel isolated. I was one of the majority, one of the “boys”, those prepared to abuse the norms of business, society and own integrity.

I am not alone.

The people committing fraud in South Africa are just like you and me; in fact they are you and me.

We should never forget that our major businesses and organisations are made up of people just like you and me no matter what their elevated positions may be.

The executives, shareholders and other stakeholders of businesses are subject to the same temptations, opportunities, threats and pressures as the rest of us.

And a business reflects the approach and attitudes of its people.

So the attitude of business must change to reflect a more moral and ethical approach. Our businesses should be above reproach.

Why is corporate fraud such a problem?

I believe that it is not only the general moral confusion that most of us suffer from (80% of people will commit fraud if the motive and opportunity is right) it is also the demands placed upon people in business by the markets, shareholder expectations or the demands of superiors to meet targets.

This is further exacerbated by our natural greed, maybe not for money per se but for recognition, promotion or bonuses.

Remember that 86% of the corporate fraud is committed by management and board members.

What could explain this? Are they just bad people, crooks?

No I don’t believe so.

I quote from Managing the Businesses Risk of Fraud: A Practical Guide, sponsored by the Institute of Internal Auditors, The American Institute of Certified Public Accountants and the Association of Certified Fraud Examiners.

“A 2007 Oversight Systems study5 discovered that the primary reasons why fraud occurs are “pressures to do ‘whatever it takes’ to meet goals” (81 percent of respondents) and “to seek personal gain” (72 percent). Additionally, many respondents indicated that “they do not consider their actions fraudulent” (40 percent) as a reason for wrongful behavior.”

Are the pressures exerted on boards and executives by market conditions, shareholder expectations or performance pressures from superiors forcing people into fraud and unethical behaviour?

Or are they just greedy crooks?

They cannot be, not 86% of them.

Our corporate society needs to take a careful, brutally honest look at corporate governance issues, the expectations they create in the markets and the performance pressures that flow from those expectations and the pressures they place on their people.

They need to manage expectations so that people don’t feel obliged to “do whatever it takes”.

Above all they must have an acceptable moral and ethical code in the organisation and a professional Fraud Management Program in place that applies from the top of the company right to the bottom.

They must have regular training and education for all management and staff on fraud awareness, prevention and management.

And they must communicate their Fraud Management Program to the investing public, other stakeholders and staff.

The commitment to effective and rigorous Fraud Management starts from the top of the organisation and filters down.

A more stringent code of conduct reflecting the fact that those at the top will be held to a higher standard and stricter code of conduct must be composed and must be communicated to all.

Set the example from the top.

The board and senior management must be morally impeccable if they expect to eradicate fraud in the company.

The situation is not beyond our grasp but we must act now, structure a Fraud Management Program, invest in staff education and communicate your commitment to the eradication of fraud in your organisation.

Apart from all the other benefits just think what you could do with 6% of TURNOVER on your bottom line.

That may relieve some of the pressure and silence your critics.

Act today, tomorrow may be too late.