Companies Look Harder, Find More Fraud

Internal controls, audits supplant ''notification by employees.'' Also: Boeing CEO follows CFO out the hatch; at Disney, who's the leader of the club?; and when a CFO-to-be withdraws, do shareholders follow?


According to a new KPMG survey, 75 percent of executives said they have uncovered fraud in their organizations in the last year, compared with 62 percent of executives responding to a similar survey in 1998.

Employee fraud was the most prevalent, reported the executives, but financial reporting and medical/insurance fraud were much more costly.

In fact, the number of companies that said that they were uncovering financial reporting fraud more than doubled, to 7 percent in 2003 from 3 percent in 1998. The average cost? More than $250 million per episode.

The overall cost of fraud is higher, too. In 2003, 36 percent of companies reported $1 million or more in costs due to fraud, compared with 21 percent in 1998.

“Companies and their boards are more intent on uncovering fraud and misconduct as a direct result of corporate governance legislation and other mandates, including the Sarbanes-Oxley Act, put in place over the past two years,” said Richard H. Girgenti, partner in charge of KPMG’s forensic practice, in a statement.

Yet surprisingly, 22 percent of the respondents said they do not plan to implement new controls, even though many companies must document and attest to their internal controls under Sarbanes-Oxley. Those companies may be at greater risk, said Girgenti, not only for fraud and misconduct, but also for “higher fraud costs and damage to the company reputation when incidents do occur.”

Even so, the survey found that management is generally taking a more active approach in detecting fraud. Internal controls are being used by 77 percent of companies — a sizable increase from the 51 percent in the survey five years ago. Internal audits, now being used by 65 percent of companies, were used at 43 percent at the time of the previous survey

On the other hand, five years ago “notification by employees” was the most common means that companies used to uncover fraud. At the time it was cited by 58 percent of companies, compared with 63 percent today, KPMG noted.

Companies are also taking more-decisive action when they detect fraud. For example, 64 percent brought civil or criminal charges, compared with just 37 percent five years ago, and 64 percent notified a regulatory or law enforcement agency, compared with 34 percent previously.

Despite the increase in the detection of fraud, 43 percent of the executives surveyed predict a decrease in fraud incidents in the next 12 months; only 7 percent expect an increase.

Other survey findings:

  • Some 60 percent of companies reported being victimized by employee fraud, almost twice the rate of the next-most-prevalent category.
  • Collusion between employees and outside third parties — such as a vendor offering kickbacks if a company employee buys its product — was reported by 48 percent of respondents, compared with 31 percent in 1998.

KPMG surveyed executives at 459 U.S. public companies with revenues of more than $250 million, and at state and federal government agencies.

Boeing CEO Follows CFO Out the Hatch

Phil Condit resigned as chairman and CEO of aerospace giant Boeing one week after the company fired chief financial officer Mike Sears for violating company ethics policies.

Lewis E. Platt was named non-executive chairman, and Harry C. Stonecipher was named president and CEO, effective immediately. Platt has been a member of Boeing’s board of directors for four years; he is a retired chairman of the board, president, and CEO of Hewlett-Packard Co. Stonecipher retired from Boeing in 2002 after working closely with Condit for five years in several roles, including vice chairman, president, and chief operating officer; he has also served as a Boeing director for six years.

“Boeing is advancing on several of the most important programs in its history and I offered my resignation as a way to put the distractions and controversies of the past year behind us, and to place the focus on our performance,” Condit said in a statement. Added Platt: “We accepted his decision with sadness, but also with the knowledge that changes needed to be made. The board is confident that the new leadership will bring a renewed focus on execution and performance.”

Boeing, the No. 2 U.S. military contractor, has been embroiled in a number of scandals of late, in addition to the Sears controversy.

In July, the U.S. Air Force suspended Boeing’s space units from seeking military contracts because the company had used stolen Lockheed Martin Corp. documents to win rocket contracts, according to reports. And last week, the Pentagon said it would consider delaying a $27.6 billion contract to lease and buy 100 air refueling tanker jets from Boeing, according to published reports.

Meanwhile, Boeing has been losing market share to Airbus. On Monday, Qantas Airways said it ordered 23 Airbus A320s worth about $1.15 billion for its new low-cost carrier.

Condit will stay with the company until March in order to assist the transition.

“He realizes that in order for Boeing to make sure the Pentagon doesn’t delay any future contract negotiations — especially with the tankers and the $50 billion Future Combat Systems program — he’d pretty much take the blame and hopefully prevent any prolonged investigations,” Robert Friedman, an analyst at Standard & Poor’s, told Bloomberg.

At Disney, Who’s the Leader of the Club?

Roy Disney, the last remaining Disney family member on the Walt Disney Co. board of directors and a frequent critic of chairman Michael Eisner, resigned Monday as vice chairman of the board in what appears to be a power struggle at the media and entertainment giant.

Stanley Gold, who has been investing on Roy Disney’s behalf for decades, also resigned from the board.

The company said Disney simply reached its mandatory retirement age requirement of 72.

However, Roy Disney — whose uncle Walt and father Roy founded the company — said in a letter to Eisner and the company’s board of directors that he was forced out, and called on Eisner to resign or retire. “After 19 years at the helm you are no longer the best person to run the Walt Disney Company,” he stated, adding that the company “deserves fresh, energetic leadership.”

Specifically, he criticized Eisner for the poor performance of the ABC television network; his micromanagement; timid investments in the theme park business; the company’s creative brain drain; its failure to forge a relationship with partners such as Pixar, Miramax, and the cable companies; and Eisner’s failure to develop a succession plan.

In his resignation letter, Gold accused the board of being “insular” and “serving as a bulwark to shield management from criticism and accountability.”

He also called into question the official reason for Roy Disney’s forced retirement, noting that “these very rules regarding age, by their terms, only apply to non-management directors, not to Roy, who, as the Committee knows, has been deemed a management director.”

Added Gold, “The real reason for the Committee’s action is that Roy has become more pointed and vocal in his criticism of Michael Eisner and this Board. This is yet another attempt by this Board to squelch dissent by hiding behind the veil of ‘good governance.’ “

When a CFO-to-Be Withdraws, Do Shareholders Follow?

Investors in auto-parts supplier Visteon Corp. were spooked Friday when George Strickler, who was to have become the company’s chief financial officer on December 1, withdrew from the job. Visteon’s stock dropped nearly 7 percent on the news.

Strickler, who had been CFO at BorgWarner Inc., withdrew for personal reasons unrelated to the company, Visteon said in a press release. Daniel R. Coulson agreed to continue as chief financial officer on an interim basis, added the company, which will restart its search for a new CFO.

On Monday the stock rebounded by about 6 percent to close just a bit below where it stood when Strickler made his unexpected announcement.

In other high-profile CFO appointments, Kmart Holding Corp. named James D. Donlon III as senior vice president and chief financial officer, reporting to president and chief executive officer Julian C. Day. Donlon was previously controller at DaimlerChrysler Corp.

And Starwood Hotels & Resorts Worldwide Inc. appointed Vasant M. Prabhu to executive vice president and chief financial officer, reporting to Barry Sternlicht, Starwood’s chairman and chief executive officer. Prabhu most recently served as executive vice president and chief financial officer for food retailer Safeway Inc.

The company added that Ron Brown, who has served as Starwood’s executive vice president and chief financial officer since 1995, will assist Prabhu during the transition and has been named executive vice president of strategy.

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