Propelled by a sharp rise in supply-chain misdeeds, the number of companies hit by fraud has risen by 9 percent in the past year, according to a new study.
Seventy percent of survey respondents polled in July and August said their companies experienced fraud in the previous 12 months, compared to 61 percent for the prior 12-month period, according to the 2013 Kroll Global Fraud Report, which surveyed 901 senior executives, 53 percent of them at the C-suite level.
Among the different varieties of cheating, the steepest ascent was in vendor, supplier and procurement fraud, which jumped from 12 percent last year to 19 percent this year.
Other major sources of fraud cited by respondents included theft of physical assets (28 percent), information theft (22 percent) and internal financial fraud (16 percent). (See chart below.)
Among companies hit by fraud in the last 12 months, 30 percent of the deeds were done by vendors or suppliers, according to the Kroll-sponsored report, performed by the Economist Intelligence Unit. (The EIU’s parent company, The Economist Group, is a minority owner of CFO.)
Frauds in another supply-chain-related category, “management conflict of interest,” shot up 6 percentage points, reaching 20 percent of the companies studied this year.
Dave Holley, a senior managing director of Kroll and head of the investigations and compliance firm’s Boston office, defines such schemes as “non-arms-length transactions in which the head of a manufacturing unit in mainland China, for example, might establish a vendor to service that business — completely undisclosed of course, but also, and particularly in recent cases, with very little effort to hide it.”
Such double-dealing can be quite bold. The official of one client company that Holley’s firm investigated for setting up a vendor to sell to the official’s own company “actually put his or her own name on the registration document of the vendor firm,” Holley said.
While not all fraudsters are as barefaced, Holley says that just among the firm’s Northeast-based clients he sees such offshore management conflicts of interest six to 12 times a year. The reason? “There is a lot of faith and trust that is placed in these subsidiaries and operating units overseas, and a lot of the checks and balances that are present here don’t make it over there.”
Holley attributes some of the rise in supply-chain fraud to corporate budget cutting. Rather than looking at internal audits and investigations as potential money makers, senior management tends to look merely as costs. “I think organizations are trying to do the least they can do in order to sleep at night,” he says.
Instead of paying for costly investigations, many companies seem to be practicing a cheaper form of fraud prevention: risk avoidance. Forty-six percent of the companies studied have shied away from expanding into one or more foreign markets, citing corruption as the chief reason.