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News from Members Beware the Trojan Horse: Fraudsters Hiding in Plain Sight

Beware the Trojan Horse: Fraudsters Hiding in Plain Sight

by KPMG Romania January 23, 2014

Website www.kpmg.ro

KPMG report reveals profiles of fraudsters and trends in fraud in the corporate environment
KPMG’s white paper ‘Global profiles of the fraudster’ sets out in detail features of fraudsters identified through an examination of 596 fraud cases investigated by KPMG member firms worldwide, including cases in Romania.
In these turbulent economic times businesses and investors alike should be aware that fraudsters have diverse profiles. Who commits fraud? What characteristics should you look for? The Global Profile of the fraudster, investigated by KPMG, reflects that most commonly he or she is employed by the victim organization (61 percent), colludes with others (70 percent) and has been employed for more than six years by the victim organization (42 percent) before committing an act of fraud.

“Fraud specialists have long debated whether it is possible to develop a profile of a fraudster accurate enough to enable organizations to catch people in the act of fraud or even beforehand,” says Déan Friedman, leader of KPMG’s Investigations Network in the Europe, Middle East and Africa region for the Global Forensic practice. “The prediction of a crime is, at least for now, the subject of science fiction. But an analysis of the constantly changing nature of fraud and the fraudster can help organizations stiffen their defenses against these criminal activities. Forewarned is forearmed.”

Key characteristics
The Global characteristics of the typical swindler include the following:
• Age between 36 to 45 years (with 70 percent of fraudsters between the ages of 36 and 55).
• Employed in an executive, finance, operations or sales/marketing function.
• Holds a managerial or executive position (25 and 29 percent respectively).
• Employed in the organization in excess of six years.
• An opportunistic fraudster – first-time offender, trusted employee, in a position of responsibility, perpetrator’s alleged behavior comes as a surprise to others. Predators, who seek out an organization to start a scheme almost immediately upon being hired and deliberately defraud the organization with little remorse, are less common.

On the other hand, the typical characteristics of fraudsters investigated in Romania by KPMG are the following:
• 26 to 35 years old (with 62 percent of fraudsters between the ages of 26 and 35).
• Employed in a managerial or executive position.
Motivated by greed (77 percent of fraudsters).
• An autocratic leadership style (31 percent of fraudsters).
• Persistent (92 percent of acts of fraud continued for 3 or more years).

Collusion with third parties

The Global Profile indicates that 70 percent of fraudsters did not work alone in the commission of their crimes. In Romania all cases surveyed, involved collusion. Richard Perrin, Partner, Risk Consulting, KPMG in Romania, comments: “The results of this study indicate that during the economic crisis, fraudsters concentrated on funneling money out of companies by procurement frauds and other misappropriation of assets. They used the help of friends or former associates to keep their actions concealed, on average for 3 to 5 years. Almost half of fraudsters appear to use the proceeds of fraud for financing their lifestyle, at the expense of the organization. Consequently, organizations must probe deeper before they engage with a potential business partner, to ensure that there are no conflicts of interest between their employees and the potential business partner”.

The need for oversight
The Global study found that over half (54 percent) of acts of fraud were facilitated by weak internal controls. The Romanian examples however indicate that many acts of fraud were committed through management override of existing controls – in 38 percent of the acts of fraud investigated, unlimited authority of management was a key factor in the perpetration of the fraud.

Jimmy Helm, KPMG Central & Eastern Europe Forensic Lead Partner, comments that: “The survey findings further indicate that shareholders, supervisory bodies and/or stakeholders need to increase their oversight over the activities of management and to hold them accountable for failures in the internal controls and processes of the organization. One way of increasing enterprise-wide controls is to consider the implementation of an effective whistle-blowing mechanism within the organization – the majority of cases investigated in Romania by KPMG arose from an informal tip-off. This observation is further strengthened by the finding that in those instances where the fraud was identified through whistle-blowing, the life-cycle of the fraud perpetrated appears to have been less than where the fraud was discovered through traditional means such as internal audits. The probability of early detection is in itself a preventative control, and early detection obviously reduces the potential losses that the organization might suffer as a result of fraud”.

About the survey
Data was gathered from fraud investigations conducted by KPMG member firms’ forensic specialists in the Europe, Middle East and Africa (EMA) region, North and South America, as well as Asia-Pacific between August 2011 and February 2013. KPMG analyzed a total of 596 fraudsters who were involved in acts committed in 78 countries. The survey examined “white collar” crime investigations conducted across the regions where the perpetrator was known and detailed contextual information on the crime available. It incorporates the observations and views of KPMG Investigations leaders in 42 countries across the world. The report builds on similar studies from 2011 and 2007.

About KPMG
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 155 countries and have 155,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
KPMG in Romania and Moldova operates from six offices located in Bucharest, Cluj-Napoca, Constanta, Iasi, Timisoara and Chişinău. We currently employ 700 partners and staff; Romanians and Moldovans as well as expatriates.

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