Fraud Barometer: More cases but less loss?

in Advisory, 09.02.2016

KPMG’s Fraud Barometer 2015, which examines fraud cases convicted by Swiss courts and made public in the media, reveals that in 2015 there were 91 cases of fraud, which is the highest number since KPMG started measuring big frauds in 2008. At the same time the damages are at their lowest since 2008 (but at CHF 280 million, still substantial!). What could possibly explain these results?

Does a one-year jump in cases really mean that there is more fraud going on?

With 91 cases in 2015, up from 77 in 2014, we saw an increased number of cases that were arraigned in court and made public. However, we have to understand that these 91 cases are only the biggest cases in Switzerland, i.e. the ones that were brought to court and which were disclosed to the media. This means that differences in numbers can appear over the years and that the number of cases can be influenced by incidental factors.

Fraud Barometer 2015

Interestingly, we also see that the losses have gone down. So it is hard to discover a trend. Therefore it might be interesting to compare this data with the broader crime statistics of Switzerland. If we look at the total of crime statistics of the past 6 years for all property-related crimes (fraud, theft, shoplifting, etc.) we see that the reported crimes are also fluctuating with many thousands per year. So it is quite hard to predict a trend when it comes to crime statistics.

Switzerland: Property related crimes reported to the police

Property related crimes

Source: Criminal offences registered by the police

What we do know is that not every case of fraud is detected, not all detected cases of fraud are reported to the police, not all reported cases of fraud are brought to trial, and not all trialed cases of fraud are sentenced. Therefore, the 91 biggest cases of fraud (with losses exceeding CHF 50,000) are probably only the tip of the iceberg! And 400,000 reported cases of property crimes on a Swiss population of 8.2 million is also something to consider, because it is a large number!

Does a decreased financial loss mean there is less fraud going on?

While CHF 280 million in losses due to fraud is a high number, it is nonetheless substantially lower than the amounts we saw in previous years. There are two possible explanations for this:

The first explanation is that in recent years there were some extremely big cases where the loss amounted to about CHF 100m in each case, thus skewing the results. But even if we correct for these extreme cases, we see a decline in the average loss per case.

This leads to a second possible explanation: organizations are detecting fraud earlier and so reduce the amount of loss. Fraud, misconduct and non-compliance have become focal points over the last few years as there were several high profile cases in the media, on the one hand, and on the other hand, supervisory authorities stepped up their efforts in battling misconduct. This has had the effect that organizations have taken to installing all kinds of risk management measures to enhance compliance and combat fraud. We see this also in the sizes of compliance departments within companies (and the long list of job vacancies). So when organizations take more steps to prevent fraud they will:

  1. initially detect MORE fraud (hence, the more cases)
  2. detect fraud EARLIER (hence, the lower amount)

While it is not clear whether this hypothesis plays out fully because the dataset we have is too limited, but other research on codes of conduct and whistleblowing measures seems to corroborate this effect as well.

Weaker victims are targeted more frequently

If we follow the reasoning that organizations undertake more to set up fraud prevention and enhance compliance measures, we can also predict a change in the victims targeted. Less well-developed organizations and private persons become more attractive for fraudsters because professional business organizations are better safeguarded. When we look at the results of the Fraud barometer we see this with a rise on the “other” category in the victims table.

Indeed, the 2015 KPMG Fraud Barometer points out that these days, charities and not-for-profit organizations are targeted often, which is should have these organizations’ alarm bells ringing as fraud is often more than just damage in the form of monetary loss. It also comes with reputational loss which is detrimental for charities and not-for-profit organizations as they often rely on donations from the public at large. But the public might hesitate to donate to an organization which seems an easy target for fraudsters.

Fraud Barometer 2015

This effect is also noticed in the UK, where KPMG also monitors big fraud cases. The UK Fraud Barometer showed that more fraudsters target the poor and the vulnerable. There was in 2015 a marked increase in fraudsters targeting individuals and families, particularly those in financial distress, stealing £156m.

Prevention is key: fraud risk management

An old saying says an ounce of prevention is worth a pound of cure. The same goes for fraud. Fraud prevention is a good investment if we consider the costs involved in responding to fraud. Fraud prevention measures are not expensive or a nice-to-have. We recommend that every organization of a certain size at least implement the following elements:

Prevention

  • Fraud policy
  • Code of Conduct and subsequent policy structure
  • Yearly fraud risk assessment
  • Governance: a three lines of defense model (first line is the regular internal controls, second line is the risk management and compliance department, third line is the internal audit department)
  • Employee due diligence
  • Third-party due diligence
  • Training and communication on ethics and compliance

Detection

  • Whistleblower mechanism
  • Auditing and monitoring
  • Forensic pro-active data analysis

Response

  • Fraud response plan
  • Forensic investigation capabilities
  • Fraud remediation procedures

The depth and broadness of these measures can vary for each organization but especially charities and not-for profit organizations should understand that they are more attractive for fraudsters than they might think. This would require that they should also step up their efforts on fraud risk management.

 

 

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