Senior Management/Board Increasingly Commit Fraud in Companies

A new KPMG survey reveals that business fraud is on the increase, with a significant proportion committed by those with board-level positions. Company bosses are responsible for an increase in fraud across the globe. The KPMG study found that board members at divisional, subsidiary and corporate level, commit nearly one fifth of fraud — an increase from 11 per cent in 2007 — to 18 percent in 2011. Of the various board roles, CEOs account for an increase in committed fraud from just 11 percent in 2007 to 26 percent across the four-year period.

Often long-serving and more senior employees will be better able to override controls and have accumulated a good deal of personal trust, so will be less suspected, and they are most prone to committing embezzlement and/or procurement fraud (these account in aggregate for just over 50 percent of the 348 cases). Examples include false billings by a supplier to fund kick backs to a senior employee; employees accepting bribes from a contractor in exchange for signing off inflated project costs; and supplier collusion with victim company employees leading to overbilling.

Richard Powell, KPMG’s EMA forensic investigations network lead, concludes from the study: "Given the findings from our survey of red flags not being followed up, coupled with increased recessionary pressures, and the impact of the credit crunch, it seems probable there will be a marked increase in the number of as yet undetected fraud cases which will surface over the next couple of years."

On May 23, I blogged about The Network, Inc., a leading provider of governance, risk and compliance  solutions, and BDO Consulting, a division of BDO USA, LLP, that had announced the first quarter 2011 findings of its Quarterly Corporate Fraud Index, a comprehensive examination of fraud incident report activity from almost 15 million employees worldwide.

For the first quarter of 2011, the Fraud Reporting Percentage (FRP), a statistic measuring fraud reporting in comparison to all compliance reporting activity from more than 1,000 organizations worldwide, was reported at 20.3 percent. The FRP statistic rose by more than 60 basis points since last quarter. FRP has increased in each of the last three quarters and stands at its highest mark since the second quarter of 2009.

According to Luis Ramos, chief executive officer of The Network, the 2011 Q1 fraud index is at a near-record high. Ramos said: “This quarter’s FRP is only 10 basis points lower than it was in 2009, one of the worst years for business on record. The increase is in line with what we are hearing from financial analysts and reinforces the trend that even in a recovering economy, fraud reporting is still on the rise.”

I find it astonishing that corporate fraud continues to increase and top management is leading the way. The increase in the FRP statistic seems to bear out the spread of the cancer that has been attacking the capitalistic system during the past 20 years or so. Remember the "Greed is Good" mantra in Wall Street? Well it's instructive to look at the entire quote by Gordon Gekko: “The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated…The  point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the            essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the uoward surge of mankind."

I believe the greed is good culture has infected society in the U.S. and contributed to our economic decline. The U.S. can stand above all others -- economically, socially and politically -- for only so long but we will eventually crumble under the weight of narcissistic behavior by our leaders as has been occurring in every field of endeavor. 

I love to read about Greek mythology because of my high regard for the ancient Greeks, Plato and Aristotle, who developed the concept of virtue. Although concern for virtue appears in several philosophical traditions, in the West the roots of the tradition lie in the work of Plato and Aristotle, and even today the tradition’s key concepts derive from ancient Greek philosophy.   

This brings me to my final point linking our economic situation today to dysfunctional, narcissistic behavior. Narcissus or Narkissos (Greek: Νάρκισσος),  possibly derived from ναρκη (narke) meaning "sleep, numbness," in Greek Mythology was a hunter who was renowned for his beauty. He was exceptionally proud, in that he disdained those who loved him. One day Narcissus saw his own reflection in the waters and fell in love with it, not realizing it was merely an image. Unable to leave the beauty of his reflection, Narcissus died. Like all mythology you need to accept the story by taking a leap of faith but it is not that far a cry from today's business and political leaders who exhibit traits of narcissistic personality disorder including egotism, vanity, conceit, or simple selfishness. Applied to a social group such as investment bankers, it is sometimes used to denote elitism or an indifference to the plight of others. Sound familiar?

Narcissus by Caravaggio
Narcissus gazing at his own reflection.

Blog by Steven Mintz, aka Ethics Sage, June 27, 2011