Employee Corporate Fraud Continues to Rise

Employee Corporate Fraud Continues to Rise

Reports of fraud by corporate employees have continued their ceaseless rise so far this year, according to the Quarterly Corporate Fraud Index. The current drivers are increasing awareness of fraud, mandated whistle-blower protections, and changing company cultures.

The index measures reported frauds as a percentage of all compliance-related reports. Most recently, for the second quarter of 2012, that ratio climbed to 22.9%, up from 21.7% for the same quarter in 2011.

“This index essentially has been going up since the day we started tracking it [in 2005],” says Jimmy Lin, vice president of product strategy and corporate development at The Network, a provider of governance, risk, and compliance solutions that conducts the quarterly analysis in conjunction with BDO Consulting. The index looks at compliance-reporting activity at more than 1,400 clients of The Network worldwide, including nearly half of the Fortune 500.

Corporate employees are simply becoming more aware of organizational issues and more willing to report compliance errors, especially fraud, Lin says. Fraud is more often covered in the news media these days, he notes. Also, he claims, the client companies have become more sophisticated in educating employees on what fraud looks like (which is a service The Network provides). “We see the index going up and up as a positive. Companies are getting more interested in a holistic approach than a check-box approach to compliance.”

Employers are highly motivated to hear about alleged internal fraud before an employee instead makes an initial report to the Securities and Exchange Commission. “Even if it doesn’t turn into anything significant, they want to catch wind of it first,” notes Lin. Companies know that “even a hint of potential fraud issues in their organization, whether true or not,” puts their reputation at risk, not only with the public but also internally: “Employees may begin to wonder about the company’s ethics.”

The whistle-blower protections under the Dodd-Frank Act, such as prohibiting retaliation against whistle-blowers, also may be having an impact. Companies are “couching it as building a better culture,” says Lin.

Jonny Frank, a partner at forensic-accounting firm StoneTurn Group, points out that the SEC has offered incentives to encourage employees to use company-compliance hotlines. But another reason for the upward trend may be that the government expects companies to make the hotlines accessible to such third parties as customers and suppliers, as well as to employees.

And a growing number of companies annually require employees to certify as to their knowledge of wrongdoing. “It’s one thing to put the burden on employees to come forward; it’s another to ask them to confirm they don’t know of any wrongdoing,” Frank says. That trend “suggests a culture where employees see that the company is serious and not just giving lip service to fraud.”

Frank says compliance officers generally are doing a good job of pushing that message. Unfortunately, he adds, some companies’ finance teams are getting less involved as ethics and compliance controls mature. “It becomes easier for the CFO to just hand off that responsibility to compliance.”

Lin observes that organizations are vulnerable if compliance enforcement is not a pervasive theme throughout the company. If functional areas, departments, and divisions aren’t working together to make sure fraud is addressed, “then everybody is going to lose,” he says.

The CFO has a crucial role to play in measuring the financial impact and reputational damage of fraud. “The CFO should not just take an audit-type perspective,” Lin explains. Rather, he or she should be an active and strategic participant in shoring up compliance and preventing fraud.

The report from The Network and BDO Consulting also measures the raw volume of fraud-related calls. Those shot up 11.7% from the second quarter of 2011 and were up 6.0% from this year’s first quarter.

Source: CFO