Amid a continuing economic downturn, renewed government regulatory enforcement and with trillions of dollars of government money infused into the U.S. economy, nearly one-third of corporate executives expect fraud or misconduct to rise in their organizations, according to a survey by the audit, tax and advisory firm KPMG LLP.
In addition, two-thirds of the respondents said combating fraud and misconduct may require more improvements in corporate internal control environments, the survey found.
As many as 32 percent of the executives surveyed said they expected fraud or misconduct to rise in their organizations in one of three categories: financial reporting, asset misappropriation, or as another illegal or unethical act. In addition, inadequate controls (66 percent) and management override of controls (47 percent) were viewed as the top enablers of fraud and misconduct, the survey found. Meanwhile, 71 percent of respondents said the potential loss of public trust was their top concern if fraud or misconduct were revealed in their organizations.
“Despite some very high profile prosecutions and the pledges of rigorous enforcement by various government watchdogs, one of the country’s most troubled economic periods has created a perfect storm of increased pressures, new opportunities and dangerous rationalizations to allow business fraud and misconduct to occur,” said Richard H. Girgenti, national leader of Forensic for KPMG.
“Our findings underscore that pressures to stem the tide of reduced earnings through these difficult economic times along with the availability of trillions of dollars infused by the government to stabilize the market could heighten the risk of fraud and misconduct,” Girgenti said.
Girgenti said the KPMG study found that 65 percent of executives perceive fraudulent and illegal acts to be significant risks in their industries.
Executives’ expectations regarding changes in the incidence by type of fraud:
— Eight percent of respondents said fraudulent financial reporting would
increase, while 66 percent said it would stay the same;
— One-quarter of respondents expected asset misappropriation to rise,
and 60 percent said it would stay the same;
— 20 percent of those surveyed said they expected other illegal or
unethical acts to rise, while 60 percent said they would remain the
same.
“Executives say that in instances of fraud increasing, they worry about a further erosion of public trust at a time when such trust is near an all-time low,” said Girgenti.
Girgenti said a volatile mix of issues dominates the market as tough economic times have pushed companies to do more with less, cutting payrolls, pushing employees to maintain output, and causing workers to feel driven to do “whatever it takes” to achieve earnings goals. Meanwhile, government enforcement has hit a fever pitch to uncover wrongdoing in the market.
“This survey also uncovered a need for improvements in corporate programs designed to prevent, detect and respond to wrongdoing,” said Girgenti:
— The executives surveyed said improvements were needed around
communication and training (67 percent), technology-driven techniques,
e.g., auditing and monitoring (65 percent), and fraud risk assessments
(60 percent).
— About 27 percent of respondents reported that their organizations did
not fully understand how to conduct investigations, and at what point
the board of directors should be alerted to potential concerns. In
addition, 33 percent said they lacked protocols on how to remedy
control breakdowns.
It is likely that regulatory changes are imminent as a result of the economic downturn and that government enforcement will increase, Girgenti said, so “companies that strengthen their corporate controls and compliance programs to confront fraud and misconduct risks have a better chance of prospering as the market improves.”