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By CYRIL TUOHY, managing editor of Risk & Insurance®

When the three quarters of survey respondents report they have been victims of fraud and the statistic is reported as "good news," it's a signal of just how pervasive fraud has become.

"A positive finding in this year's report is a drop in the overall prevalence of fraud -- from 88 percent of respondents having suffered an incident in the past 12 months to 75 percent," wrote Tom Hartley, global head of business intelligence and investigations with Kroll, the security and investigations company.

The overall decline in the incidence of fraud is good news, but Hartley also wrote that fraud involving intangible assets has become more common.

The report found an increase in fraud affecting the following categories: management conflicts of interest (2 percent increase), supplier procurement (5 percent increase), internal financial fraud (6 percent increase), corruption and bribery (9 percent increase), mismanagement (3 percent increase) and market collusion (2 percent increase).

One in six companies surveyed were affected by one or more of these types of fraud, the survey found.

"As a result, instead of an environment where there are two leading risks (theft of physical assets and information) and a number of smaller issues, companies now face a range of more widespread dangers," the report said.

Categories on the decrease include theft of physical assets, theft of information, compliance breaches and money laundering, the report found. The number of companies that reported being affected by intellectual property theft remained the same, the report also found.

The proportion of companies describing themselves as highly or moderately vulnerable to management conflicts of interest in this year's survey was 44 percent, an increase of 17 percentage points over the previous survey.

The survey found 42 percent of companies vulnerable to vendor, supplier or procurement fraud, an increase of 16 percentage points. The survey also found 38 percent of companies vulnerable to internal financial fraud, an increase of 11 percentage points, the survey found.

A total of 47 percent of respondents felt highly or moderately vulnerable to corruption and bribery, an increase of 9 percentage points from the previous survey. The percentage of companies who felt they were vulnerable to financial mismanagement was 39 percent, also an increase of 9 percentage points.

With the survey finding an increase in fraud committed among the "white collar" categories, the revelation that a majority of such fraud is committed by insiders should come as no surprise.

"More and more, the value of a company is not measured in tangible property -- rather it is measured in ideas," wrote Richard Plansky, senior managing director and head of Kroll's New York office, in a note accompanying the report. "Those ideas -- a companies' intellectual property -- tend to reside on computer sand servers in the form of digital data."

As a result, insiders have access to more assets, which they can acquire more easily than in the past. In short, fraud involving corruption, mismanagement or procurement is more likely to be committed by corporate insiders.

The survey revealed that 60 percent of frauds in which the perpetrator is known, are committed by senior managers, junior employees or third-party intermediaries, an increase of 5 percentage points over last year's survey, Plansky wrote.

The survey, commissioned by Kroll and conducted by the Economist Intelligence Unit, polled 1,265 senior executives worldwide from a broad range of industries in June and July 2011. Half of the participants represent companies with annual revenues of more than $500 million.

October 28, 2011

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