Fraud on the rise: Too many corporates ignore warning signs

Addressing the launch of Sri Lanka’s first fraud survey ‘Awakening’ by KPMG Sri Lanka, KPMG India Head of Risk Consultancy Deepankar Sanwalka said fraud was rising internationally and it was evident that the same was true in Sri Lanka.

He said globally it was estimated that fraud accounted for five percent of GDP or Corporate turnover, however he said in actual fact it was more likely two to three percent.

Out of 400 invitations issued by KPMG Sri Lanka to major corporates comprising every sector, only 90 had submitted their answers, Sanwalka said adding that it was a good sample given that in India there were only 83 participants for the first survey conducted in 1995.

The report highlighted that 70 percent of respondents had encountered fraud and the single largest loss reported was more than three billion rupees. The finding revealed that 83 percent of fraud was perpetrated internally and 15 percent had got divulged accidentally.

The analysis detected that 51 percent of organizations were not placed with a ‘Fraud Risk Management Plan’, and 41 percent of the respondents were unaware of FCPA ABC legislations in US and UK which would cause serious issues in the near future, because unless Sri Lanka can match up to these standards doing business with these countries would be difficult.

The study showed that 27 percent had ignored Red Flags (Warning Signals) in their organizations, while 34 percent followed up and investigated. However 39 percent was unaware such warnings were available in their institutions.

The middle and lower management accounted for 69 percent of fraud due to diversion of funds and goods while 17 percent was third parties and the top management accounting for 14 percent.

Based on responses it was noted that the highest loss arising from fraud which was three billion rupees reported from the industrial sector, the agricultural sector encountered the smallest which was Rs. 2.5 million. The other viggest fraud detected were: Information, Communication and Entertainment sector encountered Rs. 17 million, Financial Sector Rs. 122 million, Consumer Markets Rs. 1.12 billion, Ngo’s Rs. 85 million and other sectors reported Rs. 16 million.

The survey highlighted that 36 percent of reporting frauds came from internal and statutory audits, while 17 percent came from anonymous letters and callers. Data analysis revealed 17 percent, IT controls six percent and whistle blowing hotlines nine percent.

Out of the 90 respondents, 35 percent revealed that bribes were used to obtain routine administrative approvals from the government departments and ministries. Kickbacks were considered a useful tool to retain business. 31 percent pinpointed kickbacks for this purpose, while 24 percent said that it influenced people to make a favourable decision or deliver an outcome.

Respondents to the survey also reported Intellectual Property fraud, which according to Sanwalka would be the next big wave.