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Integrity

Analysis of results

Survey 2013

PRESENTATION TO

ALABAMA GFOA

AUGUST 2014

CONFERENCE

© 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent

member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

NDPPS 141111

1

Objectives

Provide a behind-the-scenes look at organizational misconduct derived

from the experience and perceptions of more than 3,500 U.S. working

adults

Offer organizations insights as they consider:

▬ Their exposures to fraud and misconduct risks

▬ The effectiveness of programs and controls relied on to mitigate fraud and

misconduct risks

Compare findings to previous KPMG Integrity Surveys conducted in

2009, 2005, and 2000



NDPPS 141111

2

Methodology

Blind (KPMG unidentified) national survey of pre-screened U.S.

working adults that fell into the following

demographic categories, among others:

▬ 13 industry sectors (11% from government industry)

▬ 5 thresholds of organization size

▬ 4 thresholds of organizational revenue

▬ 6 levels of job responsibility

▬ 16 job functions

▬ 5 levels of job tenure

Total respondents: 3,573

Benchmarked results where possible to previous KPMG Integrity

Surveys conducted in 2009, 2005, and 2000



NDPPS 141111

3

Key findings

The levels of overall misconduct remained virtually unchanged, with a

majority of employees nationally – 73 percent – reporting that they had

observed misconduct in the prior 12-month period (74 percent in 2009,

74 percent in 2005).

The prevalence of misconduct that could cause “a significant loss of

public trust if discovered” increased. Of the employees surveyed in

2013, 56 percent characterized the misconduct they had observed as

serious and possibly resulting in a significant loss of public trust, as

compared to 46 percent in 2009 and 50 percent in 2005.



NDPPS 141111

4

Key findings (continued)

The most commonly-cited driver of misconduct continued to be

attributed to pressure to do “whatever it takes” to meet business goals

(cited by 64 percent of respondents). However, we found thematic

increases across the board in employee perceptions of the roots of

misconduct, including:

▬ A belief that the organization’s code of conduct is not being taken seriously

(60 percent)

▬ The fear of job loss over unmet goals (59 percent) and

▬ That employees would be rewarded for results and not the methods to

achieve them (59 percent).



NDPPS 141111

5


The propensity to report misconduct to a supervisor remains high at

78 percent and has increased to 53 percent for reporting to an ethics

hotline (up from 44 percent in 2009). However, employee willingness to

look the other way or do nothing if they observed misconduct has

increased (to 23 percent, up from only 6 percent in 2009). Similarly,

employee willingness to report misconduct outside the organization has

also increased to 26 percent (from 10 percent in 2009).

Such results demonstrate a continuing need for organizations to

enhance the effectiveness of their internal reporting mechanisms. This

is especially important in light of the provisions of various federal and

state whistle blowing laws, including the recently enacted Dodd-Frank

Act, which established a “bounty program” for whistleblowers who raise

concerns directly with the Securities & Exchange Commission.



NDPPS 141111

6


Having in place formal ethics and compliance programs continues to

make a very positive difference as there is a strong correlation between

ethics and compliance programs and positive perceptions of behavior.

Employees who work in companies with programs reported fewer

observations of misconduct, less toxic pressure to hit performance

targets, and higher levels of confidence in management’s commitment

to integrity.



NDPPS 141111

7

What is Fraud?

Misrepresentation of a material fact relied upon

by someone to his or her detriment

Fraud is intentional misrepresentation meant to

mislead

Not mistakes

Not errors

Not mistaken recollections

Not minor discrepancies that are

understandable given faulty memories



NDPPS 141111

8

What is Misconduct ?

All activities, including fraud that are…

Violations of law (involving criminal and or civil

penalties)

Violation of Government regulations

Violation of Government policies and

procedures

Conduct that is illegal or unethical

Prevalence of

misconduct



NDPPS 141111

10

Prevalence of misconduct during the prior 12 months

NA responses not included in calculations

76%

74%

74%

73%

0% 20% 40% 60% 80% 100%

2000

2005

2009

2013



NDPPS 141111

11

Prevalence of misconduct during the prior 12 months

by industry

61%

64%

65%

71%

73%

74%

74%

74%

76%

76%

77%

79%

82%

0% 20% 40% 60% 80% 100%

Media and Communications

Insurance

Aerospace and Defense

Banking and Finance

Electronics, Software and Services

Energy & Natural Resources

Healthcare

Automotive

Pharmaceuticals & Life Sciences

Real Estate and Construction

Chemicals and Diversified Industrials

Government & Public Sector

Consumer Markets




NDPPS 141111

12

Prevalence of violations that could cause a

“significant loss of public trust if discovered”

49%

50%

46%

56%

0% 20% 40% 60% 80% 100%

2000

2005

2009

2013




NDPPS 141111

13

Prevalence of violations that could cause a “significant

loss of public trust if discovered” by industry

49%

50%

51%

52%

53%

54%

54%

56%

57%

57%

59%

62%

63%

0% 20% 40% 60% 80% 100%

Automotive

Insurance

Pharmaceuticals & Life Sciences

Media and Communications

Energy and Natural Resources

Chemicals and Diversified Industrials

Real Estate and Construction

Consumer Markets

Healthcare

Banking and Finance

Aerospace and Defense

Government & Public Sector

Electronics, Software and Services

Rating “Agree” and “Strongly Agree”

Nature of misconduct

by job function



NDPPS 141111

15

Select observations by employees in accounting and

finance functions

Observations of misconduct Percentage

Breaching computer, network, or database controls 34%

Entering into customer contract relationships without proper

terms, contracts, or approvals

35%

Stealing or misappropriating assets 30%

Falsifying or manipulating financial reporting information 29%




NDPPS 141111

16

Select observations by employees in purchasing and

procurement functions



Entering into supplier contracts that lack proper terms, conditions,

or approvals 29%

Violating or circumventing supplier selection rules 31%

Accepting inappropriate gifts or kickbacks from suppliers 35%

Violating contract or payment terms with suppliers 35%

Engaging in anti-competitive practices (e.g., market rigging) 35%



NDPPS 141111

17

Select observations by employees in operations and

service functions



Wasting, mismanaging, or abusing the organization’s resources 43%

Violating employee wage, overtime, or benefit rules 42%

Breaching employee privacy 39%

Mishandling confidential or proprietary information 29%

Falsifying time and expense reports 33%



NDPPS 141111

18

Select observations by employees in

technology functions



Breaching employee privacy 39%

Breaching computer, network, or database controls 38%


Breaching customer or consumer privacy 38%




NDPPS 141111

19

Select observations by employees in government

and regulatory affairs functions



Making false or misleading claims to the public or media 31%

Providing inappropriate information to analysts or investors 23%

Providing regulators with false or misleading information 20%

Making improper political contributions to domestic officials 17%

Doing business with third parties that may be involved in money

laundering 9%

Making improper payments or bribes to foreign officials 7%



NDPPS 141111

20

Select observations by employees in general

management and administration functions



Wasting, mismanaging, or abusing the organization’s resources 42%


Engaging in activities that pose a conflict of interest 30%

Stealing or misappropriating assets 28%


Understanding

acceptable conduct



NDPPS 141111

22

Employee familiarity with standards of conduct

77%

77%

78%

0% 20% 40% 60% 80% 100%

My organization’s overall values and principles

My organization’s code of conduct

Specific policies, laws or regulations unique to my job function

Rating “Agree” and “Strongly Agree"



NDPPS 141111

23

Employee views on the communication and training

they receive

91%

91%

93%

0% 20% 40% 60% 80% 100%

Provided to me when I need it

Effective in guiding my decisions and behaviors at work

Clear and easy for me to understand

Rating “Sometimes”, “Often” And “Almost Always”

Preventing misconduct



NDPPS 141111

25

Root causes of misconduct

49%

57%

57%

59%

59%

59%

60%

64%

0% 20% 40% 60% 80% 100%

Are seeking to steal or bend the rules for their own personal gain

Believe policies and procedures are easy to bypass or override

Lack resources to get the job done without cutting corners

Fear losing their jobs if they do not meet their targets otherwise

Do not understand or are not familiar with the standards that apply to their jobs

Believe they will be rewarded for results, not the means used to achieve them

Believe the code of conduct isn’t taken seriously

Feel pressure to do "whatever it takes" to meet business targets



Detecting misconduct



NDPPS 141111

27

Propensity to report misconduct

23%

26%

53%

54%

78%

0% 20% 40% 60% 80% 100%

Look the other way or do nothing

Notify someone outside the organization

Call the ethics or compliance hotline

Try resolving the matter directly

Notify my supervisor or another manager

Rating “Agree” And “Strongly Agree”




NDPPS 141111

28

45%

50%

50%

56%

57%

60%

62%

62%

76%

31%

32%

28%

24%

28%

24%

25%

23%

14%

24%

18%

22%

19%

15%

15%

13%

15%

11%

0% 25% 50% 75% 100%

My organization’s board of directors or audit committee

My organization’s internal audit department

My organization’s senior executives

My peers/colleagues

My organization’s legal department

My organization’s human resources department

My organization’s ethics or compliance hotline

My local managers

My supervisor

Agree Unsure Disagree

Channels employees “feel comfortable” using to

report misconduct

May not equal 100%

due to rounding. NA responses not included in calculations



NDPPS 141111

29

52%

52%

63%

63%

64%

67%

72%

76%

31%

26%

24%

26%

21%

20%

19%

14%

17%

22%

13%

12%

15%

13%

8%

10%

0% 25% 50% 75% 100%

My organization’s internal audit department

My organization’s senior executives

My organization’s ethics or compliance hotline

My organization’s legal department

My organization’s human resources department

My local managers

My peers/colleagues

My supervisor


Channels employees “feel comfortable” using for

advice and counsel

May not equal 100%


Responding to

misconduct



NDPPS 141111

31

49%

55%

59%

65%

68%

82%

38%

29%

28%

23%

22%

15%

13%

15%

14%

12%

9%

3%

0% 25% 50% 75% 100%

I would be satisfied with the outcome

Those involved would be disciplined fairly regardless of their position

I would be protected from retaliation

My report would be handled confidentially

Appropriate action would be taken

I would be doing the right thing


Perceived outcomes of reporting misconduct

May not equal 100%


Perceived tone

and culture



NDPPS 141111

33

57%

58%

64%

67%

68%

69%

70%

25%

24%

22%

20%

20%

21%

21%

19%

18%

14%

13%

12%

10%

10%

0% 25% 50% 75% 100%

Know what type of behavior really goes on inside the organization

Are approachable if employees have questions about ethics or need to deliver bad news

Value ethics and integrity over short-term business goals

Are positive role models for the organization

Set the right “tone at the top” on the importance of ethics and integrity

Set targets that are achievable without violating my organization’s code of conduct

Would respond appropriately if they became aware of misconduct


Perceptions about the CEO and other senior

executives


May not equal 100%

due to rounding.



NDPPS 141111

34

69%

70%

71%

71%

71%

72%

73%

21%

19%

18%

19%

19%

18%

17%

11%

12%

11%

10%

10%

10%

10%

0% 25% 50% 75% 100%

Value ethics and integrity over short-term business goals

Know what type of behavior really goes on inside the organization

Are positive role models for the organization

Set the right “local tone” on the importance of ethics and integrity

Set targets that are achievable without violating my organization’s code of conduct

Would respond appropriately if they became aware of misconduct

Are approachable if employees have questions about ethics or need to deliver bad news


Perceptions of local managers and supervisors


May not equal 100%

due to rounding.



NDPPS 141111

35

61%

61%

63%

64%

64%

71%

71%

72%

24%

26%

22%

22%

23%

20%

20%

17%

14%

14%

15%

14%

13%

9%

8%

11%

0% 25% 50% 75% 100%

The ability to conceal misconduct is minimal

Adequate checks are carried out to detect misconduct

People feel comfortable raising and addressing ethics concerns

The opportunity to engage in misconduct is minimal

The willingness to tolerate misconduct is minimal

People share a high commitment to integrity

People apply the right values to their decisions and behaviors

People feel motivated and empowered to "do the rights thing"


Team culture and environment: Perceptions of

individual teams and work units


May not equal 100%

due to rounding.

Comparison of data

over time



NDPPS 141111

37

Prevalence of misconduct

Percentage of Employees Nationally


2013 2009 2005 2000

Observed misconduct in the prior 12-month

period 73% 74% 74% 76%

Believed observations could cause “a significant

loss of public trust if discovered” 56%` 46% 50% 49%



NDPPS 141111

38



The precise wording of this question series was modified between 2000 and subsequent years. The data shown for 2000

corresponds to a similar, but different, phrasing of questions than the ones posed in 2005/2008 (shown in table). Therefore,

the comparison with data from 2000 may be viewed as directional or thematic.


Root causes 2013 2009 2005 2000

Feel pressure to do “whatever it takes” to meet business

objectives 64% 59% 57% 65%

Believe they will be rewarded for results, not the means

used to achieve them 59% 52% 49% 56%

Do not understand or are not familiar with the standards

that apply to their jobs 59% 51% 55% 50%

Believe their code of conduct is not taken seriously 60% 51% 52% 73%

Lack resources to get the job done without cutting corners 57% 50% 49% 70%

Fear losing their jobs if they do not meet targets otherwise 59% 49% 46% No data

Believe policies or procedures are easy to bypass or

override 57% 47% 47% No data

Are seeking to bend the rules or steal for their own

personal gain 49% 34% 33% 22%



NDPPS 141111

39

Propensity to report misconduct


The response scale for this question was modified in 2005 and subsequent years. The data shown for 2000 corresponds to a

frequency scale (e.g., often, sometimes, never), whereas the data shown in subsequent years corresponds to an agreement

scale (e.g., agree or disagree). Therefore, the comparison from our 2000 data may be viewed as directional or thematic.


Propensity to report misconduct 2013 2009 2005 2000

Notify supervisor or another manager 78% 81% 81% 63%

Try resolving the matter directly 54% 52% 53% 40%

Call the ethics or compliance hotline 53% 44% 38% 21%

Notify someone outside the organization 26% 10% 10% 4%

Look the other way or do nothing 23% 6% 6% 5%



NDPPS 141111

40

Channels employees “feel comfortable” using to

report misconduct



Channels for reporting fraud and

misconduct 2013 2009 2005 2000

Supervisor 76% 78% 78% 77%

Local managers 62% 61% 62% No Data

Peers or colleagues 56% 57% 57% No Data

Human resources department 60% 57% 56% 56%

Ethics or compliance hotline 62% 57% 53% 40%

Legal department 50% 43% 44% 43%

Senior executives 57% 52% 52% 40%

Internal audit department 50% 40% 39% No Data

Board of directors or audit committee 45% 32% 32% No Data



NDPPS 141111

41

Perceived outcomes of reporting misconduct to

management



Perceived Outcomes 2013 2009 2005 2000

Appropriate action would be taken 68% 66% 67% 61%

My report would be handled confidentially 65% 64% 64% 59%

I would be protected from retaliation 59% 53% 52% 47%

Those involved would be disciplined fairly regardless of

their position 55% 47% 47% 39%

I would be satisfied with the outcome 49% 39% 39% No Data

I would be doing the right thing 82% 89% 89% 85%



NDPPS 141111

42

Perceptions of the CEO and other senior executives


The precise wording of this question was modified between 2000 and subsequent years. The 2000 data shown corresponds to

a similar, yet different, question than the ones posed in subsequent years (shown in table). As such, the comparison from our

2000 data on this question may be viewed as directional or thematic.

2013 2009 2005 2000

Are positive role models for the organization 67% 64% 65% 60%

Know what type of behavior really goes on inside the

organization 57% 49% 48% 43%

Are approachable if employees have questions about

ethics or need to deliver bad news 58% 54% 55% 45%

Value ethics and integrity over short-term business goals 64% 56% 57% No Data

Set targets that are achievable without violating my

organization’s standards of conduct* 69% 67% 67% 58%

Would respond appropriately if they became aware of

misconduct 70% 70% 70% 64%

Set the right “tone at the top” on the importance of ethics

and integrity 68% 66% 65% No data


Impact of ethics and

compliance programs



NDPPS 141111

44

Presence of program elements

May not equal 100% due to rounding.

Program elements Formally Informally Unsure Not at all

Has a code of conduct that articulates the values

and standards of the organization 80% 8% 10% 2%

Has a senior-level ethics or compliance officer 62% 10% 23% 6%

Performs background investigations on prospective

employees 66% 10% 20% 4%

Provides communication and training to employees

on its code of conduct 73% 12% 11% 3%

Has a confidential and anonymous hotline that

employees can use to report misconduct or seek

advice

61% 10% 19% 10%

Audits and monitors employee compliance with its

code of conduct 56% 17% 21% 6%

Has policies to hold employees and managers

accountable for code of conduct violations 68% 12% 17% 4%

Provides incentives for employees to uphold the

code of conduct of the organization 41% 11% 23% 26%

Has policies to investigate and take corrective

action if misconduct is alleged 69% 10% 17% 4%



NDPPS 141111

45

Correlation between ethics and compliance programs

and behaviors/perceptions

Ethics and compliance programs continue to be correlated with:

▬ Reduced prevalence of misconduct in organizations

▬ Lower prevalence of conditions that give rise to misconduct

▬ Increased employee willingness to report misconduct

▬ More positive employee expectations regarding the outcomes of reporting

misconduct

▬ More positive employee perceptions of the tone at the top

▬ More positive team culture and environment

▬ Better guidance and communication of policies around misconduct

▬ Increased level of trust and greater sense of ownership

For this correlation, two groups of respondents were compared:

▬ With Program: Those who chose “Formally” for all program attributes

▬ Without Program: Those who chose “Not at all” or “Unsure/No Opinion” for all

program attributes



NDPPS 141111

46

Prevalence of misconduct

Ethics and Compliance Programs Are Correlated With Reduced

Prevalence Of Misconduct In Organizations

72%

55%

73%

60%

Without Program With Program

55%

32%

60%

43%


2009

2013

Observed Misconduct (All)

in the Prior 12 Months

Observed Violations of Organizational

Values & Principles in the Prior 12 Months

Rating “Rarely”, “Sometimes”, “Often” And “Almost Always”



NDPPS 141111

47


Ethics and Compliance Programs Are Correlated With Lower Prevalence Of Conditions That Give Rise To Misconduct

55%

46%

68%

57%


54%

48%

63%

57%


2009

2013

Feel Pressure to Do Whatever

It Takes to Meet Targets

Lack Understanding of Standards

That Apply to Their Jobs




NDPPS 141111

48

Root causes of misconduct (continued)

Ethics and Compliance Programs Are Correlated With Lower Prevalence Of Conditions That Give Rise To Misconduct

53%

37%

63%

51%


49%

39%

65%

52%


2009

2013

Believe Policies and Procedures

Are Easy to Bypass or Override

Believe Rewards Are Based on Results,

Not on Means Used to Achieve Them




NDPPS 141111

49

Detecting misconduct: Channels for reporting

misconduct

Ethics and Compliance Programs Are Correlated With Increased Employee Willingness To Report Misconduct

51%

88%

49%

85%


25%

76%

31%

77%


2009

2013

Would Feel Comfortable Reporting

Misconduct to Supervisor


Misconduct to Legal Department

Rating “Agree” Or “Strongly Agree”



NDPPS 141111

50

Detecting misconduct: Channels for reporting

misconduct (continued)

Ethics and Compliance Programs Are Correlated With Increased Employee Willingness To Report Misconduct

20%

67%

29%

72%


20%

63%

30%

68%


2009

2013


Misconduct to Internal Audit


Misconduct to Board of Directors




NDPPS 141111

51

Responding to misconduct: Perceived outcomes of

reporting misconduct

Ethics and Compliance Programs Are Correlated With More Positive Employee Expectations

Regarding The Outcomes Of Reporting Misconduct

41%

86%

43%

82%


34%

77%

37%

77%


2009

2013

Believe Appropriate

Action Would Be Taken

Believe They Would Be

Protected from Retaliation




NDPPS 141111

52

Responding to misconduct: Perceived outcomes of

reporting misconduct (continued)

Ethics and Compliance Programs Are Correlated With More Positive Employee Expectations

Regarding The Outcomes Of Reporting Misconduct

30%

68%

34%

71%


63%

92%

47%

88%


2009

2013


Satisfied with the Outcome


Doing the Right Thing




NDPPS 141111

53

Tone and culture: Tone at the top

Ethics and Compliance Programs Are Correlated With More Positive Employee Perceptions Of The Tone At The Top

39%

85%

42%

83%


40%

75%

40%

76%


2009

2013

Believe CEO & Other Senior Execs

Set the Right “Tone at the Top”

on Ethics & Integrity


are Approachable if Employees

Have Ethics Concerns




NDPPS 141111

54

Tone and culture: Tone at the top (continued)


32%

81%

38%

81%


44%

88%

41%

83%


2009

2013


Value Ethics & Integrity Over

Short-Term Business Goals


Would Respond Appropriately if They

Became Aware of Misconduct




NDPPS 141111

55

Tone and culture: Tone at the top (continued)


34%

75%

43%

75%


36%

86%

41%

83%


2009

2013

Know What Type of Behavior Really

Goes on Inside the Organization

Set Targets That are Achievable

Without Violating my Organization’s

Code of Conduct




NDPPS 141111

56

Tone and culture: Team culture and environment

Ethics and Compliance Programs Are Correlated With More Positive Team Culture And Environment

43%

90%

39%

82%


35%

83%

33%

79%


2009

2013

People Feel Motivated & Empowered

to “Do the Right Thing”

People Feel Comfortable Raising

& Addressing Ethics Concerns




NDPPS 141111

57


(continued)


44%

89%

37%

82%


47%

88%

39%

82%


2009

2013

People Apply the Right Values

to Their Decisions & Behaviors

People Share a High

Commitment to Integrity




NDPPS 141111

58


(continued)


44%

81%

33%

79%


41%

79%

34%

77%


2009

2013

The Opportunity to Engage

in Misconduct is Minimal

The Ability to Conceal Misconduct is Minimal




NDPPS 141111

59


(continued)


43%

83%

35%

78%


34%

87%

32%

79%


2009

2013

The Willingness to Tolerate

Misconduct is Minimal

Adequate Checks are Carried Out

to Detect Misconduct


2013

Global profiles of the fraudster:

White-collar crime – present and

future



NDPPS 141111

61

Methodology

KPMG gathered data from fraud investigations conducted

by our member firms’ forensic specialists in Europe,

Middle East and Africa (EMA), the Americas, and Asia-

Pacific regions between August 2011 and February 2013.

KPMG analyzed a total of 596 fraudsters who were

involved in acts committed in 78 countries.

KPMG Investigations leaders provided insight into the

difficult question of profiling a fraudster. v

.



NDPPS 141111

62

Methodology

The survey examined ‘white collar’ crime investigations

conducted across the three regions where we were able to

identify the perpetrator and could provide detailed

contextual information on the crime.

The analysis identifies:

– fraudster profiles and details of the more common types

of fraud

– environmental conditions that tend to enable fraud

– the impact of fraudsters’ capabilities

– The context in which fraudsters ply their trade across the

countries in which KPMG operates

The findings in this study are contrasted, where possible,

with our 2007 and 2011 analysis to highlight shifts in

patterns and to provide a perspective on emerging trends.

v



NDPPS 141111

63

KPMG’s 2013 Global profiles of the fraudster key findings

70 percent of fraudsters are between the ages of 36 and 55

61 percent of fraudsters are employed by the victim organization. Of these, 41 percent

were employed there for more than 6 years

When fraudsters acted alone, 69 percent of frauds were perpetrated over 1 to 5 years. Of

these, 21 percent of the frauds incurred a total cost to the victim organization of $50,000-

200,000 and 16 percent cost a total of $200,000-500,000. In 32 percent of these cases the

cost to the victim organization exceeded $500 000, exceeding $5 000 000 in 9 percent of

these cases.

Analysis shows that there is no fixed, but rather a continuous morphing, face of a fraudster. Organizations

thus need dynamic responses to fraud risk and may have to anticipate the impact of these changes in the

behavior of fraudsters

Based on an analysis of the 596 fraudsters, some of the key observations are:

In 70 percent of frauds, the perpetrator colluded with others - a continuing rising trend since

2007



NDPPS 141111

64


Based on an analysis of the 596 fraudsters, some of the key observations are:

93 percent of frauds were committed in multiple transactions. For 42 percent of these

frauds, the average value per individual transaction was between $1,000 and $50,000.

The most prevalent fraud is misappropriation of assets (56 percent) of which

embezzlement comprises 40 percent and procurement fraud makes up 27 percent. The

second most prevalent fraud is revenue or assets gained by fraudulent or illegal acts (24

percent).

When acting in collaboration, 74 percent of frauds were perpetrated over one to five years. With

regard to value, 18 percent of frauds had a total value of $50,000-200,000 and 16 percent of the

frauds had a total value of greater than $5,000,000. In 43 percent of these cases the cost to the

victim organization exceeded $500 000, exceeding $5 000 000 in 16 percent of these cases.

For 53 percent of the 198 fraudsters where corrupt conduct was present, weak internal

controls contributed to the perpetration of the fraud. Corruption was a common element

in cases of collusion - 29 percent of collusion-related cases involved bribery.

Continuing rising trend of collusion and greater financial impact thereof may require organizations to extend

defenses against fraudsters beyond the internal processes and controls



NDPPS 141111

65


The level and nature of the opportunity for frauds affect the frequency and behavior of

fraudsters. Managing opportunity affects the type of fraudster organizations can encounter.

Greed, financial gain and financial difficulty remain strong motivators of the fraudster.

Emotion is not a key factor, but ethical and cultural context seem more relevant in rationalizing fraud.

This, in turn is affected by the way ethics and morals are institutionalized in regulations.

Collusion is a growing trend and probably represents the fraudster’s response to the increasing

global connectedness of business and the complexities of the modern business world.

We also make the following key observations based on the analysis and

insights of our investigators:

Environmental factors affect the behavior of the fraudster and changes in environment drive

changes in the fraudster’s behavior.

Cyber crime and technology is a growing area of interest to fraudsters. These, along with the

rising trend in collusion, may indicate future patterns of fraud.



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v

Three drivers of fraud: Opportunity

In order to understand a fraudster’s profile it is useful to

consider three drivers of fraud:

Opportunity

People do not commit fraud without an opportunity presenting itself.

A plurality of fraudsters in the surveyed cases has worked in the

victim organization for more than six years, and nearly three

quarters of the frauds were conducted over a 1-5 year period.

This implies that fraudsters do not join an organization with the

aim of committing fraud. But opportunity presents itself then and

is identified, fuelled by personal circumstances or pressures to

meet aggressive business targets, which create the conditions

conducive to fraud.

How does the opportunity present itself? According to the survey,

54 percent of the frauds were facilitated by weak internal controls.

This suggests that if organizations tightened controls and the

supervision of employees, the opportunity for fraud would be severely

curtailed.



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v

Three drivers of fraud: Motivation

Motivation

Fraud, as with most crimes, requires a motivation, and for the 596

fraudsters, the overwhelming reason for committing fraud is financial.

Survey respondents were offered 14 possible motivations and

could select as many as they believed appropriate. Out of a

total of 1,082 motivations listed, 614 were motives of greed,

financial gain and financial difficulty, and a further 114 were

related to business targets.

Greed infrequently seems to spill over into observable patterns

of behavior. Only 18 percent of the fraudsters had expensive

hobbies and 17 percent drove expensive vehicles, hardly

distinguishing features when the fraudster is a senior executive.



.



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v

Three drivers of fraud: Rationale

Rationale

Fraudsters, as with other types of criminal, will frequently provide a

rationale for their deeds.

Anger and fear were important factors in 10 percent or less of the

596 fraudsters.

16 percent of the responses mentioned being under-remunerated

as being important.

The only emotion that appears to be significant is a sense of

superiority, which is important for 36 percent of the fraudsters.

This may be linked to the fact that 29 percent of the frauds were

committed by executive directors, the largest single job title.





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Fraud by industry

Industries should have unique fraud risks, but in the industries

listed below the most common type of fraud was

misappropriation of assets.

Financial Services

Pharmaceuticals

Consumer & Industrial Markets

Mostly embezzlement

Energy & Natural Resources

Public Sector & Information

Communications & Entertainment

Mostly procurement fraud

v

.



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v

New technology and the fraudster

New technology has created novel types of fraud

behavior and brought new capabilities to the face of a

fraudster:

Organizations are struggling to keep pace with the growing

technological sophistication of hackers. A few years ago, hackers

were motivated by political objectives and disrupted computer

networks to make an ideological point; but it is only a matter of

time until fraudsters harness the full power of technology for

financial gain.

Cyber-related crimes occurred by virtue of infections of computer

systems with malware, attacks on computer networks, etc.

Cyber fraudsters were employed by the victim organization,

mainly in IT, but also in finance and operations.

67% of the fraudsters in cyber enabled frauds acted in collusion

with others, who were also mostly employed by the victim

organization.

.



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Some thoughts on the profile of the fraudster…

The ever changing face of the fraudster

There is no fixed face of a fraudster. The fraudster’s appearance

changes to respond to rapid flux in the modern business world.

Complexity of changing factors

Factors affecting the fraudster profile include the opportunity of the

day, relationships on an organizational and global scale, the latest

technologies, and socio-political and economic issues.

Collusion

The collusion trend suggests that organizations may need to reach

beyond the organization itself, perhaps in collaboration with other

similar organizations and law enforcement/regulatory bodies, to

combat fraudsters.

Technology

The fraudster of the future will be shaped by factors such as

technology, the inter-connectedness of the business world, as well

as the traditional fraud drivers of opportunity, rationalizing and

motivations of greed and financial gain.

v



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Conclusions

Changes in the environment spawn new

capabilities that drive different behavior.

Organizations must constantly adapt their

strategies for managing fraud risk to the changing

relationship between the drivers (motivation,

opportunity and rationale) and behaviors and

capabilities.

The dynamic opportunity of the day, relationships

on an organizational and global scale, the latest

technologies, and socio-political and economic

issues will shape the fraudster’s profile timelessly.

One must also not forget the typical fraudster may

likely remain the tenured, trusted employee. The

one you may never have suspected…because we

do not look.

v

Red Flags



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Red flags: Does this describe an area of your

business?

■ There are difficult relationships and a possible lack of trust between the

business and the internal/external auditor.

■ Excessive secrecy about a function, its operations, and its financial

results. When questions are asked, answers and supporting

information are often stalled or withheld.

■ Elsewhere in the industry, companies are struggling and sales and/or

profits are declining. Your business appears to buck the trend.

■ Increases in profitability fail to lead to increased cash flows.

■ A division or department of the business is perceived as complex

or unusually profitable, thereby diverting the attention of

management and the audit functions.

■ High staff turnover within a function. Employees may be more likely

to commit fraud in a business with low morale and inconsistent

oversight.



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Red flags: Do you work with someone who

displays these behaviors?

■ Refuses or does not seek promotion and gives no reasonable

explanation.

■ Does not or will not produce records/information voluntarily or on

request.

■ Tends to shift blame and responsibility for errors.

■ Bullies or intimidates colleagues.

■ Vendors/suppliers will deal with this individual only.

■ Volatile and melodramatic, arrogant, confrontational, threatening, or

aggressive when challenged.

■ Is suspected to have over-extended personal finances.

■ Has opportunities to manipulate personal pay and reward.

■ Accepts hospitality that is excessive or contrary to corporate rules.



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Sample Antifraud Programs and Controls



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Presenter’s contact details

Donna Sanford

KPMG LLP

(601) 714-7440

[email protected]

www.kpmg.com

All information provided is of a general nature and is not

intended to address the circumstances of any particular

individual or entity. Although we endeavor to provide accurate

and timely information, there can be no guarantee that such

information is accurate as of the date it is received or that it will

continue to be accurate in the future. No one should act upon

such information without appropriate professional advice after

a thorough examination of the particular situation.

© 2013 KPMG LLP, a Delaware limited liability partnership and

the U.S. member firm of the KPMG network of independent

member firms affiliated with KPMG International Cooperative

(“KPMG International”), a Swiss entity. All rights reserved.

NDPPS 141111

The KPMG name, logo and “cutting through complexity” are

registered trademarks or trademarks of KPMG International.

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