South African companies are tightening security measures as the incidence of white- collar crime increases, reports Madeleine Wackernagel
SOUTH AFRICAN businesses have the highest expectation of fraud in the world, according to a new survey by the international consultancy, KPMG.
In the second survey of its kind to be conducted in this country, KPMG found that 66% of respondents had experienced some kind of fraud in the past year, 88% believed incidents of fraud to be on the increase, and 62% saw it as one of the biggest problems in business today.
The reasons given for this increase in white-collar crime were a weakening of social values (75%), economic pressures (70%) and inefficiencies in the justice system (66%). Other explanations included lack of government intervention, not enough emphasis on prevention and detection, more sophisticated criminals and insufficient penalties.
But of the 1 000 businesses targeted in the survey, only 129 replied. Says Petrus Marais of KPMG’s investigative unit: “Many big corporations see fraud as an internal matter; there is a natural reluctance to broadcast such problems.
“In addition, no one single person handles such issues in the large companies, so it takes a lot of work on their part to co- ordinate all the information needed to accurately respond to our questionnaire,” says Marais.
Nevertheless, reported fraud cost more than R186,6-million in the past year – although many respondents believed this to be a conservative and unreliable measure.
External fraud, defined as product theft, false representations, extortion/blackmail, bribes, false invoices and credit-card misuse – the biggest culprit, with 1 400 instances – accounted for the majority of fraud cases (57%), while incurring 25,1% of the total financial loss reported in the survey.
Employee fraud cost companies the most (70,8%), while clocking up 39,9% of occurrences, with inventory theft top of the list (380 cases).
Management fraud was fairly innocuous by comparison, coming in at 3,1% of occurrences and 4,1% of cost. False financial statements, abuse of expense accounts and unnecessary purchases were the top offences.
Interestingly, although a high percentage of respondents claimed to be aware of the risks of fraud, 14% of cases were discovered only by accident.
Internal controls caught up with 40% of offenders, while 28% were down to a targeted investigation by management; 22% owing to notification by another employee, and 19% owing to customers blowing the whistle.
KPMG says most companies had already established anti-fraud measures but felt more initiatives were necessary to counter the growing problem.
John Louw, chairman of the investigative accounting division, recommends the teamwork approach, involving external auditors in conjunction with management and internal auditors through audit committees, as well as risk-management processes.
A starting point in the fight against financial crime is double-checking on new employees, following a corporate code of conduct and tightening internal controls.
One of the most surprising aspects of this year’s survey, says Marais, is just how many respondents (about 60%) reported incidents to the police, despite a widespread lack of confidence in the judicial system.
“This could be because the police are now prepared to register complaints without an affidavit being lodged, and because the King Commission’s report on corporate governance has heightened awareness among company directors of good practice.”
Because of the small size of the sample in the first survey conducted in 1994, comparisons would be invalid, says Marais, but KPMG hopes the next survey will trawl an even greater number of South Africa’s biggest companies.