IT overlooked in fraud investigations

Nearly half of all companies in a new survey reported significant fraud, with managers being the most likely culprits. But IT remains underused in cracking down on the problem

If your boss has recently been promoted -- watch out. A global report by Ernst & Young surveying 400 companies found that half of all fraud is committed by managers who have been in management for less than one year. Less than 5 percent of all fraud investigations rely on securing electronic evidence such as disk drive images, emails and access logs. The report suggests the reason for this lack of reliance on IT in securing evidence may be that the value of electronic evidence is limited because regulations over the admissibility of the evidence have lagged, or that investigation competencies have not yet moved to match this source of evidence. The implication is that effective use of IT could help clamp down on fraud, which costs companies huge amounts of money: the scale of the fraud in most cases in the survey was less than £60,000 but in 13 percent the losses were over £600,000 and affected the survival of the organisations involved. The true cost of the fraud is more than financial, impacting on reputation, management time, morale and trust within teams. Of the fraudsters, 85 percent are on the payroll. Fifty-five percent were in management, 30 percent were employees, 6 percent were from organised crime syndicates, 5 percent were clients and 4 percent were suppliers. Of the management fraudsters, 85 percent of managers committing the largest frauds had less than one year's service in their current post. Grey areas exist in corporate governance investigations on subjects like 'What is allowable as a corporate expense?' because people push the boundaries until there is a complaint. "Management are particularly guilty in this area as they get access," said David Sherwin, partner in charge of global special investigations for Ernst & Young. "They are the ones that people tend to query less. They are in a position of trust and therefore there are fewer challenges at management than there are for more junior people." "The problem with this is a lot of the management that we identified have been recently promoted into the management role," Sherwin added. "They therefore have been with the company five or ten years and knew something of the company's modus operandus." In previous global fraud surveys by Ernst & Young, half of all frauds were by employees who have been with the company five years and a quarter was by those who have been with the company for ten years. Sherwin said one source of fraud was people promoted to management with a lot of pressure to produce results. "In this market it is difficult for them to deliver. Rather than disappoint they 'deliver' and they do all sort of stupid things," he said. "Some of the fraud is for personal gain, for bonuses and things like that but other times it is for self-preservation. You could be inflating results." Transient staff, the growing complexity of organisations and greater access to knowledge via the Internet were all fuelling the risk of fraud, stated John Smart, forensic services partner at Ernst & Young.

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