Fraudsters thriving in business AICD REVIEW

  • Date:01 Feb 2005
  • Type:CompanyDirectorMagazine
Identity "takeover" - where someone poses as you or me - is proliferating like e-mail viruses. While viruses eat up corporate productivity, identity "takeover" can wreck your good reputation overnight.

Fraudsters thriving in business

By Ali Cromie*

Identity "takeover" - where someone poses as you or me - is proliferating like e-mail viruses. While viruses eat up corporate productivity, identity "takeover" can wreck your good reputation overnight.

Detective Acting Superintendent Colin Dyson, Commander of the NSW Police fraud squad told company directors recently that identity takeover has become an intense focus for the fraud squad during in the past 12 months. Crime syndicates have stepped up theft of personal documents as financial institutions and utilities more have closer scrutinised customer identity documents.

"It's a very well run business and very lucrative," Dyson told an AICD Directors' Briefing held in Sydney discussing fraud threats and strategies for reining-in dishonest activities.

It is the dark-side of advances in technology that have facilitated identity fraud.

Dyson cites as examples:

  • Trojan horses penetrating bank accounts when customers log in over the Internet. (Trojans are computer viruses which attempt to control a computer, for example to siphon money from one bank accounts to another).
  • Theft of magnetic data from credit cards facilitating shopping sprees by cyber criminals on the Internet.
Gary Gill, partner KPMG, says fraud is a "thriving business" in Australia. The accounting firm's 2004 fraud survey reported participating businesses lost an average $2.1 million over a two-year period to March 2004, 45 percent of respondents experiencing at least one fraud incident during the survey period. Fraud losses totalled $456.7 million across the 221 survey respondents before recoveries and associated costs.

"The major threat to business is from within - from employees in your businesses," says Gill who focused his presentation at the Directors' Briefing on fraud within companies.

Non-management employees are identified as the most common perpetrators of major frauds, theft of inventory representing the majority of the losses, according to the KPMG fraud survey.

"Poor internal controls are one of the key drivers," says Gill. A contributing factor is poor hiring practices. Gill relates how the City of Vancouver in Canada employed as city treasurer a person who had filed for personal bankruptcy three times. He later stole $112,000 from the city, "so screening your employees before you hire them can certainly help out."

Organisations often do not report incidents of fraud to the police, concerned that fraud incidents highlight lax internal controls and sully the company's reputation.

Gill warns of the danger of companies terminating people for fraud and letting them walk away scot-free. "There has been a law suit for not disclosing that issue."

Dr Larelle Chapple, director of the UQ-KPMG Centre for Business Forensics at the University of Queensland, says that 84 percent of survey respondents believe that fraud control is a governance issue. "Obviously the most important response is to improve controls", says Chapple. Other actions identified by survey respondents as assisting to contain fraud risk include;

  • establishing a corporate code of conduct/ethics
  • pre-employment screening,
  • improved security,
  • establishing a fraud strategy
  • fraud risk assessment
  • focusing senior management on fraud
Training staff about fraud risk is one of the most cost effective ways of reducing the risk of fraud, says Chapple. Yet this did not rate highly on the agenda of organisations, only 39 percent of respondents indicating they intended to undertake this sort of training.

"Uncomfortable" business practices as opposed to outright fraud were also measured in the survey, the likes of favouritism in awarding contracts bullying and employees running businesses "on the side".

The key "unethical" behaviours identified by survey recipients were:

  • unauthorised personal use of corporate assets
  • false claims for sick leave and absences from work
  • unauthorised disclosure of sensitive information, and,
  • sexual harassment
"Lack of senior management commitment to ethical management" is the key of a poor ethical culture, argues Chapple.

The news from the unseemly side of business is not all bad. The number of people identifying unethical behavior in the latest KPMG fraud survey was down from 41 percent to 33 percent compared to the 2002 KPMG fraud survey. And, the number of respondent identifying fraud as a major problem for their organisation significantly dropped.

A sting in the tail is that the average cost of fraud to afflicted organisations has almost doubled to $2.1 million. To repeat Gary Gill's disheartening observation; fraud is a "thriving business" in Australia.

* Ali Cromie is chair of AIDC advisory group, the Education Development Group and principal of Rigour Group.


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