BRM Week 11 Lecture Slides 6 Slides to a Page

14/07/2014

Australian School of Business Australian School of Business

Australian School of Business

Aims for this Week

Business Risk Management Week 11

• To understand the significance of Fraud Risk to businesses – Review the KPMG Australian Fraud study

Fraud Risk Management

• To examine the key elements of Fraud Risk management • To examine the significance of People Risks in an organisation • To examine how a sound Corporate Culture can act as a powerful risk mitigant for Fraud and People Risks • To look at a Case of Fraud “First Hand” – Barings plc

Australian School of Business

Australian School of Business

Incidence of Fraud in Australia

What is Fraud?

- KPMG Australian Fraud Survey 2002, 2006, 2010 and 2012

“Using deception to make a personal gain for oneself and create/or create a loss for another”.

2002

2006

2010

361

465

214

281

Total Losses

$273m

$155m

$345.3m

$372.7m

Instances of Fraud Reported

44,564

65,074

164,065

194,454

50%

50%

$3.0m

$3.08m

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20

Number of Respondents

Number Experiencing at least one fraud loss event Average Loss per Respondent who experienced at least one fraud event

Chartered Institute of Management Accountants (CIMA)

Australian School of Business

Perpetrators of Fraud – All Respondents (by value) 2002

2006

2010

$1.4mio

$714,000

Number of Respondents suffering more than $1m of loss

2012

Australian School of Business

Perpetrators of Fraud – Finance & Insurance (by value)

2012

2002

2006

2010

2012

Internal Management

40%

18%

18%

26%

Internal Management

8%

4%

14%

22%

Non-Management Employees

19%

36%

3%

45%

Non-Management Employees

1%

6%

2%

4%

External Parties

41%

46%

80%

25%

External Parties

91%

90%

84%

74%

Instances of Fraud in 2010 Internal Management Non-Management Employees External Parties

Instances of Fraud in Finance and Insurance in 2010 104 1,931 162,030

Internal Management Non-Management Employees External Parties

9 1,494 143,693

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Australian School of Business

Major Classes of Loss – All Respondents (by Value)

• 2002 Internal mgt (non-financial firms) – Misappropriation of funds (46%) – Information theft (30%) – Services & benefits derived from false information (9%) – False invoicing (6%)

• 2006 Internal management – False invoicing (31%) – Theft of inventory (21%) – Theft of cash receipts (10%) – Theft of equipment (9%)

Australian School of Business

Major Classes of Loss – All Respondents (by Value)

• 2002 Non-management employees – – – –

• 2006 Non-management employees – – – –

– Cheque Tampering (46%) – Theft of Cash (28%) – Payroll Fraud (4%)

– Theft of Cash (77%) – Corruption – Diversion of Sales(18%) – False Invoicing (3%)

Australian School of Business

Major Classes of Loss – All Respondents (by Value)

• 2002 External Parties (non-financial firms) Services obtained by false information (35%) Credit card fraud (28%) Cheque fraud (23%) Telecommunications (10%)

• 2006 External Parties (non-financial firms) – – – –

False invoicing (22%) Theft of intangible assets (20%) Theft of cash (18% Credit card fraud (9%)

• 2010

• 2010 Internal Management

– – – –

Misappropriation of funds (30%) Kickbacks/bribery (14%) Theft of inventory (13%) False invoicing (12%)

Theft of inventory (47%) Theft of cash (17%) Provision of false information (16% Theft of equipment (8%)

Australian School of Business

Major Loss Classes – Finance & Insurance (by Value)

• 2010 External Parties – False claim general insurance 35%, $96.3m – Credit Card Fraud 18%, $49.9m – Other financial misappropriation 17%, $46.1m – False Motor Vehicle Claims 16%, $45.1m – Lending False Information 10%, $28.6m

• 2010 External Parties (non-financial firms) – Theft of Inventory (69%) – False Invoicing (17%) – Theft of Equipment (7%)

Australian School of Business

Discovery of Fraud

• 2002 – Notification by employee 26% – Internal controls 23% – Management investigation 18% – Employee investigation 11% – Notification by customer 9% – Internal audit 9%

• 2006 – Internal controls 38% – Notification by employee 28% – Notification external party 15% – Internal audit 7% – External audit 1%

• 2010 – Internal controls 42% – Notification by employee 20% – Notification external party 25% – Internal audit 3% – External audit n/a

• 2012

Australian School of Business

The Key Factors in the Management of Fraud

• • • •

Motive Assets of Value Opportunity Lack of control Exacerbated by a poor corporate culture

– Internal controls 41.3% – Notification by employee 22.2% – Notification external party 9.5% – Internal audit 5.6% – External audit n/a

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14/07/2014

Australian School of Business

Australian School of Business

Fraud Risk Management Cycle Measure Fraud Resistance

Develop an Anti-fraud Culture

Manage Incidents

Assess Fraud Risk

What is Corporate Culture? • A system of shared values and beliefs that influence worker behaviour – Often lies in the values of the founders • Strong at Lincoln

– The societal culture of the organisation • Influenced by country and institutional factors

– Often expressed in a code of conduct

Detect Fraud

Treat Fraud Risk

• Either formal or informal • Eg Johnson and Johnson reflected in the Credo

– A significant aspect of control systems • Forms part of the belief systems

Australian School of Business

Developing an Anti-Fraud Culture

Relies on: • Chairman and CEO setting the tone • External influences such as country culture • Personal influences: honesty of employees • Fraud risk awareness

Australian School of Business

People Risks – more than just about fraud

• Often the failure of management to manage brings down a company not business risks Sadgrove p179 • CEO lacks leadership or common sense • Rogue CEO unrestrained by the Board – e.g. Parmalat

• Managers who base their decisions on hunch or beliefs –Don’t properly test these beliefs, e.g. Lincoln

Australian School of Business

Australian School of Business

• Corporate values and philosophies – Is the employee’s view valued? – Is honesty and integrity valued? • Organisational stories – Staff magazines etc promote corporate culture – Positive gossip • Stability • Rewards – How resources are allocated indicates what is valued • Rights and rituals – Regular meetings and functions

• the tone at the top should be credible and genuine • executives should first apply the standards to themselves and behave as they would have others do • honest employees want and support honest behaviour in their managers and colleagues: will go out of their way to ensure that people they see as fraudulent or corrupt get a just punishment*

Some Tactics to Develop a Strong Culture

Creating a Positive Tone from the Top

* Mackenzie, Craig and Mallon, Patrick (2005), ‘Rewarding virtue: effective board action on corporate responsibility’

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Australian School of Business

The Impact of a Positive Corporate Culture

• Competitive advantage – Firms who link employee goals and organisational goals outperform those who do not. • Cultures that foster high morale and productivity tend to achieve these • Person-organisation fit lead to greater commitment and higher job satisfaction • Important in successful mergers & acquisitions

Australian School of Business

Fraud Risk Treatment • Reducing the Motive – The corporate culture, and developing an anti-fraud culture

• Reducing the Assets at Risk – Inventory reduction

• Reducing the Opportunity – Surveillance

• Improving Controls – Supervision – Control Systems – Audit Internal and External

• Transferring the Risk

Australian School of Business

The Impact of a Positive Corporate Culture (Cont)

• A positive corporate culture can reduce risks by encouraging ethical behaviour – Sadgrove lists the following groups which will be affected: • Government • Competitors • Customers • Staff • Suppliers • Environment – These are of course the organisation’s stakeholders

Australian School of Business

Ethical Behaviour • Management must present moral leadership • Illegal activities will eventually come back to haunt the perpetrator • Ask yourself if you would be prepared to have your actions made public • Can some of the crisis cases we have examined be traced back to a poor or a failed corporate culture? – Barings, Heblon, LTCM, Lincoln Electric, Maytag, Westpac, NAB etc

– Insurance

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