Financial companies vulnerable to fraud

Australian and New Zealand financial services companies have lost $273 million to external fraudsters since 2008, according to the latest KPMG Fraud and Misconduct Survey.

Fraud committed against Australia and New Zealand’s top organisations doubled in the last two years, up from $1.5 million per organisation in 2008 to $3 million in 2010, with financial and insurance companies proving particularly vulnerable, said KPMG forensic partner in charge, Gary Gill.

The biennial survey of about 200 public and private sector companies revealed that the level of fraud reported increased from $301 million to $345 million.

“Not only has the average value of fraud doubled in a short space of time, but the organisations surveyed believe that only one third of frauds are actually being picked up,” said Gill. “This is particularly concerning as the results capture a relatively small portion of the business population. The real fraud price tag for Australia is substantially more, likely in the billions.”

The survey found that the financial and insurance services sector continues to be particularly vulnerable to external fraud (typically involving credit card fraud, irregular lending and bogus insurance claims), which resulted in the loss of $273 million. However, insiders were the main offenders across all sectors.

“Ultimately a breakdown in internal controls is enabling employees to make off with the funds,” said Gill. “So often KPMG’s investigations expose simple methods used to fleece large amounts of money from organisations that could have been prevented or detected with the right controls.”

Gill noted that there was a “marked” increase in frauds involving the abuse of internet-based electronic funds transfer (EFT) facilities, mostly as a result of poor controls over access to EFT facilities. He said another popular method was the ‘switch and switch back’, where an employee switches their personal bank account details with that of a vendor prior to processing an invoice payment. Gill stated that without proper controls — such as electronic monitoring to detect an account that has been tampered with — it was often impossible to see that the information had changed once the fraudster switched the details back again.

The survey found that whistleblowers were responsible for uncovering around 20 per cent of frauds, although fraud ‘red flags’ were overlooked in 38 per cent of major frauds. The average time taken to detect major fraud was 399 days (up from 342 days in 2008) and there was no recovery of funds in 61 per cent of cases.