Whistle blowing vital to prevent fraud

Whistle blowing vital to prevent fraud

The number of fraudulent activities in Sri Lanka had increased by 83 percent during the past two years, a fraud survey analysis by KPMG revealed.

Companies lose around five percent of their annual turnover as a result of fraud in financial statements, misappropriation of assets and corruption, the survey revealed.

The highest loss so far was Rs. 3b from the industrial sector while the smallest was Rs. 2.5b from the agricultural sector, data revealed.

Eighty three percent of the respondents said that incidents of fraud had increased in Sri Lanka, while 62 percent maintained that fraud in their industry had risen during the past two years. However, only 51 percent of the respondents accepted that fraud had increased in their organisations.

The fraud survey analysis revealed that in instances of bribery and corruption, around 27 percent of the perpetrators were from the top management while 46 percent were from the middle and lower levels of management, the rest were customers,vendors, and busines associates.

Frauds occur due to diversion of funds and goods, through false claims and pilferage at different levels of management and outsiders. Five of six incidents of fraud are perpetrated by internal parties.

Bribery and corruption account for 33 percent of fraud in the industrial sector, NGOs 43 percent and Information, Communication and Entertainment( ICE) 33 percent. The diversion of funds and goods in the consumer market account for 59 percent and 39 percent in the financial services sector.

The survey revealed that 36 percent of fraud was detected by internal and statutory audits while 15 percent were by accident. Detection from whistle blowing hot lines were nine percent, anonymous letters and callers 17 percent, IT controls six percent and data accounts for 17 percent.

The motivation for fraud according to financial statements stemmed from enhanced performance of institutions which then had the provision for incentives to be given to employees.

Twenty-three percent of the respondents said that tax evasion was the main reason and 12 percent felt the motive was the need to cover personal debts while 18 percent attributed financial statement fraud to the need to meet market expectations. Twelve percent said diversion of funds was the reason for fraud.

The involvement of the top management accounted for 60 percent of the cases while the middle and lower level management accounted for 30 percent and 10 percent by external parties.

In non-compliance, top management was said to be involved in 47 percent of the cases while 53 by middle and lover level employees.

In employee and third party diligence, the implementation of a whistle blower mechanism, an internal fraud reporting hotline, monitoring of corporate ethics and code of conduct, fraud awareness training and independent fraud detection unit will help detection and prevention of fraud, the survey revealed.

Thirty-five percent of the respondents said that bribes were used to obtain routine administrative approvals from Government departments and ministries. Kickbacks were considered a useful tool to retain business.

Cash payments account for 26 percent, donations 16 percent, travel 11 percent, gifts 21 percent and entertainment accounted for 19 percent with regard to bribery and corruption in business organisations it was 35 percent.

Head of Risk Consultancy KPMG, India, Deepankar Sanwalkar said that global corporate fraud is on the rise and added that the scale of fraudulent activities has de-stabilised economies.

Around 87 percent of occupational fraud comprise misappropriation of assets. He said that corporates should adopt preventive mechanisms and develop a comprehensive code and conduct and carry out periodic assessment of corruption-related risks.

“Whistle blowing is vital to prevent fraud in organisations and steps should be taken to maintain confidentiality of the information and ensure protection of the whistle blower from harassment”, Deepankar said.

Quoting the Indian Fraud survey report 2010, he said that bribery and corruption were viewed as an inevitable aspect of doing business in India.

The Sri Lankan report revealed that bribery and corruption were inherent to the industry.

Partner and Head of Forensics for KPMG, Sri Lanka said that 70 percent of the respondents admitted that they encountered fraud in their organisations.

Around 89 percent from the public sector and 64 percent from the private sector admitted fraud in their organisations.

The KPMG Fraud Survey Analysis 2011/12 explores the perceptions of senior executives across the business and industrial landscape with the aim of identifying the nature and scale of fraud encountered.


/ English

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