The fraud risk management field in Europe, and particularly in the United Kingdom, is quickly gaining momentum as many corporations are recognizing how white-collar crime adversely affects their financial bottom lines, and in turn, the overall economies of their countries.

In the United Kingdom alone, it is estimated that fraud constitutes for £5 billion in annual losses, according to the Serious Fraud Office. This growing concern inspired two academicians at the University of Nottingham Business School in the United Kingdom to conduct and publish a survey that would determine the current trends of white-collar crime in Europe and what “ if anything “ corporate management is doing about it.

The survey authors, Dr. Paul Barnes and David Sharp, enlisted the aid of Business Defence Europe Ltd. and the U.K. Chapter of the Association of Certified Fraud Examiners, and eventually came out with The Fraud Survey “ 1998, which received extensive media coverage in numerous U.K. newspapers, magazines, and radio programs. The fraud research was for Sharp ™s dissertation as part of his master of business administration degree at the University of Nottingham. He now has a career in fraud consulting and training. Barnes is the director of the Fraud Research Centre at the University of Nottingham Business School and a reader in corporate finance and accounting.

The Survey Participants

Barnes and Sharp distributed 2,000 surveys in the summer of 1998 to people within the Association ™s European Membership database and Business Defence Limited's database, which included numerous CEOs from most of Europe ™s largest corporations. Just over 200 responses were received, and roughly 90 percent of the respondents were from the United Kingdom. Here's a breakdown of the respondents ™ organizational roles, their industries, and their companies ™ status, type, and size. (Figures represent percentages.)

Occupational Role: internal auditor, 33.5; security manager, 14.6; "other," 12.7; financial director, 10.7; finance manager, 8.9; executive director, 3.8; personnel director or risk manager, 3.2; chairman/chief executive, 3.1; company accountant, 2.5; and company secretary or in-house counsel, 1.9.

Industry: healthcare, 27.9; "other," 17.1; retail, 10; manufacturing, 9.3; services, 8.6; banking, 7.1; insurance, 6.4; government and oil/gas, 3.6; and education, utilities, and construction, 2.1.

Company Status: nonprofit, 35.1; group parent, 30.1; standalone company/firm, 11.7; overseas subsidiary or national subsidiary, 9.4; national division/department/branch, 2.3; and overseas division/department/branch, 1.7.

Company Type: public limited company, 37.2; public sector (government), 35; private limited company, 18; partnership/sole trader, 4.4; and non-governmental or "other," 2.7.

Company Size: 1,001 “ 10,000, 37.8; 101 “ 1,000, 24. 3; 10,000 “ higher, 21.1; and 1 “ 100, 16.8.

A Summary of the Findings

Due to the survey's low response (200 out of 2,000), the authors were only able to perform meaningful analysis on a broad level. The findings were divided into nine subtopics.

Organizational Size

• The incidence of inventory (stock/supplies) frauds increases with organizational size.
• Smaller organizations seem to be quicker at discovering fraud.
• Fraud awareness is influenced by organizational size. Large organizations are less aware.
• As organizations become larger, the proportion of fraud discovered diminishes.
• As organizational size increases, so does the belief that fraud is likely to increase.
• As organizational size increases, so does the belief that the reasons for fraud are economic.
• As organizational size increases, so does the belief that fraud may be solved by increased internal control.

Organizational Personnel

• Within organizations, the internal audit, finance, and security departments are those principally responsible for fraud risk management.
• The security department ™s role in fraud risk management increases with organizational size. It is also the department most likely to be involved in helping the police deal with external fraudsters.
• Middle managers are the most likely group to commit fraud.
• Frauds perpetrated by owners and executives are of a higher loss value than those perpetrated by middle managers, which in turn, are of a higher loss value than those perpetrated by other employees.
• The probability of fraud is about the same for all organizational personnel.
• Individuals in top management believe that fraud is likely to increase but not by much. Internal auditors, and those more closely involved in fraud examination, believe the problem is larger and is likely to increase.

Industry Sector

• The healthcare and banking sectors seem particularly susceptible to fraud perpetrated by external fraudsters.
• The insurance and banking sectors make above average use of corporate investigators.
• Bankers believe that 60 percent of their fraud cases are discovered within six months.
• Education believes it uncovers 90 percent of its fraud (by number and value).
• Bankers believe they detect 73 percent of their frauds by number, and 77 percent by value.
• Insurance, construction, manufacturing, and retail believe they discover only a relatively small amount of their frauds (by incident number) 30 percent, 33 percent, 36 percent, and 38 percent, respectively.

Differences between the United Kingdom and the rest of Europe

• In comparison with the United Kingdom, the rest of Europe seems to believe that the application of technology plays a greater role in combating fraud.
• Internal collusive frauds are less prominent in the United Kingdom than in the rest of Europe.
• The United Kingdom believes it discovers proportionally more fraud than the rest of Europe.

Perpetrators

• This study suggests that accomplices and initiators are treated equally in the action taken against them. However, a harder line seems to be taken with managers. They are punished more vigorously than both top management and non-managerial employees.
• The largest group of perpetrators are those working alone inside the organization. Losses register a median of £18,500.
• Organized criminals are the largest group working alone from outside the organization.
• External perpetrators often collude with other individuals with a similar role. For example, suppliers with other suppliers, and customers with other customers.
• Exclusively external frauds are detected earlier than other collusive frauds.

Fraud

• Frauds primarily occur because of the circumventing or overriding internal controls (17.1 percent), failing to separate duties (13.1 percent), and failing to make periodic checks (10.1 percent). These are factors that require continuous internal supervision.
• Almost half of all frauds are discovered within 12 months.
• Prosecution whenever possible, is an organization ™s most popular redress.
• Organizational fraud focuses almost exclusively on tangible assets “ particularly upon cash and checks.
• The most common corruption frauds are those which involve bribery and kickbacks.
• Frauds involving corruption are much more costly than other types of frauds.
• Intangible asset frauds generally are larger than tangible assets frauds.
• The longer a fraud continues, the more expensive it becomes.
• Fraud involving collusion between internal and external perpetrators are on average the largest frauds (median loss “ £250,000). Frauds perpetrated by external fraudsters working alone are the smallest (median loss “ £11,000).
• Collusion is involved in more than 50 percent of all frauds.
• In 58 percent of cases there was no recovery of loss whatsoever. In 24 percent of cases, full recovery was achieved. Partial recovery accounted for the remaining 18 percent. The average percentage recovery was 44 percent.

Fraud Management Methods

• Most organizations believe that fraud management methods need to be under constant review.
• The retail sector, more than any other sector, uses technology to combat fraud.
• Increased internal control and better risk management techniques are considered to be the most likely way to combat fraud, as opposed to other means such as new legislation.

Fraud Awareness Levels

• Lack of fraud awareness is considered to be a problem in organizations, although respondents are satisfied with the fraud control training employees are given.

Fraud Susceptibility

• Compared to in-house personnel, external anti-fraud professionals consider organizations to be more vulnerable to fraud.
• The construction and insurance sectors are considered to be the most vulnerable sectors.
• The education, manufacturing, services, and healthcare sectors are considered to be the least vulnerable.
• Susceptibility to fraud increases with organizational size.

So What Can We Do Now?

Although fraud obviously exists in Europe, information regarding fraud risk management is scarce. This was one of the primary reasons Barnes and Sharp decided to conduct "The Fraud Survey “ 1998" with the intention of conducting follow-up surveys every year to track trends. (The 1999 survey is in progress and slated for release early next year.) They wanted to tap into the white-collar crimes being perpetrated, and then release their findings to spark a dialogue among corporate management, fraud examiners, accountants, auditors, and others involved in fighting fraud to create a sort of "shared intelligence."

In the closing remarks of the survey's findings, Barnes and Sharp state, " ¦regarding the scale and extent of fraud, the need for more objective information is obvious. However, it needs to be seen in the context of organizational change and complexity, and the temptation and opportunities for potential fraud. Few may disagree with the assertion that organizational fraud is growing, but is it in proportional terms when we take into account new opportunities?"

Perhaps the answer lies in future European fraud surveys. We'll have to wait and see what the 1999 study reveals.