KPMG Analysis Identifies Key Fraudster Traits

Red Flags That Could Have Signaled Trouble Were Missed in More than Half of Cases

A senior employee known as an aggressive workaholic, but who seems stressed, yet rarely takes vacations, declines promotions, and zealously protects his business unit from outside scrutiny while personally handling choice vendors may be up to something devious, according to an analysis of corporate fraud cases investigated by KPMG International’s member firms.

“Knowing the common traits of a fraudster can help employers be better prepared to prevent damaging incidents from happening in their organizations,” said Philip D. Ostwalt, who leads the Forensic Services Investigations Network for KPMG LLP, the U.S. audit, tax and advisory firm.

Ostwalt said an analysis of 348 cases that KPMG investigated for its clients across 69 countries from 2008 to 2010 identified the typical fraudster as:

• A 36- to 45-year-old male in a senior management role in the finance unit or in a finance-related function;
• An employee for more than 10 years who usually would work in collusion with another individual.

The report, “Who is the typical fraudster?,” found that 56 percent of the frauds the KPMG member firms investigated had exhibited one or more red flags that should have brought management attention to the issue, but only 10 percent of those cases had been acted upon prior to requiring a full investigation.

Ostwalt said the report identified a series of fraud red flags, including:

• A business unit thrives despite competitors struggling with declining sales and/or profits.
• Excessive pressure exists on senior managers and employees to achieve unusually tough profit targets and business goals.
• Complex or unusual payment methods and agreements occur between the business and certain suppliers/customers.
• The business may have multiple banking arrangements rather than one clear provider–a possible attempt to reduce transparency over its finances.
• The business consistently pushes the limits and boundaries regarding matters of financial judgment or accounting treatment.
• There is excessive secrecy about a function, its operations and its financial results, and the unit is not forthcoming with answers or supporting information to internal inquiries.
• Increased profitability fails to lead to increased cash flows.

In addition, the KPMG analysis found that a fraudster’s traits include:

• Volatility and being melodramatic, arrogant and confrontational, threatening or aggressive, when challenged.
• Performance or skills of new employees in their unit do not reflect past experiences detailed on resumes.
• Unreliability and prone to mistakes and poor performance, with a tendency to cut corners and/or bend the rules, but makes attempts to shift blame and responsibility for errors.
• Unhappy, apparently stressed and under pressure, while bullying and intimidating colleagues.
• Being surrounded by “favorites,” or people who do not challenge the fraudster, and micromanaging some employees, while keeping others at arm’s length.
• Vendors/suppliers will only deal with this individual, who also may accept generous gestures that are excessive or contrary to corporate rules.
• Persistent rumors or indications of personal bad habits, addictions or vices, possibly with a lifestyle that seems excessive for their income, or apparently personally over-extended in their finances.
• Self-interested and concerned with their own agenda, and who has opportunities to manipulate personal pay and rewards.

Companies should consider whether their internal controls and other processes remain relevant as market conditions and internal growth goals change, said Ostwalt.

“Senior management must endorse and support a robust ethics and compliance policy that advocates doing the right thing, provide an easy way for employees to report an issue without fear of retaliation, and conduct appropriate due diligence such as vendor screening and background checks on new hires and those being promoted to material positions,” Ostwalt said. “It can be helpful to conduct pulse checks on how all employees view ethics and compliance within the organization.

“In addition to monitoring potential risks through communications and feedback from employees, senior management must be aware of the unique fraud risks to their company and industry, in addition to analyzing cases brought to their attention for trends on potential future issues or that demonstrate a breakdown in their internal controls processes,” said Ostwalt.

The analysis by KPMG found that the investigations resulted in:

• Disciplinary action in 40 percent of cases;
• Enforcement action (includes regulatory, legal and police) in 45 percent of cases;
• Civil recovery in 23 percent of cases;
• Resignation or voluntary retirement in 17 percent of cases;
• Out of court settlements in 6 percent of the cases, and,
• No action or sanction in 3 percent of the cases.