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is adding to the growth of fraud Companies Seem Unperturbed by Tide of Internal Fraud, Study Says
BOSTON — FRAUD is a booming sector in an otherwise sluggish economy, according to a new study by KPMG Peat Marwick, the world's largest accounting firm.
Seventy-six percent of the biggest American companies have been hit by fraud during the past year and a full two-thirds predict that fraud will increase this year, according to the "1993 U.S. Fraud Survey."
If corporate America "starts to see that this is a problem that every business faces, and then deals with it in a determined way, it can do something about fraud," says Michael Carey, director of Peat Marwick's U.S. Forensic & Investigative Services Practice.
Nearly one quarter of the firms in the survey have lost $1 million or more to fraud in the past year. Companies reported that the majority of losses occurred because of poor internal controls. Management overrides of internal controls and collusion between employees and third parties were also significant contributors to successful fraud.
The most surprising result of the survey was the apparent lack of commitment on the part of companies to boost internal fraud detection and prevention efforts.
"Most fraud was discovered through the proper use of internal controls," Mr. Carey says. "The thing which most caused fraud was the absence of internal controls." Yet only 3 percent of companies in the survey have taken steps to tighten up their controls in the past year. "That's a real puzzle to me," Carey says.
Accounting firms auditing companies' books do not focus on finding low-level fraud. "Their task is to report on the financial statements as a whole," Carey says.
Whenever major fraud goes unchecked by auditors, however, it usually makes front page news. And as the host of savings-and-loan disasters and more recent disclosures, such as accounting irregularities in the Phar-Mor drugstore chain, have piled up, Congress has been tempted to add new regulations for auditing public companies.
Rep. Edward Markey (D) of Mass. has cosponsored a bill, the "Financial Fraud Detection and Disclosure Act," which would require auditors to search out fraud as part of their regular annual audits of companies.
"Despite a decade of dealing with the bitter lessons of increasing corporate fraud, I am disheartened to learn that most companies believe the problem is getting worse, not better," said Mr. Markey, responding to the results of the Peat Marwick survey. "This is the tip of the iceberg; the survey's authors conclude that the figures they uncovered don't even begin to address the huge amounts of corporate fraud presently left undetected by our management and accounting systems."
But William Kinney, an accounting professor at the University of Texas at Austin, is wary of casting the net too broadly in the search for fraud. "It's hard to write standards on how good controls ought to be," he says. "You can easily spend more on controls than the value of the fraud that might be prevented. If it costs $1 million to prevent a $250,000 mistake, is that worth it?"
While the debate about the policing role of auditors and government will continue, there does seem to be a consensus among firms about the source of the fraud problem. Eighty percent of the firms surveyed said economic pressures on individuals are contributing to fraud. And almost as many firms said that the "weakening of society's values" is pushing up the incidence of fraud.
"Some of the major traditional sources of values in our culture - our religious and educational institutions and the family - are in trouble and simply do not have the kind of value-forming influence that they once did," says Paul Minus, president of the Council for Ethics in Economics. "We cannot expect such movements to happen without fallout like an increase in fraud."
As businesses have found incoming recruits increasingly lacking in moral grounding, calls have gone out for business schools to offer training in ethics.
"Business schools and even businesses are doing remedial work on the point of ethics," Mr. Minus says.
Peat Marwick's Carey says that to prevent fraud, companies have to be clear about what is and is not acceptable on the part of employees, managers, and even suppliers.
"That starts with a code of ethics in writing," he says. "But that's not where it should end."