KPMG has launched the “Corporate Failures” publication which, among other things, discusses corporate failures and the nature of fraud causes. The publication stipulates that humans seem to be fascinated by fraud. Some do it and eventually, so it seems, believe that they have created magic. Others stand in shocked astonishment observing the demise of companies, ensuing court cases and media blazes seeking answers, pointing fingers and never arriving at a satisfactory explanation of the chaos left behind.
Before it is said that everyone is now accused of being fraudsters, the simple analogy of the tooth fairy does create a number of interesting questions about fraud, which the publication attempts to answer. Children accept the unpleasant task of losing part of themselves with the ensuring ramblings of parents about a magical creature bringing money/rewards in exchange for little treasures. Is this fraud? Is this unethical? Or are we all just looking for a little bit of magic in a world that is hard to comprehend, even for adults?
Cornelia Niemand, Associate Director at KPMG in South Africa, says: “This publication reveals that it was not only auditors that have been in the firing line following corporate failures. CEOs and boards have also been called to task on the execution of their duties and why fraud occurred under their management and oversight. Leaders in corporate failures have been sentenced to jail, paid substantial fines and walked away with reputations a little less intact. Various authors have highlighted the character traits of leaders of failed corporates.”
Much research has been done globally to measure fraud and many articles have been published recommending additional mechanisms to prevent and detect fraud. Court sanctions of convicted fraudsters do not appear to deter and additional legislation and regulation appear to have little impact in reducing the occurrence of fraud and, hence, corporate failures.
KPMG’s approach to Risk-Based and Behavioural Investigations focusses on the various elements of fraud, i.e. motivation/pressure, rationalisation, opportunity and capability.
According to Niemand, a variety of factors contribute to fraud, for example, greed, ambitious corporate growth, deceptive reporting practices and lack of transparency, excessive interest in maintaining stock prices, executive incentives, stock market expectations, incompetent or ineffective boards, dominant CEOs, pride and the desire for power.
Considering the wide variety of causes observed in the corporate failure case studies, the challenge of detecting and deterring fraud is therefore not easy to solve due to the numerous role players, possible scenarios and the unpredictable nature of individuals. The obvious question is then how to apply the broken windows theory to corporates in an effort to detect and deter fraud.
“It must be understood that fraud does not always result in corporate failure, nor do corporate failures occur only as a result of fraud. However, in some of the biggest corporate failures across the globe, fraud was involved,” says Estelle Wickham, Senior Manager at KPMG in South Africa.
In its conclusion, the publication notes that experience has shown that individuals who are dissatisfied with certain procedures or decisions have a tendency to disregard policies and “bend” the rules or “expedite” transactions in a particular way. This creates the impression that everybody could get away with inappropriate behaviour and more loopholes may be exploited by others in the organisation
The full Corporate Failures publication can be found here.
KPMG