Corporate fraud cannot be dismissed as a rare ailment affecting a handful of badly run or unlucky companies: it is a global challenge to every modern business.

The Kroll Global Fraud Report (See: Four out of five companies worldwide affected by fraud: Kroll Global Fraud Report) provides a deeper understanding of the extent and nature of fraud today, and of the strategies to fight it. It draws on decades of expertise of Kroll professionals worldwide and on a survey of nearly 900 senior executives, commissioned from The Economist Intelligence Unit, investigating how this issue affects their companies.

The survey results show a widespread, expanding problem: four out of five businesses have suffered from corporate fraud in the last three years; One in 10 large companies lose over $100 million a year to it; about half of firms consider themselves at least moderately vulnerable to seven different categories of fraud and 8 in 10 believe that their overall vulnerability has grown.

The very tools and techniques used in pursuit of global opportunities — complex IT arrangements, entry into new markets, and increased collaboration — are themselves increasing risk levels.

As Jules Kroll makes clear, market turmoil inevitably uncovers cases of fraud, and the survey suggests that many are out there to be found. There is no single, simple solution. Although present everywhere, the face of fraud, and the best countermeasures, vary by region, even by country, with legal systems, degrees of economic development, technology levels, cultural norms, and history each profoundly shaping local conditions.

In a globalised world, however, criminals can use local laxity to defraud businesses operating continents away. The survey suggests that companies treat fraud mostly as a financial and IT issue. Both are important, but the problem is far wider.

Repeatedly, in the different sections of this report, the following themes appear:

• Fraud will appear if you do not expect it
• Internal controls and best practice are not optional or unnecessary burdens but essential protections and
• Money spent on due diligence and other preventative efforts is far cheaper than the potential costs of doing nothing.

1 Financial Services
The survey reveals a sector that, although more active than most in addressing its vulnerabilities, faces extensive problems. It has the highest per firm rate of loss to fraud, more than twice the norm. Moreover, compliance breaches, internal financial fraud, information attack, and theft of physical assets have each affected over a quarter of companies in recent years.

Kroll experts try to help investors separate real, if risky, securities from Ponzi schemes among such investments as emerging market hedge funds.

2 Professional Services
The survey shows that this industry is doing well compared to others, suffering
lower fraud, and losing per firm two-thirds less, than other sectors. Higher than
average vulnerability to IT attack and intellectual property (IP) fraud, mixed with
lower spending on appropriate defenses, however, spark concern. Looking in detail, one specific professional key to countering fraud, the Risk Officer, is discussed.

3 Manufacturing
The survey should be a wake-up call for manufacturing companies. This sector is less concerned about, and spends less countering, vulnerabilities than the average, but in practice fraud is more widespread:

• Theft of physical assets hurt 47 per cent of businesses in recent years, against a 34 per cent overall average
• Corruption and bribery 28 per cent, against 19 per cent, and
• Intellectual property theft 23 per cent against an overall average of 13 per cent

For those seeking to protect themselves, the report shows how analysing already existing procurement data can catch fraud before payments are made, or even deter it from happening.

4 Healthcare, pharmaceuticals and biotechnology
Corporate fraud is a serious, growing issue for this sector. The survey shows that it feels more vulnerable than most, partly because it loses 75 per cent more money per firm than other sectors. Two particular problems are compliance (31 per cent have had a failure here recently), and IP theft (22 per cent).

Companies are doing too little in the latter as the threat grows. A study of internet
pharmacies by Mark Monitor, a Kroll Partner, shows how fraud is threatening patients, drug distribution channels, and brand value. Kroll''s Vander Giordano then outlines ten ways that pharmaceutical companies can protect valuable IP.

5 Technology, Media, and Telecommunications
This sector feels vulnerable to high-tech threats, such as IP theft or information
attack. Companies have invested accordingly, with some success: the percentage of firms suffering such frauds is not dramatically higher than the overall average.

Complacency, however, may be appearing. Fewer than half of these firms are investing more in IP monitoring.

These technologically sophisticated businesses must also be alert to traditional frauds: according to the survey, 28 per cent have suffered from physical theft recently and 24 per cent from procurement fraud. Robert Pé of Orrick, a law firm, outlines the case of traditional misrepresentation against a Chinese computer company, and Tsuyoki Sato of Kroll describes how loose controls allowed old-fashioned window dressing and embezzlement at a Japanese media firm.

6 Natural Resources
Fraud is particularly costly here: survey results showed the loss per firm is over 70 per cent above the norm, even though the proportion of affected companies is noticeably lower (66 per cent to 81 per cent), which implies a very high cost per incident. The
industry has noticed: existing and planned investments in anti-fraud strategies are much more widespread than general.

Corruption and bribery is considered the sector''s biggest vulnerability, though the survey results suggest that the biggest difference between natural resources and other industries on this serious issue may be awareness: the proportion of firms here affected by corruption is about average, but the percentage of those highly vulnerable is twice the norm.

7 Consumer Goods
This sector is doing the best overall according to the survey, and fraud here is
decreasing: losses are low - 9 per cent of the average - and 32 per cent of companies surveyed suffered no fraud at all recently. This comes from hard work: the industry''s existing and planned investment is much more widespread than average.

Such vigilance is increasingly necessary in a globalised marketplace and the report outlines the challenge that counterfeiting poses to governments and conclude, along with a United States Senator, that "you better protect yourself".

8 Construction
Kroll''s Blake Coppotelli, having investigated hundreds of construction projects, has "never met one that was clean." The survey also found fraud widespread. Vulnerability in many areas is high, exposure increasing, and the proportion of companies defrauded well above average: theft of physical assets has hurt 44 per cent (35 per cent is the average); corruption and bribery 33 per cent (19 per cent); and financial mismanagement 30 per cent (20 per cent).

Felipe Soares of Kroll describes some ways that pervasive fraud enters projects, particularly through service providers and procurement. Ian Makgill suggests some defenses against the latter, in particular insuring probity among suppliers, while Coppotelli outlines general strategies likely to reduce fraud and associated costs.

9 Travel, leisure and transportation
This sector has a comparatively small corporate fraud problem, but needs to increase its efforts to keep it that way. The loss per firm is one-sixth of the norm and very few firms surveyed feel highly vulnerable to any risk.

Although the costs per incident are still small, the above average proportion of businesses hit by certain frauds according to the survey is worrying: theft of physical assets (42 per cent), management conflict of interest (30 per cent); and internal financial fraud (27 per cent).

The report says airlines, where only 40 per cent have anti-fraud programs, and explains why they need dedicated fraud departments. The report also advises the gambling industry that, in the face of US anti-terrorism legislation, it will need to take further steps to protect itself against money laundering.

10 Retail, Wholesale and Distribution
Overall, the survey indicates that this sector is comparatively well off, suffering only 29 per cent of the average loss per firm for all companies. It has, however, two areas of weakness. The first is fraud involving the physical goods at the heart of its operations.

About one in five considers themselves highly vulnerable to physical theft and to
procurement fraud, while 44 per cent have suffered from the former in recent years,
and 31 per cent from the latter. Kroll''s Richard Abbey accordingly examines what to look
for in shipping fraud, and how companies can protect themselves.

The second weaknesses, which the survey reveals, is that businesses might be too focused on physical goods and not look at other vulnerabilities like internal controls, for example, that has weakened at 31 per cent.

Executive summary

Emerging markets
From the EIU survey data, the different fraud risks of developed and emerging
markets is discussed. It examines how cultural differences lead to varying perceptions of fraud issues in China and the West, and advises risk officers operating in the former.

A section deals with the extraterritorial impact of United States anti-fraud and anti terror legislation on South American corporate governance. These pieces show that the world is far from uniform, and that knowing where the differences lie is essential to compete in a global economy.

Fraud prevention
The report what corporate boards, faced with the demands of Sarbanes-Oxley in the US and similar regulation elsewhere, can do to change corporate cultures and establish a fraud control plan. It shows how the human resources function, by simply checking the résumés of applicants, can stop much embarrassment and potential damage, while a case study shows how essential due diligence is in acquisitions.

Time and again, these articles demonstrate that companies too often ignore, until too late, easily understood best practices. The result is a bill for fraud far exceeding that of doing the right thing to begin with.