DELOITTE FORENSIC CENTER STUDY REVEALS 'FRAUD CONTROL GAP'

More effective companies fall short in certain aspects of fraud control; less effective companies lag far behind in all areas

NEW YORK · November 6, 2007 /PRNewswire/ — According to a new study published by the Deloitte Forensic Center there is a substantial self-reported "fraud control gap" between more effective companies and others leaving many companies potentially exposed to fraudulent activities.

In addition, even the companies considered more effective in detecting and preventing fraud demonstrated significant opportunities to enhance their performance in areas such as fraud risk assessments, whistleblower hotlines and employee fraud awareness training.

To analyze their different approaches, companies were categorized into those that were more effective at fraud control and those that were less effective. Companies were considered as "more effective" when executives gave their companies an average rating of 3.5 or greater (on a five-point scale) on their effectiveness in four areas: preventing internal fraud, detecting internal fraud, preventing external fraud, and detecting external fraud; "less effective" companies were those receiving average ratings of less than 3.5. The threshold for categorizing companies as "more effective" and "less effective" was set by the professional survey firm that conducted the survey for the Deloitte Forensic Center.

"The size of the 'fraud control gap' reported by corporate executives in this study should concern corporate managers and boards of directors, and hopefully spur them on to action," said Toby Bishop, director of the Deloitte Forensic Center. "More effective companies are driving higher performance of their fraud controls, which better protects their business and their investors. No-one should want their organization to be in the less effective group when it comes to fraud control."

Bishop continued, "It is a real cause for concern that only 32 percent of executives considered their company's whistleblower hotline to be 'very effective' at uncovering or preventing fraud. Hotlines play a vital role in deterring and detecting major frauds. Our findings highlight the opportunity to improve the performance of whistleblower hotlines and other fraud controls at many organizations."

The self-reported "fraud control gap" between more effective and less effective companies was large. Ninety-three percent of executives at more effective companies considered their organizations to be "very effective" at detecting internal fraud compared to only 17 percent at less effective companies.

Both groups of companies rated themselves significantly less effective in dealing with external fraud than with internal fraud, revealing opportunities for even the more effective companies to improve. Fifty-six percent of executives at more effective companies considered their organization to be "very effective" at detecting external fraud, compared to only 4 percent at less effective companies.

Executives at more effective companies gave their companies far higher ratings on all aspects of fraud control

Effectiveness of Fraud Control
Percent of Companies Responding "Very Effective" (4 - 5 on 5-point scale)

(Click to view enlarged chart)

Only 41 percent of the 277 U.S. senior executives participating in the online survey rated their organization's fraud control performance highly enough to meet a threshold of "more effective" as defined previously. There were few differences across industries in the ratings of fraud control effectiveness, with the exception of financial services. The financial services industry has been more focused on fraud control over the years, which may explain why 53 percent of executives at these firms rated their organization's performance sufficiently highly to be considered more effective at fraud control.

More effective companies have a distinctive profile—conducting more detailed fraud risk assessments, benefiting from active involvement in fraud control by senior management, and involving mid-management and lower-level employees in the effort to prevent and detect fraud.

About the Study

The Deloitte Forensic Center formulated the survey and engaged a professional survey firm to conduct it online. Two hundred and seventy-seven senior executives involved with fraud control, drawn from functions including internal audit, compliance, finance, risk management and legal participated.
Executives participating in the survey came from a broad range of industries including financial services; manufacturing; technology, media and telecommunications (TMT); energy and resources; life sciences and healthcare; retail; real estate; public sector; transportation; and other industries.
The executives surveyed represented small, mid-sized, and larger companies: 46 percent of executives were from companies with $1 billion or more in annual revenues, 31 percent from companies with $100 million to less than $1 billion, and 23 percent from companies with less than $100 million.
Sixty-four percent of respondents said their company was subject to the Sarbanes-Oxley Act.

About the Deloitte Forensic Center

The Deloitte Forensic Center (DFC) is a think tank aimed at exploring new approaches for mitigating the costs, risks and effects of fraud, corruption and other issues facing the global business community. Unique to the marketplace, the DFC aims to advance the state of thinking in areas such as fraud and corruption by exploring issues from the perspective of forensic accountants, corporate leaders, and other professionals involved in forensic matters. The DFC strives to provide multidisciplinary analyses that companies and official organizations will find practical and helpful. A particular focus will be placed on the use of technology as a means of providing solutions to fraud and corruption detection, mitigation, and prevention. In addition to encouraging a public dialogue on these issues, the DFC also will contribute to the development of the forensic accounting profession and raise its profile in discussions of issues of public importance. The DFC will accomplish its goals by bringing together leading professionals from a wide variety of backgrounds including business, academia, law, government and regulatory affairs. The Deloitte Forensic Center is sponsored by Deloitte Financial Advisory Services LLP.

About Deloitte

As used in this document, "Deloitte" means Deloitte Financial Advisory Services LLP, a subsidiary of Deloitte & Touche USA LLP. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte & Touche USA LLP and its subsidiaries.