A fraud study released by Kroll Advisory Solutions gives pause to the rising trend of insider fraud. While overall corporate fraud seems to be declining, the percentage of fraud committed by insiders is growing. Here are some of the major findings of the study:

• In 2011, 75% of those surveyed reported incidents of fraud at their company
• In 2012, only 61% reported incidents of fraud
• The percentage of fraud that was committed by insiders grew, from 60% in 2011 to 67% in 2012

The study found 67% of firms that had at least one incident of fraud in the past year and laid blame on insiders such as junior employees, senior managers and agents of the company.

But the report said the proportion of companies reporting that they were affected by at least one incident of fraud in the past year dropped to 61% from 75% in 2011.

There's a downside to the decrease in fraud, however. The survey's numbers suggest companies are becoming more complacent. Respondents describing themselves as highly or moderately vulnerable to information theft declined from 50% in 2011 to just 30% this year.

While information attacks on customer data remain a big concern, the Kroll survey showed it's only one part of the hacker threat. Nearly half of the respondents said either company financial data or strategic data had been stolen.

"The survey tells the story of a changing fraud environment, with dangers ebbing and flowing in often unpredictable ways," Kroll officials said.

The survey polled more than 830 senior executives worldwide this summer; 52% of the participants represented companies with annual revenues above half a billion dollars.

The average cost to businesses due to theft declined from 2.1% of revenues to 0.9%.

"The results this year demonstrate that companies must turn their attention inward. In particular, firms need to make protection of confidential information and electronic data a top priority," said Robert Brenner, Kroll senior managing director, in a statement accompanying the report.

Internal fraud is most pronounced in the following categories:

                                                                                                        2012                2011

Theft of physical assets                                                                   24%                25%

Information theft                                                                             21%                23%

Management conflict of interest                                                       14%                21%

Vendor, supplier procurement fraud                                                 12%                20%

Internal financial fraud                                                                    12%                19%

Corruption & bribery                                                                       11%                   19%

Regulatory or compliance breach                                                     11%                    11%

IP theft                                                                                           8%                    10%

Market collusion                                                                             3%                        9%

Money laundering                                                                           1%                        4%

Emerging markets continue to report high levels of fraud: Africa retains its position as the region with the largest fraud problem. Despite some improvement in the fraud environment, the decline in overall fraud prevalence, from 85 percent to 77 percent, was less marked than in other regions. Outside of Africa, India has the highest number of companies affected by fraud of any region or country (68 percent), followed by Indonesia (65 percent). Eight of the 10 frauds covered in the survey were more widespread in India than they were globally. Indonesia experienced the highest rate of information theft (35 percent) among countries surveyed.

Developed markets also report significant levels of fraud. Following Indonesia, the U.S. and Russia tied at 26 percent for the highest rates of information theft compared with the global average of 21 percent. Even though the overall prevalence of fraud has decreased in Europe, the percentage of companies affected by at least one fraud, 63 percent, is slightly higher than the global average. And while the number of businesses in the U.S. hit by at least one fraud was down (to 60 percent from 65 percent last year), the decline was significantly less than the global average.

Fraud varies across industries: Companies in the manufacturing sector saw a substantial increase in the incidence of fraud, with 87% affected. Moreover, eight of the 10 frauds tracked for this survey became more common this year among manufacturers. Manufacturing also experienced the highest levels of theft of physical assets (50 percent), corruption and bribery (29 percent), management conflict of interest (27 percent), vendor or procurement fraud (23 percent) and IP theft (13 percent). The financial services sector had the highest level of internal financial fraud (25 percent) and regulatory or compliance breach (16 percent) of any industry, and the second largest rate of IP theft (10 percent). Of all the companies surveyed, those in the consumer goods sector recorded the second lowest overall number of companies affected by fraud (51 percent) and the lowest average losses (0.4 percent of revenue).

Fraud has been a problem for U.S. businesses for many years. It started in earnest during the “go-go” years of the 1990s when the telecommunications boom – and then bust – created an incentive to show rising earnings even in a down economy. In the 2000s we experienced mega-frauds at companies such as Enron and WorldCom and the meltdown of financial institutions.

My personal feeling is fraud will continue to infect our economy and potentially cost consumers billions of dollars in lost wealth as occurred during the financial crisis that began in 2007. Wall Street and all too many corporations still seem to live by the motto of Gordon Gekko, the fictional character in the movie Wall Street: “Greed is good.”

Blog posted by Steven Mintz, aka Ethics Sage, on October 31, 2012