In their Trends and Issues paper, "Red Flags of Fraud", Grabosky and Duffield (2001) identified a number of warning signals for fraud, or anomalies. While the existence of anomalies is not always indicative of criminality, they do signify heightened risks that should be investigated further. Drawing upon data collected for the Australian Institute of Criminology and PricewaterhouseCooper's study, Serious Fraud in Australia and New Zealand (2003), this paper identifies those circumstances or anomalies that were present in the cases of serious fraud examined. Understanding these factors will help those at risk of fraud victimisation to take action to prevent financial crimes from being perpetrated or to detect instances that have already begun at the earliest available opportunity.
The Australian Institute of Criminology and Pricewaterhouse Coopers (AIC/PwC) recently examined a sample of Australian and New Zealand 'serious fraud'1 cases within the calendar years 1998 and 1999. For the two years in question, the total amount in respect of which offenders were sentenced was $260.5 million, while the total actual loss suffered by victims was $143.9 million. Details on sample and methodology are provided in the Serious Fraud study (Australian Institute of Criminology and Pricewaterhouse Coopers 2003).
Recent studies have identified a number of circumstances that arise regularly in cases of serious financial crime (e.g. Ernst and Young 2002, KPMG 2001 and 2002, Krambia-Kapardis 2001). Part of the AIC/PwC study (2003) involved the examination of how cases were detected. Internal audit was the most frequently identified manner of discovery (19%), followed by cases in which offenders simply failed to make payments to creditors or investors (13%) -thus leading to complaints being made. A number of cases were also discovered during police investigations (11%) or inquiries by law enforcement agencies (10%). Despite research to the contrary (Association of Certified Fraud Examiners Report to the Nation (2002)) relatively few cases involved whistleblowers.
Internal auditing generally led to the discovery of accounting anomalies resulting from fraudulent transactions, such as those carried out by a bank employee or a company's financial manager. Behavioural anomalies associated with professional misconduct, such as professionals failing to make payments due to their clients, were detected often when the clients reported this to the police or other regulatory bodies.
While a large number of offenders failed to take effective measures to conceal their misconduct, it was apparent that many instances were difficult to detect. The mean period between the first offence and the last offence committed by a single offender was approximately two years, and the mean period between the last offence to the date of detection was an additional 10 months. In one instance, offences were committed over a period of almost 13 years without the illegal conduct being discovered.
What, then, are the anomalous circumstances that give rise to the commission of serious fraud and to its discovery?
* Poor investment controls
Where funds are invested either by corporations or individuals, it is critical for adequate steps to be taken to investigate the legitimacy of the entity to whom funds are provided and the adequacy of securities. Sometimes investment funds will be lost in so-called advance fee schemes in which capital is not at risk but supporting advance payments are stolen. This is the gist of the many West African-based schemes that currently operate globally. On other occasions, the target is the investment fund itself which can be misappropriated by dishonest finance providers or lost if funds are placed in unacceptably risky ventures. In both cases, risks are created through investors failing to assess the legitimacy and security of individuals or organisations with whom investment funds are placed. …