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Friday 20.10.2017 | Name days: Leonīda, Leonīds

KPMG: management representatives of Central and Eastern European companies often involve in illegal activities

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUManagement of companies located in Central and Eastern European countries more often than others get involved in different illegal activities, according to results of a survey by KPMG. This survey includes information about 596 fraud cases around the world, including 70 in CEE region.

Management officials of companies are involved in 44% of all fraud cases in this region. Elsewhere in the world this proportion is only 28%. Persons involved in fraud cases are often described as ‘autocratic’ (39% in CEE region and only 20% elsewhere in the world) and people with a ’sense of superiority’ (47% in CEE and 36% elsewhere in the world).

Specialists note that the main factors that increase the risk of fraud in companies include authoritarian leadership style, unlimited power, weakness or lack of control mechanisms, as well as too much trust partners. Even though the majority of fraud cases are uncovered in large companies, small companies and organizations often fall into risk as well (20% in CEE region and 13% in the world). While large companies overcome problems caused by fraud relatively easy, the existence of small companies can even be put at risk by fraud cases.

Andris Puriņš of KPMG’s Financial Fraud Investigation expert says: ‘When management of companies decide to involve in fraud, the sheer scope and financial damage caused to their companies are usually larger than any other fraud cases. In some cases we’ve investigated in the Baltics, fraud is usually continued over many years. It is a way managers often use to increase their income.’

Fraudsters work alone only in 13% of all cases. Often even family members participate in fraud (28%). This also applies to former colleague (25%). Most fraudsters have no prior history of being caught. However, there is quite a large proportion of cases when persons who were previously fired from their jobs for fraud are caught again. This is why it is often possible to prevent potential risks by carefully studying the background of potential employees and performing regular inspections of people in important posts. Potential internal conflicts can be identified by carefully inspecting either a business partner or employees of the company.

Authoritarian management style and unlimited power

The management style of companies in CEE region has historically been rather authoritarian. An environment where ‘orders of the management’ are not challenged provides conditions for high-rank managers to involve in fraud. In 41% of all fraud cases in CEE the reason why people turned to fraud was unlimited power. A thorough analysis of fraud cases leads to the conclusion that if foreign companies provide their subsidiaries a lot of freedom, it should come as no surprise if this trust ends up being misused.

The survey reveals that most often cause for fraud in the world is weak internal control (44% of all cases in the world). It should be added, however, that fraud cases in countries of CEE region often take place in spite of internal control mechanisms (31% in CEE and 20% in the world). This can be explained with the fact that these fraud cases involved the highest level managers in companies. Usually these people are the ones who are responsible for maintaining internal control in the companies they work in.

Risk sectors: trade and marketing

Trade and marketing sectors are believed to have a higher risk of fraud than other sectors (23% in CEE and only 14% in the world). In most fraud cases uncovered in CEE region were noted in companies with exceptionally aggressive marketing strategy (44% in CEE and 26% in the world). If wages of management representatives depends on financial results, they will often try to find ways of using this to their advantage.

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