Study: Czech fraudsters older than counterparts elsewhere

In recent years, corruption has been a huge issue in the Czech Republic. Indeed, manipulated public tenders, fraud and other forms of economic crime are estimated to cost the country up 100 billion crowns a year. A new study by the international consultancy firm KPMG, entitled Global Profiles of the Fraudster, takes a closer look at the perpetrators of graft, and how they differ in various parts of the world. But who is a typical Czech fraudster? That’s a question I discussed with Maroš Holodňák, the head of forensic services at KPMG’s Czech branch.

Photo: Barbora Kmentová

“The typical fraud in the Czech Republic is related to procurement. That’s an evergreen. The typical situation is when a public tender is manipulated by disqualifying some companies from it through restrictive qualification criteria. Usually, it involves a conflict of interests when the employee of the buyer is somehow related to the supplier, either directly or through wife or a friend, and so on. The key issue for the company is that they are either buying at inflated prices, or they are buying in quantities that they don’t need.”

Is that a global phenomenon or is the prevalence of this type of fraud typical for the Czech Republic or other countries in the region?

“Based on our profiles of the fraudsters, globally it’s mostly related to the manipulation of financial statements and operations. We still see a significant risk of the manipulation of financial statements in the Czech Republic, definitely during the current period which is not that promising economically for companies. But here, we mostly see fraud in the procurement and sales compared to the situation elsewhere.”

Have you seen any rise in this particular type of fraud given the difficult economic times?

“We definitely see a rise in requests for investigation from medium and large corporations where we investigate more type of fraud. We have seen a rise in cases where the fraudsters are members of board of directors, which means they are in more senior positions. That could be the result of the crisis because it’s really difficult for some companies to meet their targets. Another reason could be that the managers want to keep their jobs with the companies, knowing that not meeting the targets would lead to their dismissal. This is the rise that we see.

“We have also seen more frauds in managing the companies’ relations with financial institutions – once a company gets into trouble and are unable to pay their loans’ principles, interests and so on, they try to find ways of prolonging the situation by either supplying the banks with false information or, vice versa, they might decide to transfer their assets out of the company and continue their business elsewhere, leaving the banks empty shells.”

How has the situation changed from your previous study which came out in 2011, covering the previous two-year period?

Maroš Holodňák, photo: archive of KPMG

“It’s very similar but what has changed is that while before, the average fraudster worked for the company for more than six years, now they work for them for less than that. This could be caused, again, by the current difficult economic situation where there is more fluctuation in companies and even at their managerial positions. It in fact tells us that it would be wise for companies that have a significant rotation of employees, managers, and so on, to spend some effort on due diligence on people employed in sensitive positions.

“Also, the age of the typical fraudster has diminished; it used to be between 35 and 45 years of age and now they are older. But I cannot explain the reason – maybe because we see more fraud committed by senior managers of companies, executive officers, and so on.”

I understand the typical Czech fraudsters are a little different in that they are older. Is age the only difference here?

“It’s not only the age; it’s very similar to what I said about the difference between our previous and current profiles. The global fraudster works longer for their company so we can assume the frequency of employees changing is lower. What we also see as a warning signal is that 25 percent of cases in the Czech Republic were detected by chance while globally, that’s a minimum.

“The difference between Czech and global fraudsters is that Czech fraudsters are able to override controls that are in place which means that there is not enough supervision by mother companies, by shareholders, and so on. Some managers behave like they own the companies; that’ why they are able to override the controls and commit fraud.”

How are companies reacting to the changing situation? Are they more alert?

“Unfortunately they are not. I believe that because of the difficult economic environment, companies focus on their performance, on sales and on maintaining their market share, they spending less time on internal controls. I see a lot of reduction in the staff and expenses related to internal audit and control systems, and I think the situation is not getting better.”

How representative is your survey for the entire private sector? Do the results say anything in general about fraud in the private sector?

“The purpose of this survey is to show the typical fraudster regardless of the company, the type of industry, and so on. It’s useful for everyone. For example, we see that fraud is detected by chance which means there are no or little controls in place. On the other hand, we know that what works very well, are things like ethical hotlines; in a culture of openness, employees are willing to speak up and point to issues. Our survey shows that this really works, and other companies can take that as a way of improving their own controls.

Photo: Barbora Kmentová

When company owners see that the market going down, and their products are not as successful as they were before, and at the same time, the companies’ figures are going up, it should be a red flag for them to start thinking whether everything is right with the figures presented by the managers.

“Once we identify who the fraudsters are, in which area the fraud occurred and how it was detected, that gives other companies an opportunity to identify the key risks, and how they can avoid or mitigate the risk of fraud.”