Corporate fraudsters are getting caught red-handed in ever greater numbers in the Gulf through tighter oversight and the pressures of the financial crisis, according to a survey from Deloitte Corporate Finance.
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More than a third of executives in the region reported at least one instance of fraud during the past year, the web-based survey found. Of those, 14 per cent were valued at more than US$1 million (Dh3.6m) and 7 per cent at more than $10m.
The high incidence of fraud may be linked to stepped-up efforts to detect and prosecute it, rather than an actual increase in fraudulent activity, lawyers and fraud investigators said. "People are more willing to take action now," said Stephen Millington, who heads financial investigations in the Middle East for Kroll, a corporate investigations company. "Before, a fraud may have happened but it was resolved quietly and in-house, whereas now shareholders and boards are acting."
The financial crisis has also exposed frauds that were more easily kept under wraps when profits were rising and the region's economies were booming, said Stuart Paterson, a partner at Herbert Smith, which specialises in corporate fraud and asset recovery.
With the global economy staging a fragile recovery, he said companies now were also more willing to spend money on hiring lawyers and investigators to find fraud and get their money back. "I think there will have been fraud that people have detected as a result of the financial crisis," Mr Smith said. "It's like the age-old quote: when the tide goes out, you see who's left without their trousers on. Because of a lack of liquidity, people are finding it more difficult to conceal their fraud."
The crisis had "also led to increased internal reviews of transactions and systems of controls, and therefore fraud is being discovered more regularly", he said.
More than a third of the executives surveyed by Deloitte said the financial crisis had contributed directly to a rise in fraud. The survey also found the most common forms of fraud were "thefts of physical assets" and "theft or misuse of information".
Almost three-quarters of companies reported having stops in place to detect and prevent fraud, and half had policies protecting corporate whistle-blowers. Those percentages could stand for improvement, Deloitte said, although it acknowledged companies had made progress.
"While our results illustrate an increased exposure to fraud, they also show an improvement in corporate governance standards in the region," said Humphry Hatton, the head of regional forensic and dispute services for Deloitte and the chief executive of Deloitte Corporate Finance Middle East.
"Overall, our results are encouraging and indicate that while organisations have experienced a recent increase in fraud-related activity, they are focused on continually improving controls and implementing risk mitigation strategies," said Mr Hatton.
Better corporate governance had been a driver of the recent surge in fraud investigations, Mr Millington said. One duty of boards of directors was to watch carefully over the companies whose shareholders they served for any evidence of mismanagement.
"Corporate governance is getting more sophisticated in this region," Mr Millington said. "Governance is being implemented in terms of how to react to incidences of fraud, but also to learn from mistakes."
