Upfront: Measuring the Cost of Financial Reporting Fraud

Financial reporting swindles are the least common type of fraud committed against U.S. companies, but they're by far the most costly for organizations that experience them, according to a recent KPMG LLP survey of executives at more than 450 public companies and state and federal government agencies.

Seven percent of respondents said that their organization had uncovered financial reporting fraud in the 12 months prior to the survey, more than double the proportion of respondents who checked that box in a similar KPMG study conducted in 1998. Respondents' estimate of the cost of financial reporting fraud averaged more than $250 million.

Among the organizations that discovered fraud in the seven broad categories that the survey investigated, more than three in four did so through internal controls, and almost two-thirds uncovered problems through internal audit. Both of these percentages represent substantial increases over the results of the 1998 study.

"Companies and their boards are more intent on uncovering fraud and misconduct as a direct result of corporate governance legislation and other mandates -- including the Sarbanes-Oxley Act -- put in place over the past two years," says Richard H. Girgenti, New York City-based Americas partner in charge of KPMG's forensic practice.

The vast majority of survey respondents said they plan to implement new anti-fraud programs as a result of Sarbanes-Oxley, but Girgenti worries about the 22 percent who said they have no such plans. "This finding was regrettable and may put these companies at greater risk not only for experiencing incidents of fraud and mis-conduct, but also for facing higher fraud costs and damage to the company reputation when incidents do occur," he says.