MORE companies are suffering from fraud and the scale of losses is increasing, according to a new survey on white collar crime. The KPMG fraud survey, the third one carried out since 1993, shows that over 40 per cent of the 242 respondents, drawn from the top 500 companies, admitted to experiencing the problem in the past two years.

The average loss from companies reporting fraud was £199,000. However, losses of over £1 million were incurred in 10 instances. A third of defrauded companies lost between £10,000 and £50,000.

Increasing reliance on complex information systems is allowing greater opportunities for fraud, according to 64 per cent of respondents, and most fraud is carried out by employees. However, one respondent said: "Although computerisation is labelled as a gateway to fraud, it should be noted that it is also a great source of fraud prevention. If properly harnessed, computerisation does not change basic controls, it merely changes their definition."

The increased sophistication of criminals was the most commonly cited reason for respondents feeling that fraud will increase over the coming year. Most respondents also cited a weakening of society's moral values as another reason for the prevalence of fraud.

"The Fraud Squad is grossly underfunded, underresourced and overworked," according to one respondent. "Only cases of serious financial or national implication are pursued. The lack of sanctions in less major cases encourages others to attempt fraud." External fraud - that perpetrated by people outside a company - accounted for the most costly cases. This type of fraud cost companies £9.3 million in 1997, compared to £4.9 million in 1995, but "there has been a growth in the value of fraud across all sources between 1995 and 1997".

Employee fraud cost companies almost £5 million, an increase of £1 million on the amount reported in 1995, while management fraud cost almost £1.5 million, an increase of £1 million on the previous survey.

According to Mr Richard George, of KPMG, the survey results show that fraud is a significant problem and the defeatist posture adopted by many companies is disappointing "especially as 90 per cent of respondents feel they are knowledgeable about the way fraud can occur in their organisation".

"Poor internal controls are acknowledged to be the most significant factor in allowing fraud to occur. The better the business, the better the opportunity to have strong internal controls in place," he said.

The survey notes that the number of frauds discovered accidentally increased from 9 per cent of all discoveries in 1995 to 26 per cent of all cases in 1997.

"What is needed, in many companies, is a stronger commitment to take preventative action to curtail the opportunities for future fraud.

"There is no question but that preventative action is better than the time consuming and publicly embarrassing pursuit of the fraudster for an uncertain recovery of funds lost," Mr George said.

He noted that there had been a substantial growth in the scale of losses incurred since the last KPMG survey. Just over half of the respondents had reported their fraud cases to the i, Garda, which had resulted in prosecutions in 40 per cent of referred cases. A similar number of respondents immediately dismissed the fraudster.

"Consistent with previous surveys, other common actions taken by companies were to strengthen their internal controls and permit the culprit to resign," the report states.

Over half of the surveyed companies increased internal controls as a future preventative measure. More companies than before are carrying out reference checks on new employees, tightening employment contracts and installing surveillance equipment.

Most fraud involves theft of stock and cash, cheque forgery and teeming and lading, where a cheque made in payment of a debt is diverted by the fraudster. Comparing the results with surveys carried out in 1993 and 1995, KPMG finds that 42 per cent of respondents experienced fraud in 1997, compared to 39 per cent in the 1995 survey and 40 per cent in 1993.

In 1995, some 73 per cent of fraud occurred in the manufacturing, retail and distribution sector, but this declined by 20 per cent in two years. Fraud in the financial services sector decreased by 2 per cent to 13 per cent in that period.

Cheque forgery remains the biggest form of external fraud, followed by false invoices, credit card fraud, false insurance claims and false presentation of funds. Product substitution, bid rigging or price fixing and bribery or secret commissions are also listed as fraudulent practices.

Over 25 per cent of employee fraud occurs as stock theft, with misappropriation of cash accounting for over 20 per cent. Fraud also occurred in teeming and lading, expense accounts, and using petty cash. Providing kickbacks and being involved in fraudulent loans or investments are also cited.

"Additional types of employee fraud include fraudulent purchases for personal use, which in the latest survey represented 5 per cent of employee fraud. Credit card fraud accounted for 4 per cent of employee frauds while payroll fraud and information theft represented 2 per cent of insider frauds."

In management fraud, teeming and lading declined as the greatest source of fraud from 32 per cent of all incidents in 1995 to 21 per cent in 1997. "Expense account fraud has also decreased from 21 per cent to 11 per cent of management frauds and incidents of cheque forgery and diversion of sales have also fallen over the period," the report says.

The total reported by respondents to have been lost through fraud over the past two years is estimated to be £19.3 million. This is a significant increase from 1995 when respondents disclosed losses totalling £9.4 million and is consistent with respondents' belief that the level of fraud will increase," the report states.

It adds that "the real incidence of fraud in Ireland runs to a large multiple of the amount reported in this survey".

The KPMG survey was carried out last August, using a postal questionnaire and following that up with a telephone interview, usually with a senior executive. Most of the respondents (57 per cent) were drawn from the manufacturing, retail and distribution sectors, and just over a third were from companies with an annual sales turnover of between £20 million and £49 million.

The respondents included organisations of all sizes, with annual sales turnover from just under £10 million to over £1 billion.