A more conducive environment is needed in the GCC to help in reporting and controlling financial fraud, which is likely to run into billions of dollars of losses per year, said top officials at KPMG, a leading consultancy firm in audit, tax and advisory service.

"It is very important to have a safe environment for people to come forward and report financial fraud. Fear is one of the main reasons that prevents people from going to the authorities," Colin Lobo, Partner – Forensic at KPMG told Emirates Business during a media roundtable yesterday.

The demographics of the region aggravates this problem. "There are a lot of expats living in the region, who do not report problems happening in their organisation for fear of being victimised. They need their jobs, have a family to look after back in their home country, so they just let their bosses do what they are doing," added Lobo.

The UAE is no different from any other economy and as it grows cases of fraud are bound to increase.

"Organisations in the region are facing major challenges brought about by rapid economic growth, increasingly sophisticated businesses and technological advances," said Lobo.

"Earlier people in the Middle East relied on trust. Rental and sale contract was just half-page but now you see the number of pages of these contracts. Trust is being eroded in this market place," he added.

And people are adapting to this changing environment. "Some time back people were shy of reporting fraud – it was like killing their reputation and financial value. But now, there is a willingness to report fraud. People and organisations are realising that this is an issue and should be dealt with," said Lobo.

According to figures released by KPMG in its latest GCC Fraud Survey 2008, around 43 per cent polled people believe fraud is a major problem, while 60 per cent believe fraud is set to increase in the region.

"Again, this is a global phenomenon. Currently, economies are growing in the region and when countries grow people are more inclined to look at levels of growth being achieved and forget accounting practices. They will be putting more people in their sales team than their accounting teams," said Lobo.

"In a booming economy many instances of fraud can lie dormant for years. It is only when the economy slows down that people will scrutinise," added Lobo.

After the financial services in the UAE, Lobo expects fraud cases to come from the realty and construction sector, which may not be good news for the booming property market in the country.

Citing the case of Enron, Lobo said that it is the employees that are the victims of such fraud, besides shareholders, banks and suppliers. "Enron's financial statements were misleading and when things came to light people just lost their jobs."

However, such things have not happened in the UAE as companies in the region are relatively cushioned because of a buoyant economy and the authorities have stepped in to prevent businesses from failing. But as the growth slows problems may creep up.

In such a scenario, it is all the more important that organisations try to insulate themselves from such mis-happenings. "Fraud risk management is very important. You have to have the right corporate framework in place, right rules and policy. This is followed by detection – look for the red flags. And lastly, have a proper response to fraud," said Lobo.

Fraud cases can be avoided to a certain extent if the "captain of the ship is in the right". "It is the board members, the CEO, the top management that has to set the standard. They've got to create the right ethical climate," he said.

Even the respondents who participated in the survey regard it as the duty of top management to set an example to the entire organisation and to take the lead in fighting fraud.

"Organisations in the region appear to have varying levels of understanding as regards the optimal framework for fraud management strategies. A sustained management focus is needed to understand current characteristics related to fraud and misconduct in their organisation in order to design a strong, organisation specific fraud risk management strategy," the report said.

"Perhaps because of the buoyant regional economies, management of fraud risk is not currently top of the agenda. It should be. In other markets, relative measures have been taken as a result of massive individual frauds or because frauds have been identified when there is a downturn in the economy. For some organisations in this region, it will be too late," the report added.

KPMG officials are satisfied with the current rules and regulations in the UAE to control fraud. "There are enough regulations in Dubai and because of this many people involved in financial fraud have been taken to court," said Robert Chandler, Partner at KPMG.

The KPMG survey shows that – compared to KPMG 2004 GCC fraud survey (the last conducted by the company) – there has been a significant increase in the percentage of internal (management/employee) fraud as a percentage of total fraud – from 48 per cent in 2004 to 65 per cent in 2007.

This arose mainly through fraudulent manipulation of financial statements to obtain excessive bonuses or bank funding.

Cheque forgery, kickbacks, bribery and procurement fraud also remained popular whilst e-Commerce fraud has emerged as a major type of fraud in terms of value.

Internal controls continue to be relied upon to detect fraud but almost 40 per cent of it was detected by way of notification by stakeholders, anonymous letters or calls.

This emphasises the need for encouraging such mechanisms by establishing secure and trusted channels of communication.

However, almost half of the respondents suggested that early warning signals were ignored.

Greed and the desire for a lavish lifestyle were reported as the key motives for committing fraud. That said, a number of fraudsters were opportunists. They may not have originally intended to commit fraud but, on becoming more aware of the ethical climate and poor or non-existent corporate ethics, they "took advantage" of the situation.

Economic growth in the region is currently high and this brings new challenges from a fraud risk perspective. This has created more sophisticated businesses but also led to growth of fraud
in some new areas – for example, intellectual property/contract compliance in self-reporting relationships and identity theft.