Given the economic downturn, record levels of government spending, and the uptick in enforcement, it's not surprising most executives expect fraud and misconduct risks to stay the same or increase over the next year.

That's one finding from KPMG's 2009 Fraud Survey, which polled more than 200 executives on the nature of fraud and misconduct risks in their organizations and the challenges they face in trying to prevent, detect, and respond to those risks.

When asked which categories of fraud and misconduct pose the most significant risk, more than a third said misappropriation of assets (35 percent), while 31 percent cited other illegal or unethical acts, such as bribery and corruption. Fourteen percent said fraudulent financial reporting, while 20 percent said all three are an equal threat.

The nature of perceived fraud and misconduct risks varied by industry. For instance, executives from consumer markets were more likely to cite asset misappropriation as a concern, while respondents from health care and pharmaceuticals tended to cite other illegal and/or unethical acts, such as bribery, corruption, market rigging, or conflicts of interest as threats.

Looking ahead over the coming year, most executives believe fraud and misconduct risks will either stay the same or increase over the next twelve months. Nearly a third of the group expect an increase in at least one form of fraud and misconduct risk. One-quarter of executives expect increases in asset misappropriation, while 20 percent expect other illegal and unethical acts to increase, and 8 percent expect more fraudulent financial reporting.

Meanwhile, over the same period, the vast majority of executives (75 percent) expect the amount of funding their organization dedicates to combating fraud stay the same, while 16 percent expect it to increase and only 9 percent expect it to decrease.

As for the factors that executives say most enable fraud and misconduct to occur, two-thirds cited inadequate internal controls or compliance programs. Almost half (47 percent) cited management override of controls, while 44 percent cited inadequate director oversight over management. Nearly the same number (43 percent) cited collusion between employees and third parties, while almost a third cited collusion between management and third parties, and 27 percent cited collusion between employees and management.

When asked which sources they believed would mostly likely uncover fraud and misconduct within their organizations, almost half said internal audit, legal, or compliance personnel were most likely to uncover fraud and misconduct. Twenty percent cited employee whistleblowers, while 13 percent cited line managers and 9 percent cited external auditors.

However, the report points out that that might not be the reality, citing data from the Association of Certified Fraud Examiners which shows that frauds were more likely to come to light through whistleblower tips than through audits, controls, or any other means and KPMG survey data reporting internal audit as among the least likely channels to which employees said they'd feel comfortable reporting misconduct.

While the majority of executives report that their organizations have effective protocols in place to address how to respond when allegations of fraud arise, the report notes that some gaps remain. For example, just over one-quarter of respondents lack effective protocols on how investigations should be conducted and at what point the board of directors should be alerted to potential concerns. One-third lack protocols on how to determine remedial actions, and 38 percent lack protocols to address when a voluntary disclosure to the government should be made.

Respondents also acknowledged room for at least moderate improvement across the majority of their anti-fraud efforts. Areas where executives cited the most amount of improvement needed include employee communication and training, technology-driven continuous auditing and monitoring techniques, and fraud and misconduct risk assessment.

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