'There is an increased awareness of fraud as a business issue. More companies have fraud systems put in place, but these systems may not be quite as effective as they could be,' Mr Jamieson said.

Existing fraud management tools may not suit the operating environment. 'Organisations need to continually assess their fraud risk management mechanisms to ensure they are appropriately targeted for the place they do business.'

In the 2003 survey, 57 per cent of respondents said their organisation had insufficient internal control mechanisms to manage fraud. This figure had since dropped to 11 per cent in 2006.

However, their fraud management mechanisms might not be as comprehensive as they thought when questioned about their specific measures, Mr Jamieson said.

Companies surveyed included those involved with consumer products, financial services, retail, health care, building and construction, IT and software, engineering, petroleum and mining, and media and communications.

Mr Jamieson pointed out that while fraud issues on the mainland were no worse than in any other developing country, they could still be a serious problem. He said no industry was immune to the problem, and fraud took place across all business sectors.

The most common types of fraud on the mainland differed from those in Hong Kong. Theft of funds and physical assets were more common on the mainland, while computer and e-commerce related fraud were the bigger risk in Hong Kong, respondents said. The most likely areas for fraud on the mainland included payroll fraud, theft of plant and equipment, giving kickbacks, false invoicing and accounts receivable fraud.

'Companies have to devise fraud strategies that can deal with different types of fraud,' Mr Jamieson said. 'The survey shows that supply chain fraud and theft of assets are especially prevalent on the Chinese mainland, but companies need to be increasingly vigilant about more sophisticated forms of computer-related fraud within Hong Kong,'

Payroll fraud and theft of equipment would be the biggest concerns for the next two years, the polled firms said, with 71 per cent expecting both fraud and theft in their mainland operations, compared with 21 and 12 per cent in Hong Kong, respectively.

Only 25 per cent of the respondents had a supply chain review programme, and only 31 per cent had conducted due diligence on their suppliers and business partners. Risk could be reduced by putting in place a 'right-to-audit' clause in supplier agreements and carrying out regular audits.

Supply chain fraud can take the form of overcharging by a business partner, and the acceptance of kickbacks by employees in any situation.

A hypothetical example would be for an employee who ordered all the firm's stationery requirements from a single supplier who happened to be a relative of the employee. However, this supplier did not produce stationery products but simply marked up goods sourced from another company.

'Despite greater awareness, there is in many cases an overconfidence in fraud management systems,' Mr Jamieson said. 'The answer is to institute a thorough strategy for fraud detection and prevention, including screening of employees and business partners, fraud risk assessments, declaration of interest policies, staff training and an external fraud hotline.'

Mr Jamieson recommended that companies conducted regular fraud assessments at top management level. Fraud prevention should include maintaining a fraud register, monitoring fraud risks, ensuring that all members of staff were aware of the company's code of ethics, conducting pre-employment screening and screening third parties and suppliers.

Firms could also conduct fraud awareness training and put in place mechanisms for reporting fraud, such as a fraud hotline number.

Before entering into any business negotiation, businesses must first identify the companies they were dealing with. This should include a background and credit check on

the partners and their business, as well as licences and standing with local and state government departments.