According to PricewaterhouseCoopers’ latest global survey on Economic Crime, fraud remains a major threat to companies around the world, despite heightened efforts at regulation and control. For example, nearly half of all organisations surveyed said that they were victims of some form of economic crime in the past two years. The average direct loss to companies rose nearly 40 percent to €1.5 million. Total direct losses exceeded €2.7 billion for the companies surveyed. The losses arose from a variety of economic crimes, including asset misappropriation, accounting fraud, money laundering and intellectual property infringement. The survey found that controls alone are not enough to effectively fight fraud – with corporate culture, ethics and risk management being important deterrents also.
Of those reporting fraud, 88 percent reported that the fraud had damaged their brand and impacted staff morale, 84 percent said it had harmed their relations with other companies and increased the costs of dealing with regulators while 69 percent said it had negatively affected their share price. While fraud levels have not dropped in the last eight years it is, however, heartening to know that most companies said that their control measures will limit their exposure to fraud in the future with only 11 percent considering it likely that they will be the victims of some form of fraud within the next two years.
The survey found that forty-three percent of fraud was initially detected via a whistleblower hotline or other tip off -- while the most effective control measure -- internal audit -- was the initial detection method in 19 percent of reported cases, highlighting the importance of a transparent corporate culture that enables employees to recognise and expose improper conduct.
Speaking about the survey, Bob Semple said:
“As noted above Internal Audit can play a key role in detecting and therefore mitigating this fraud. This is however dependent on Internal Audit having a risk based focus. Adopting a risk-based mindset within the internal audit function will play a key role in controlling such fraud as well as in the overall prevention of the misappropriation a company’s assets.
Semple continued:
"Controls alone are not enough. The answer lies in establishing a culture that supports control efforts and whistle-blowing with clear ethical guidelines. Companies need to build loyalty to the organisation, give employees the confidence to do the right thing and identify clear sanctions for those who commit fraud, regardless of their position in the company.”
ENDS
Notes to the Editor:
Other key points from the survey included:
The survey, entitled "Economic Crime: People, Culture and Controls," found that economic crime is all but universal, affecting companies of all sizes, on all continents and in all industries. The survey revealed a direct correlation between the size of a company and the prevalence of fraud. Among companies of 5,000 or more employees, 62 percent reported being victims of fraud. That number dropped to 52 percent for companies with 1001 to 5000 employees and to 32 percent for small companies of less than 200 workers.
No industry is immune to fraud. Fraud was most prevalent in the insurance and retail sectors, where 57 percent of companies reported fraud, followed by the government and the public sector, with 54 percent, financial services, 46 percent, and automotive, 44 percent. The types of fraud most common to each industry, varies due to their unique operating characteristics.
Theft was the most common type of fraud, reported by 30 percent of those who said they had experienced economic crime. Intellectual property infringement was reported by 15 percent, corruption and bribery by 13 percent, accounting fraud by 12 percent, and money laundering by four percent.
Of those responsible for committing fraud, 85 percent are male, most often between the ages of 31 and 50, with half having college educations or advanced degrees. More than half were employed by the defrauded company, 26 percent in senior management, and 43 percent had more than five years with the company.
According to the survey, reasons cited to explain why individuals committed fraud included financial incentives, 57 percent, expensive lifestyle, 36 percent, and career disappointment, 12 percent. Weak controls were cited in about a third of cases, a low level of commitment to the company, 34 percent, relative anonymity, 17 percent, lack of clarity about the company's ethics, 14 percent and temptation, 44 percent.
For frauds to continue for extended periods, the executives involved must be able to rationalise their behaviour, which can include justifications like "it's really for the company's benefit" or "it’s a gray area". In 40 percent of reported frauds employees lacked awareness of wrongdoing, and in 26 percent denied the financial consequences to the company.
Companies that experienced at least one significant structural change - a merger, acquisition, reorganisation, or staff reductions - reported increased levels of fraud. An acquisition, creation of a new venture, combining processes and IT systems, changes in personnel, the interaction with new customers and suppliers, and dealing with new cultures or foreign countries all create a fertile environment for fraud to flourish..
Fraud was as prevalent in the fast-growing E7 emerging economies, (Brazil, China, India, Indonesia, Mexico, Russia and Turkey) as in more developed countries, but the cost of fraud was significantly higher in emerging economies. In total the E7 countries accounted for more than 45 percent of the €2.7 billion in financial losses reported globally. Companies with operations in E7 countries reported average losses from fraud of €3.2million; more than double that of companies not operating in such territories.
In the E7 markets, at least one in four companies and in some countries half of all companies reported they had been asked to pay a bribe. Corruption and bribery and intellectual property theft are the major concerns of corporations establishing operations in emerging markets. Although companies have implemented control measures, many remain uncertain of how best to address such risks.
About the Survey:
1. PricewaterhouseCoopers’ latest Global Economic Crime Survey was conducted on behalf of PricewaterhouseCoopers and Martin-Luther University, Halle-Wittenberg by TNS-Emnid in Germany in late 2007 in 40 countries.
Over 5,400 computer-assisted telephone interviews were conducted with CEOs, CFOs and other executives who claimed responsibility for crime prevention and detection within their respective companies. More than half of the respondents (52 percent) are members of the executive board or company management; 43 percent stated that their main responsibility was in the field of finance.
The companies were randomly selected with preference given to the 1,000 largest companies of a country and the target number of respondents for each country was determined according to its GDP.
A full copy of the report can be obtained from Johanna Dehaene at johanna.dehaene @ie.pwc.com
2. PricewaterhouseCoopers (www.pwc.ie) provides industry-focused assurance, tax and advisory to build public trust and enhance value for its clients and their stakeholders. More than 146,000 people in 150 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
3. PricewaterhouseCoopers Ireland is proud to have achieved first place in the ‘Best Companies to Work for’ in Ireland 2008.
