Economic Crime in Canada
Helen Mallovy Hicks
Release date: Dec. 10, 2009
Hosts: Dean Mullett and Helen Mallovy Hicks
Guests: Pierre Taillefer, Caroline Hillyard
Running time: 17:44 minutes
In this episode, Pierre Taillefer, a partner in the Advisory Services practice, and Caroline Hillyard, a manager in the Investigations and Forensic Services, talk about the prevalence of fraud in Canada and some ways in which companies can help prevent it.
Voiceover: Welcome to Strategy Talks, the business podcast series from PricewaterhouseCoopers Canada. Hosted by Dean Mullett, a corporate finance partner specializing in Capital Markets and M&A, and Helen Mallovy Hicks, a partner the Dispute Analysis and Valuations group, this interview series, featuring new topics and guests every episode, is designed to give you valuable insight into some of today’s hottest issues affecting your business.
Helen: PwC’s recent economic crime survey revealed that 56 percent of Canadian companies reported being victims of economic crime during the previous 12 months. To talk more about this we are joined by telephone from our Montreal office by Pierre Taillefere, a partner in PwC’s Risk and Regulatory team and by Caroline Hillyard, a manager of investigations and forensic services in PwC in Toronto. Welcome Pierre and welcome Caroline.
Dean: To kick things off, let’s just look at the impact of the economic downturn on economic crime in Canada and why that has had the impact that it’s had.
Pierre: Actually our global economic survey usually covers a two year period and what we did for this last year, given the difficult economic context that we’re living, is that we focused on economic crime over the last 12 months. We have as you said a score of 56 percent a rating, or percentage of 56 percent of companies having said that they were victims of fraud and that is due to, in my view, a number of reasons. First, is the Canadian regulatory framework, which requires companies to have robust anti-fraud programs in place and secondly the economic contexts. Companies wanting to survive, or fighting for survival, decreasing costs or investments that they’re making controls, there increasing the potential for fraud in companies.
Dean: Pierre, just on that first point, having an economic crime frame-work in place. Maybe you can expand on how that actually leads to a higher number, is it just because you detect it more or is there more to it then that?
Pierre: Well again Canada regulatory requirements for companies to have robust internal control processes in place and those processes anti-fraud programs allow companies to detect, if the program is implemented and properly implemented will allow companies to detect more fraud than companies where no such procedures are in place.
Dean: So in countries where there isn’t that type of framework a lot of the fraud may go undetected is what you’re saying?
Pierre: It may go undetected or may be detected but not by the means of a structured process for detection which is the answer to our program that we see in North America. I think what’s interesting though in our experience all companies are subject to fraud, no companies are immune. Either companies aren’t detecting it and it is happening or they are detecting it because they have put procedures in place but in a bench mark or a rule of thumb is that somewhere between 5 to 10 percent of profits may be lost to fraud on a yearly basis.
Dean: So if you look at that 56 percent and I believe the survey said that Canada says it ranked 4th in the world for the level of economic crime taking place, so is Canada a country full of crooks or on a relative base is it not as staggering in comparison as to what is going on because that kind of catches headlines.
Caroline: There are higher rates elsewhere in the world but I think we have better means of detecting, I think maybe there’s a combination of factors that go into statistics. I think the US is around 30 percent and globally I think we’re at 33 percent overall. So we are above those but it’s not necessarily that we have a bunch crooks in Canada or bunch of fraudsters but it could be that are better at detecting the fraud.
Dean: Even in the US? Because obviously that’s a developed country with a lot of regulatory framework as well.
Pierre: Well, my take on this is that Canadians are not worse fraudsters than any other people or residence or any other country around the world. Fraud occurs everywhere and it’s really our ability to detect it as I said before, because of the regulatory framework that’s in place, and I think that combined with the economic context, again companies fighting for survival, not putting a lot of money or putting less money into controls and organizations and employees also fearing for jobs. Getting the messages, or receiving messages that they’re not getting a bonus or a salary increases has resulted in more fraud occurring. So I don’t think it’s a phenomenon which is specific to Canada but for some reason we’re able to detect more of those cases.
Helen: And what are the most common forms of economic crimes? And is it changing from what it used to be?
Caroline: We’ve seen this year that asset misappropriation is the highest type of economic crime reported and this has been consistent in the past few years in our surveys. We’ve also seen an increase in accounting fraud. That would be such things as financial statement fraud and counting manipulations. But the asset misappropriation has been the highest.
Helen: And what sort of assets are we talking about?
Caroline: Just the theft of anything tangible, any kind of tangible assets. I think it’s more achievable to be able to commit that type of fraud.
Pierre: What we thought 83 percent of companies that had asset misappropriation was the fraud that they suffered from. I think accounting fraud is an interesting one this time because of the economic context and because for the pressure internally in the organizations to maintain results or show better results and also employees having bonuses based on profitability has resulted in there being a significant portion of companies reporting accounting fraud this time around.
Dean: So on the accounting fraud difference, a lot of companies their business has slowed in the last year they may bump up against on their debt facilities, things of that nature. So what they report to the bank, there has been an increased incidence where people are maybe being a little bit more lax on how they’re putting that situation together.
Pierre: I think it’s manipulation. Is it lax? I’m not sure that’s the way I would explain it, but it’s the objective of presenting of a better financial position than the company is actually in and it could be for a number of reasons, you’re right in that. But also, the market appreciation of the company’s value as well as employees wanting to continue to get a bonus, for example.
Helen: And then you talk about fraud costing sort of as a bench mark number you said 5-10 percent of profit which is astounding. I mean that could be the difference between profit and loss for many companies that are marginal or have slim profit margins. Where does that 5-10 percent margin come from? What is it made up from?
Pierre: Well again, it’s not made up of one specific component based on a number of years of experience in fraud investigations and assessing the actual impact of the fraud on the company’s financial performance and over time, again, a bench mark – a rule of thumb, that the impact is somewhere around 5 percent of net income.
Helen: So what are some things that organizations can do to detect fraud?
Caroline: Well the way that our survey was looking at we were showing how fraud was detected. So organizations that were surveyed were asked how the fraud in your company was in the last 12 months detected and 38 percent of respondents say it was detected by chance internal or external tip off. So even though there are these great programs in place it’s actually a very high percentage that are coming through by chance just from a tip off.
We also had 17 percent detected form preventative fraud risk management activities and additional 14 percent by internal audit detection. When you look at the whistle blower mechanism, in Canada it was only 3 percent of the companies that have fraud reported it through whistle blower or found out about it through the whistle blower mechanism, so that’s quite low.
Dean: How has that stacked up with other countries with whistle blower programs?
Pierre: Fairly consistent around the world around the world. Whistle blower is a requirement that started in the United States with certain regulations and was meant to be a means by which an employee could communicate a suspicious fraud being done at a level above that person within an organization. And it has been demonstrated the experiences that it hasn’t been as affective as the regulations of the government thought it would be, in terms of a means for detecting fraud.
Dean: So it gets lots of press coverage but it’s really not hitting the mark as perhaps some other means of detecting it are.
Pierre: No, again with what Caroline was saying, internal/external tip off, risk assessment or managing the risk of fraud occurring and that through an anti-fraud program as well as robust internal audit functions that focuses or have part of their audit being the focus on fraud have been a means which fraud has been detected.
Caroline: I think that in terms of the whistle blowers program, I think companies have more work to do just to educate their staff, make them aware and let them trust the whistle blowers programs and let them know that they have an anonymous tip line that they can report through. Just so they get that confidence that they can report that way.
Dean: It’s confidential etcetera and people do have to get comfortable with that. What would be a profile of somebody that is committing these frauds, is it somebody in the C-suite or is it somebody that’s cleaning the office at the end of the day and they’re totally by themselves and they have access to just about anything that’s not bolted down?
Pierre: The typical fraudster has changed over the last surveys compared to this time. This time it’s been what companies have identified as more external fraud than internal fraud. That is a new phenomena whereby in previous surveys it was more internal, it was employees that were causing fraud. This time as well there has been less important, or almost a very low percentage of senior management being identified as the fraudster. The fraud is then carried about more by middle management or staff or employees in organizations.
Helen: And what about the external fraudster? Who is that? Is it someone who is gaining access physically or through systems?
Caroline: It could be vendors doing fraudulent things I guess through their contracting through the company.
Pierre: With the new phenomena in terms of fraud from external is related to money laundering. Canada has fairly robust anti money laundering regulations in place as well. Requiring companies to understand who they’re doing business with, knowing their client and also analyzing the risk associated with doing business with their client and then monitoring client transactions to identify potential money laundering transactions. Twenty-eight percent of companies that indicated that they were victims of fraud were money laundering. Money laundering is then from external, normally done from outside of the organization.
Dean: Are there certain sectors of the economy or certain industries where fraud is more prevalent than in others? And if so, why would that be?
Pierre: There are a couple of sectors that have consistently reported more fraud than others, insurance financial services; hospitality and leisure have been industries that have been targeted by fraudsters over a number of years. Well the financial services there are a lot of estimations that are financial instrument; it’s a fairly complex industry. There can a be a significant amount of accounting fraud within that industry because there are a number of assumptions that underlie the key numbers that appear in financial statements for hedging and other complex financial instruments. We’ve seen a number of frauds being carried out in banks around the world and that have been very, very, high dollar fraud. It’s the nature of the operations and it’s also a cash industry to a certain extent where there is, well I don’t want to say easier, but there is easier access to cash within financial services.
Helen: So what can we do to help companies to detect and prevent fraud?
Caroline: What we’re doing to encouraging companies is to develop anti-fraud regimes and that’s just having the right tone at the top and making sure that the board of directors and the audit comities are fully aware of all the fraud risks and they do these risk assessments on a regular basis to make sure that all their fraud risks have been covered off. I think yes, that would be the main thing that they should be doing. We found through the survey results that even though companies perceived that was a high risk of fraud during you know, the past 12 months, during the economic downturn, they weren’t actually increasing the number of times a year or however often they were doing their fraud risk assessments. They say the increase threat but they weren’t doing anything about it.
Pierre: I think upper management is aware of the issue and understands the risks that the organization has with regards to fraud. Having said that our survey response as Caroline was saying, companies haven’t performed fraud risk assessments at a greater frequency during these economic downturn and some haven’t done it at all. They understand the risk but they don’t necessarily always see the dollars or the impact to the organization so it has received less attention than other issues within organizations where they can clearly see the dollar value associated.
Caroline: Right, when the companies are in survival mode like they have in the last little while, they don’t necessarily want to spend the money on doing the fraud risk assessments.
Pierre: Having said that, when they have been victims of fraud, the organization management is more willing to listen to prevention and how to implement prevention. Caroline was saying before, one of the most important component of anti-fraud regime is the tone that the top, so it’s what management has added to the defraud and how do they communicate that with to the company That’s one area where once they’ve actually suffered a loss they can see the dollars, they’re more willing to implement or they’re more wiling to listen and to communicate through the organization what their attitude is and employees understand what’s going to happen.
Dean: You know I think that this has been eye opening and I know I can speak for myself I’ve been clutching onto my wallet ever since you’ve been talking about this. Making sure it doesn’t walk away because it’s not bolted down. Hopefully our listeners take this issue to heart because it is a serious one. It is better to prevent a fraud than to try to and uncover it later and that perhaps setting the right tone from the top prevents, or cause people to have a second thought before they commit fraud going forward. So thank you very much for being here today, Pierre and Caroline. To download a copy of PwC’s 2009 Global Economic Crime Survey the Canadian perspective, please visit pwc.com/ca/crimesurvey.
Voiceover: This concludes this episode of Strategy Talks. Thank you for listening. We hope you’ll join us again, soon for another episode. To download or subscribe to this podcast series, or to find more information on this topic, please visit pwc.com/ca/strategytalks.
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