Secured or just naive?

In times of economic uncertainty, economic crime continues to be one of the most problematic issues for businesses worldwide, one that potentially affects every company, no matter its size or industry sector. Fraud always means financial losses for affected companies. While this is very unpleasant in times of growth, it is hardly affordable in times of downturn. And to make it even more difficult for companies, fraud in crisis has changed its face.

Yet, as the 2009 PwC Global Economic Crime Survey, the largest study of its kind now available worldwide, reveals, businesses hit by the present economic crisis frequently see anti-fraud systems as a luxury rather than a necessity. According to the results, 24 percent of companies in the Czech Republic experienced one or more economic crimes in the past 12months. That is below the average for CEE, where 34 percent of companies have seen economic crimes, or globally, where 30 percent on average have experienced them. So should we be happy? We don´t think so. As most fraud in the Czech Republic is detected by chance as opposed to via anti-fraud systems, these numbers indicate that a lot of fraud remains undetected.

The global economic downturn has affected most organizations quite a lot. Some 69 percent of Czech companies have reported a decline in financial performance over the last 12 months this is compared to 62 percent at a global level. The current economic climate has affected people´s views on fraud risks, and 40 percent of people interviewed globally said they believe that their organizations face a greater risk of economic crime right now. In the Czech Republic just 24 percent of people felt this way, because the crisis had not affected Czech companies as much as it had at a global level.

Our survey shows that 24 percent of Czech companies had been victims of economic crime over the last 12 months and that 25 percent of the victims of fraud had more than 10 incidents.


What is the cost of fraud?

According to the survey we carried out in 2009, 25 percent of companies in the Czech Republic, 43 percent in CEE and 42 percent globally reported the cost of fraud had increased compared to the 12 months before. In financial terms, 25 percent of companies in the Czech Republic reported that financial losses through incidences of all economic crimes was more than $100,000 (Kč 1.7 million) in the last year, and 10 percent reported losses greater than $1 million. This is a cost that can often be avoided and is one that most companies these days can´t really afford.

Our results show that most people who took part in the poll in the Czech Republic think that damage to employee morale and to the company´s business relations are the most significant impact of economic crimes within their organisations, and you can find the same thinking across CEE as well as globally. Collateral damage can be a significant cost to a business, even though it´s sometimes difficult to measure.


The psychology of fraud

We asked Czech companies to tell us what has contributed to increasing pressures and motives to commit fraud in today´s economic environment. Some 58 percent of those asked said that job security was the main reason. In CEE and globally, trying to achieve difficult targets was the key reason given. In the Czech Republic a third believed that competitors were paying bribes to win contracts, this compares to 13 percent at a global level.

Some 67 percent of Czech companies surveyed mentioned three key issues that contributed to an increased risk of fraud. The first one given was staff reductions this has resulted in fewer resources being used in internal controls. As well as that, management is focusing more on the survival of the business than fraud risk management. Transferring operations to new territories also plays a role.

About 25 percent ofCzech companies said they believe the reason for the greater risk of economic crime reported was the fact that people aremore able to rationalize committing fraud. And what contributes to this higher level of rationalization?About 80 percent of companies reported the maintenance of the existing standard of living which was also the key reason given across CEEand globally. Three-fifths of respondents in the Czech Republic attempted to defend fraud by saying that others do it and so it´s okay which is in linewith theCEE response, but much higher than globally,where only 35 percent thought this was a reason.

We can see from these results that fighting fraud in the Czech Republicmeans that significant attention should be given to cultural and psychological factors and that efforts to change people´s ways of thinking need to be backed up by efficient control systems and the ability to deal with fraud without compromises.


Accounting fraud on the rise

Economic crime takes many different forms, some more common than others, but they can all be damaging if and when they occur. Asset misappropriation has always been the most common form of economic crime reported in the Czech Republic and it is the most common fraud in 2009. It´s not surprising how common this type of fraud is, as it is quite easy to detect; it involves taking items with a defined value and provides a clear indication of where management should concentrate its immediate attention in order to avoid losses.

Some 50 percent of those who reported economic crime last year in the Czech Republic also suffered accounting fraud. This is a much higher figure than has been reported in the past and also much higher than the incidence globally (38 percent). Two of the reasons given for accounting fraud in the Czech Republic are fraudulent borrowing and raising for finance and credit. The reason for the large increase in this type of fraud could be the current economic climate as well as a combination of a less-controlled work environment due to staff reductions. The increasing pressure placed upon management to meet targets plays a part, too.

The level of bribery and corruption in the Czech Republic has risen steadily in the results of our surveys from 27 percent in 2007 to 30 percent in 2009. This is a positive trend that we think means that Czech companies are identifying more incidents in an area that is typically difficult to detect. Across the CEE, however, the incidence of bribery and corruption was 44 percent, which might mean that levels in the Czech Republic are in fact higher still, and have not been detected or reported.


Perpetrators of fraud

We have found that a significant proportion of economic crime is committed by employees, or in conjunction with employees. The results of our 2009 survey support this, showing that the number of internal perpetrators increased. Organizations that suffered from economic crime in the Czech Republic reported that 50 percent of perpetrators were internal, and 45 percent external to the organization. This compares to 40 percent in 2007.

This is perhaps due to the fact that those inside the company tend to have a better understanding of the business (including its strengths and weaknesses) and are therefore in a better position to commit fraud.

Czech respondents told us that the perpetrator had been a junior member of staff in 70 percent of cases; and 30 percent were middle or senior management. Some 56 percent of the fraudsters were middle and senior management at a global level, and 59 percent across CEE. We can´t really say that crimes involving senior management have decreased in the Czech Republic, as usually they are involved with financial misrepresentation fraud, which may be more difficult to uncover than crimes committed by junior employees, such as the misappropriation of assets.

At a level of 56 percent, agents and intermediaries were by far the main perpetrators of external fraud in the Czech Republic, compared with the global incidence of 20 percent.


Most fraud is detected by chance

The most common contributing factors to the increase in opportunities to commit fraud, according to our survey, were „staff reductions resulting in fewer resources deployed on internal controls“ and „management focusing on survival of the business.“

Some 15 percent of the frauds reported were detected by internal audits, according to our survey. You can see that if there were no reductions in the levels of internal control staff, more frauds would probably have been detected. A fifth of reported frauds were detected through riskmanagement measures, including preventive fraud risk assessments.

More than half of all frauds detected were by means that were beyond the influence of management a combination of internal/external tip-offs other than the formal whistle-blowing mechanism, and by accident. This is quite a lot higher than in the CEE (32 percent) and globally (32 percent), which suggests that companies in the Czech Republic rely too heavily on chance, and may explain the lower levels of economic crime detected in the last 12months compared with the rates across CEE and globally.


Fraud in the future

It is quite shocking to see that over the last year, 30 percent of respondents in the Czech Republic did not carry out any kind of fraud risk assessment another 29 percent performed it only once. About a third of respondents who reported fraud said they believed that there had been an increase in the level of economic crime compared to 12 months ago, yet 74 percent of Czech respondents have made no change to the frequency of fraud risk assessments in the same period. It seems that in difficult economic times, fraud riskmanagement is seen as something non-essential. However, since fraud is not a static threat, organizations need to assess their fraud risks regularly.

Most companies in the Czech Republic still think it unlikely that their organization will be subject to economic crime in the next 12 months, surprisingly, particularly accounting fraud, asset misappropriation and/or corruption and bribery. This complacence is difficult to understand, especially when we consider the striking difference between perception and real incidence of fraud as the accompanying table shows. There is no real reason to expect that Czech companies might be less affected by fraud than companies in other parts of the world.

The fight against economic crime is a continuous struggle that I feel will become tougher the next 12 months as pressures grow on organizations, and on individuals. Internal control procedures can never be totally effective by themselves. The creative and determined fraudsters are able to circumvent even the most robust control systems. This is where a compliance program working in conjunction with a clearly understood, and lived, code of ethics is vital; and one that demonstrates that each perpetrator will be appropriately penalized no matter how senior or seemingly important they maybe that is the true foundation for an effective anti-fraud program. Being in control of fraud should be a priority for organizations as preventive actions are cheaper than reactive responses. The situation will not change by itself; but a proactive approach is necessary.