Over the past two years, Czech companies suffered an average loss of CZK 34,000,000 per company as a direct result of economic crime

16 October 2007 - Over the past two years, Czech companies suffered an average loss of CZK 34,000,000 per company as a direct result of economic crime

PricewaterhouseCoopers finds controls alone are not a strong enough deterrent. A combination of corporate culture, ethics and risk management is key to fighting fraud effectively.

61% of companies in the CzechRepublic reported they were victims of some form of economic crime in the past two years, according to PricewaterhouseCoopers' Global Economic Crime Survey 2007.  The average direct financial loss to companies reached striking USD 1.7 million (approximately CZK 34 million) during the period. Over one third of Czech companies reported to have lost more than USD 250,000 (almost CZK 5 million) due to fraud, up from 13% in 2005. 

The biennial survey of 5,400 global companies (including 79 leading companies in the Czech Republic), the most comprehensive study of economic crime of its kind, was conducted by PricewaterhouseCoopers in association with Germany’s Martin-Luther University, Halle-Wittenberg. It examined economic crime in companies, including asset misappropriation, accounting fraud, bribery and corruption, money laundering, intellectual property infringement and other types of fraud.

In addition to the high direct costs of fraud, Czech companies spent on average more than USD 639,000 (CZK 12,500,000) on managing their cases of economic crime. Nearly two-thirds of companies that suffered fraud also reported collateral damage to their day-to-day operations and the success of their business, the most serious impact quoted being significant demand on management time, declining working morale, impaired business relations and damaged company reputation.

Asset misappropriation (reported by 38% of companies that suffered fraud) remains the most prevalent form of fraud in the country, followed by corruption and bribery at 27% (down from 43% in 2005).

 “Companies seem to understand that corruption and bribery have a major negative impact on business and need to be seriously addressed. However, the situation on the Czech market is still grave. During the past two years, over 30% of companies felt they were being asked to pay a bribe and almost half of our respondents say they lost an opportunity to a competitor whom they believe may have paid a bribe,” said Sirshar Qureshi, Partner in Forensic Services at PricewaterhouseCoopers Czech Republic.

For fraud to occur, three elements are essential: motive, ability to self-rationalise the offence, and opportunity. Reasons cited to explain why individuals were motivated to commit fraud included financial incentives (greed) in 71% of instances and expensive lifestyle (59%). Interestingly, these motives play a much bigger role in the Czech Republic than globally (57%, and 36% respectively).

Perpetrators also need to be able to rationalise their behaviour. In 54% of reported cases, Czech fraudsters appeared to have had a low temptation threshold, and in 40% of frauds, they lacked an awareness of their own wrongdoing.
The opportunity to commit economic crime is both a function of a weak control environment, and perhaps more importantly, of corporate culture that does not engender loyalty, ethics and compliance. One third of Czech companies reported insufficient internal controls as a reason for fraud being committed, but almost two thirds of respondents pointed out cultural issues: low commitment to brand, relative anonymity and unclear corporate ethics.

“The importance of transparent and ethical corporate culture is further stressed when we consider the way fraud is detected,” explained Sirshar Qureshi. “The most effective control tool is internal audit with 18% of initial detections, however 41% of cases were detected via a whistle-blower hotline or tip-offs. This shows us how much companies depend on a transparent corporate culture and the right approach of their employees – their awareness, responsibility and readiness to recognise and expose improper conduct.”

The number of companies who introduced whistle-blowing doubled to 44% from 2005. The survey shows that it pays off: with 16% of fraud in the Czech Republic reported via these hotlines, whistle blowing is more effective here than globally (8%) and in Central and Eastern Europe as a whole (10%).

"It is simply impossible to eliminate economic crime completely. It's like fighting the mythical Hydra, cutting off one form of fraud merely allows another to grow," said Steven Skalak, Global Investigations and Forensics Leader, PricewaterhouseCoopers. "Controls alone are not enough. The answer lies in establishing a culture that supports control efforts and whistle-blowing with clear ethical guidelines, builds loyalty to the organisation and protects employees trying to do the right thing, and identifies clear sanctions for those who commit fraud, regardless of their position in the company."

Detailed information about economic crime in country can be found in a special report on the Czech Republic (available on www.pwc.cz or upon request).

A full copy of the global report can be found at: www.pwc.com/crimesurvey.

Attachments:
- A summary of key global findings
- Methodology
- Terminology

END

1. PricewaterhouseCoopers Investigations & Forensic Services practice operates across over 50 countries and can deploy experienced and knowledgeable teams to manage and mitigate the threat of corporate crimes and achieve the best possible outcomes. Using in-depth forensic accounting and corporate investigation skills allows clients to continue their business, recover lost funds, and halt further economic losses.  The expertise to assist organisations investigate and manage the many risks associated with fraud, abuse and dishonesty comes from the experience of the international staff and their backgrounds in forensic accountancy, forensic IT and private sector investigations as well as regulatory work and law enforcement.

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A summary of key global findings:

• Nearly 43% of companies were victims of economic crime in the past two years.
• The average direct financial loss rose to USD 2.4 million from USD 1.7 million during the period.
• Companies also reported suffering significant collateral damage: of those reporting fraud, over 80% reported the fraud had damaged their brand, impacted staff morale, harmed their relations with other companies, and increased the costs of dealing with regulators. 69% said it had negatively affected their share price.
• No industry is immune to fraud. Fraud was most prevalent in the insurance and retail sectors, where 57% of companies reported fraud, followed by the government and the public sector, with 54%, financial services, 46%, and automotive, 44%.
• Theft was the most common type of fraud, reported by 30% of those who said they had experienced fraud, a decrease of one-third from the previous survey. The percentage of incidents of money laundering tripled to 12%, compared with 2005. Corruption and bribery was reported by 22%, up by 40%, and accounting fraud was cited by 21%, up 36%. Intellectual property infringement remained constant at 16%.
• The 2007 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% reported being victims of fraud. That number dropped to 52% for companies with 1001 to 5000 employees and to 32% for small companies of less than 200 workers.
• Reasons cited to explain why individuals were motivated to commit fraud included financial incentives, 57%, expensive lifestyle, 36%, and career disappointment, 12%. On the company causes side, there were a low level of commitment to the company, 34%, relative anonymity, 17%, and a lack of clarity about the company's ethics, 14%.
• 43% of fraud was initially detected via a whistle-blower hotline or other tip off. The most effective control measure -- internal audit -- was the initial detection method in 19% of reported cases.
• Companies that experienced at least one significant structural change -- a merger, acquisition, reorganisation, or staff reductions -- reported increased levels of fraud. Circumstances  following an acquisition or creation of a new venture, such as combining new processes and IT systems, changes in personnel, or their roles and responsibilities, interaction with new customers and suppliers, and dealing with new cultures if the venture is in a foreign country, all create a fertile environment for fraud.

Methodology

PricewaterhouseCoopers Global Economic Crime Survey 2007 was conducted on behalf of PwC and Martin-Luther University, Halle-Wittenberg by TNS-Emnid in Germany.

It was conducted in 40 countries between May and September 2007.  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%) are members of the executive board or company management; 43% 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.

More details about the methodology can be found in the global report, p. 40.

Terminology

• Fraud/economic crime: The intentional use of deceit to deprive another of money, property or a legal right.
• Asset misappropriation (inc. embezzlement/deception by employees): The theft of company assets (including monetary assets/cash or supplies and equipment) by company directors, others in fiduciary positions or an employee for their own benefit.
• Accounting fraud: Company accounts are altered or presented in such a way that they do not reflect the true value or financial activities of the company.
• Corruption and bribery (inc. racketeering and extortion): Typically, the unlawful use of an official position to gain an advantage in contravention of duty. This can involve the promise of an economic benefit or other favour, the use of intimidation or blackmail. It can also refer to the acceptance of such inducements.
• Money laundering: Actions intended to legitimise the proceeds of crime by disguising their true origin.
• IP infringement (inc. trademarks, patents, counterfeit products and services, industrial espionage). This includes the illegal copying and/or distribution of fake goods in breach of patent or copyright and the creation of false currency notes and coins with the intention of passing them off as genuine. It also includes the illegal acquisition of trade secrets or company information.