Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the October 16, 2007 issue of the Bangkok Post.
By Charles Ostick and Neil Thamotheram
Fraud is one of the most problematic issues for businesses, no matter what a company's country of operation, industry sector or size.
According to PricewaterhouseCoopers' 2007 Global Economic Crime Survey, half of all Thai companies surveyed have fallen victim to fraud in the past two years, and a staggering 83% of them did not recover any losses at all.
On average, Thai companies reported losses of US$547,843 per incident of fraud. The amount is higher than in previous years, due mainly to a number of big losses in the intellectual property infringement category which averaged $2.75 million per incident.
The highest incidence of fraud was reported in the asset misappropriation category (29%) with an average loss of $93,248, while the corruption and bribery category (24%) reported an estimated loss of $100,952 per incident.
On average, Thai companies were victim to 11 cases of fraud over the past two years, with each incident incurring a cost of $65,559 to manage (including legal costs, investigation costs, stakeholder management, etc.). While the average number of cases of fraud in Thailand is higher than globally and in the Asia Pacific , the managing cost of each incident is lower in Thailand than globally ($550,356) and in the Asia Pacific ($416,393).
Whilst direct financial losses from incidents of fraud can be substantial, it is the collateral damage from fraud that can potentially have a crippling impact. These are costs that derive from ''collateral damage'' to a company's brand and customer trust; to the share price and shareholder trust; to the company's relationship with suppliers; and to staff morale, which can precipitate a loss of productivity.
Sixty-two percent of Thai companies that were victims of at least one case of economic crime in the past two years reported either significant or some intangible damages in addition to financial damages suffered.
It is also apparent that the level of collateral damage is directly proportional to the seniority of the perpetrator: the higher the management position, the greater the trust that is bestowed, and any breach of that trust can have a dramatic impact, not only on relations with company staff, but also with clients and stakeholders.
Our 2007 study reveals that the demographics of a typical fraudster remain unchanged from our previous research in 2005. In the case of Thailand, 75% were males and 54% were in 31-40 years old.
The number of female perpetrators in Thailand (25%) was significantly higher than the numbers reported globally (15%) and in Asia Pacific (21%). Sixty-nine percent of the perpetrators in Thailand were graduates or post graduates, and 45% of the internal perpetrators were middle to senior managers of the company.
Half of all incidents of fraud in Thailand were perpetrated by employees and this was consistent with the globally reported figure (50%) but lower than the Asia Pacific's (59%). However, 45% of the incidents of fraud in Thailand were perpetrated by either customers or suppliers — significantly higher than those reported globally (19%) and in the Asia Pacific (26%).
The opportunity to commit fraud, the incentive to commit fraud, and the perpetrator's ability to rationalise his/ her actions must be present for the fraudster to set to work.
Insufficient internal controls (32% of cases), low temptation threshold (33%), lack of clarity about company ethics (32%), and financial/materialistic incentive (20%) were the main reasons cited for frauds committed in Thailand.
The 2007 survey once again shows the correlation between a higher number of fraud risk management activities and a higher chance of detecting fraud. More controls not only detect more fraud but also enable companies to more accurately assess associated losses.
In Thailand, the major sources of detection were internal tip offs (15% of cases), external tip-offs (19%), internal audit (12%) and fraud risk management (8%).
Respondents from Thai companies rated internal controls (31%), audit committees (31%), forensic analysis (29%) external audit (28%) and internal audit (27%) as the most effective measures to combat economic crime.
An important step in creating a corporate culture that does not tolerate fraud is consistency of action when an economic crime is detected. When staff understand the consequences of their potential foray into fraud, and that detection is certain and inevitable due to the sophisticated and effective nature of the risk management systems, this serves to deter most criminals.
Responses received from Thai companies indicate that no disciplinary action was taken in 35% of the cases. This was considerably higher than the 16% reported globally and the 21% reported for Asia Pacific.
Corporate culture is a vital element in whatever fraud risk management programmes a company employs. Given this backdrop, we recommend that companies give due consideration to the following when developing fraud control programmes and strategies:
- Replace one-off risk mitigation programmes with comprehensive compliance programmes that are fully integrated into all components of business operations;
- Proactively monitor vulnerabilities to fraud;
- Develop a strong ethical culture that is clearly evident to all employees;
- Be sensitive to issues that individual employees might be faced with, such as the wrongdoing of a colleague;
- Take all precautionary steps to deter fraudsters; and
- Have a comprehensive understanding of fraud risks and controls when making informed decisions on building businesses.
