London, 18 July 2006 - Over forty percent (43%) of engineering and construction companies have experienced economic crime and need to tighten controls to combat this threat and recover losses, according to the latest PricewaterhouseCoopers Global Economic Crime Survey. Engineering and construction (E&C) companies suffered from an average of seven incidents of economic crime in the past two years with an average total cost of US$1.1million.
Jonathan Hook, global engineering and construction leader, PricewaterhouseCoopers, commented:
“In the past, there was a tacit knowledge that a certain level of economic crime existed in the engineering and construction industry. Materials can go astray and in some countries local officials sometimes receive commissions as part of doing business. However specific instances of fraud can severely damage working morale, jeopardizing the critical trust relationship between parties such as subcontractors and suppliers, and thus negatively impact an entire project. More engineering and construction companies need to focus on improving fraud controls and detection processes in order to counteract fraud at all levels.”
Since the previous PricewaterhouseCoopers Global Economic Crime Survey two years ago, the number of E&C respondents who have experienced economic crime reporting instances of financial misrepresentation, has nearly trebled, from 8% to 21%, where company accounts are altered or presented in such as way that they do not reflect the true value or financial activities of the company. It is clear that the industry needs to be increasingly careful to verify the financial robustness of both clients and subcontractors.
Asset misappropriation, such as material theft or substitution of inferior materials, was by far the most common type of economic crime, being named by 57% of respondents who have suffered a fraud event in the last two years. It has decreased in the past two years, when 66% of respondents had experienced asset misappropriation. This improvement may stem from a trend towards installing better tracking devices which help deter theft of construction plant.
The survey revealed that over half of the perpetrators of economic crime in the E&C industry come from within the company and that a large percentage (40%) of fraud is carried out by middle management, as project managers often have the ultimate responsibility for bringing a project in on-time and on-budget, with additional opportunities to by-pass controls.
Economic crime in the E&C industry remains very difficult to detect. Although most companies report a very high level of satisfaction with their various fraud detection measures, almost 40% of frauds are still detected by chance (through tip-offs or by accident). Internal audit was the most effective internal method of detecting economic crime, with nearly a quarter of crimes coming to light via this route. E&C companies may be able to improve detection by providing fraud training to internal audit staff. They should also ensure that the internal audit team has actual field experience, and is thus better able to detect the industry's more common types of fraud, including validating the existence and quality of suppliers and subcontractors, researching anomalies in disbursements, and looking for opportunities for kickbacks, particularly in respect to change orders and subcontractor liability evaluation. A robust internal audit function may also serve as a deterrent to would-be offenders.
Claudia Nestler, partner and Global Economic Crime Survey leader, PricewaterhouseCoopers, concluded:
“Fraud is being recognised and reported more and more often but some engineering and construction companies have a false sense of security when it comes to economic crime. Only 18% of respondents feel their organisation is likely or very likely to suffer from economic crime in the next five years and nearly a quarter viewed an incident of economic crime as very unlikely. Given that 43% of engineering and construction companies have experienced economic crime over the past two years, this optimism may be somewhat misplaced unless companies work to implement more concrete fraud prevention measures.”
Notes to Editor
- The Global Economic Crime Survey report on the engineering and construction industry is available to download at Crime Survey.
- Over 180 engineering and construction companies based in 26 countries took part in the survey as part of a wider cross-sector study for which over 3500 executives responsible for detecting economic fraud were interviewed. It was conducted on behalf of PricewaterhouseCoopers and leading criminological scholars at Martin-Luther, Halle-Wittenberg by TNS-Emnid in Germany.
- The member firms of the PricewaterhouseCoopers network provide industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries across our network work collaboratively using Connected Thinking to develop fresh perspectives and practical advice.
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