PwC finds effective detection and prevention mechanisms needed to fight fraud effectively

Malaysian organisations are at greater risk of fraud in a downturn

20 November 2009

According to the PricewaterhouseCoopers (PwC) 2009 Global Economic Crime Survey, the global economic downturn has significantly affected most organisations in Malaysia, with 66 percent or 2 in 3 organisations, reporting a decline in financial performance over the past 12 months.  Almost 43 percent of all organisations surveyed in Malaysia reported that they face a greater risk of fraud in the current economic downturn and 82 percent of all respondents cited increased pressures on financial performance as the key reason for this increased risk.  Of concern is the high percentage (50 percent) of frauds that are detected by “accident” (i.e. outside of management’s control). Going forward, Malaysian companies need to be even more vigilant, and need to put in place effective detection and prevention mechanisms to combat fraud. 

Economic crime is pervasive, persistent and pernicious

28 percent of all organisations surveyed in Malaysia reported they were victims of some form of economic crime in the past 12 months.  This is similar to the global average of 30 percent and a little higher than the average for the Asia Pacific region of about 23 percent.

“The results of the survey clearly show that in Malaysia and around the world, economic crime is pervasive, persistent and pernicious; and organisations face greater risks in an economic downturn,” said Mr Chong Shao Yen, Executive Director, PwC Advisory Services, Malaysia, Forensics and Litigation Support unit.

Increased financial performance pressures and greater risk of fraud in the current economic downturn

Economic crime includes asset misappropriation, financial statement fraud, bribery and corruption, money laundering, and intellectual property infringement.  Asset misappropriation remains the most common form of economic crime.  In the 2009 survey, financial statement fraud, and bribery and corruption, feature notably - 22 percent reported having experienced financial statement fraud and 39 percent experienced bribery and corruption.

These two forms of economic crimes can, to a large extent, be linked to the current economic downturn. The survey found that 82 percent of respondents in Malaysia felt that increased incentives or pressures are the most likely reasons for the greater risk of fraud.  The two most common contributing factors for increased pressures for fraud are ‘financial targets that are more difficult to achieve’ and ‘senior management want(ing) to report a desired level of performance’.  

Financial statement fraud usually involves significant sums of money; requires complex planning and execution and a high level of collusion; is harder to detect; and often entails bribery and corruption within the organisation and with external parties. Financial statement fraud includes financial statement manipulations, fraudulent borrowings/raising of finance, fraudulent application for credit and unauthorised transactions.

"In these tough times, the temptation to inflate results or take part in other forms of financial statement fraud may overcome ethical values. In a downturn, financial targets are more difficult to achieve, individuals may feel pressured, and their personal financial position may be threatened by reductions in pay or layoffs,” said Shao Yen.

The pressures that can lead to fraud being perpetrated are “assisted” by the opportunity presented from cost cutting measures implemented by organisations in a downturn.  In the 2009 survey, staff reductions resulting in fewer resources deployed on internal controls was cited as one of the main contributors to the increased opportunities to commit fraud. 

Fraud detection - the tip of an iceberg

The survey showed that 50 percent of reported fraud is detected by mechanisms set up by management such as internal audit, whistle blowing mechanisms, fraud risk management and electronic transaction reporting systems. The remaining 50 percent is detected by means beyond the influence of management, and as such is detected “accidentally” by management – such as tip-offs by employees and external parties (outside of a formal whistle blowing mechanism), by accidental discovery, during a change of personnel or by regulatory authorities.

Malaysian companies tend to have a large number of controls in place. Conversely, with only 50% of frauds detected by mechanisms set up by management, it is clear that current controls either do not relate to or are ineffective in fraud detection.

“This is indeed worrying.  The current level of fraud being reported may only be the tip of the iceberg. Management may actually detect a significantly higher number of fraud incidences if more effective and relevant mechanisms were in place” said Shao Yen.

Increasing cost of fraud – worthwhile to have effective mechanisms and the right culture

In the 2009 survey, 61 percent of Malaysian respondents reported that the cost of fraud in their organisations has increased in the past 12 months. 

Its adverse impact goes beyond direct financial losses to include “collateral damage” such as lower share prices, and a negative impact on employee morale, reputation and brand, and business or other significant relationships. 

“No organisation or industry is immune to the threat of fraud. To detect and prevent economic crime in the near and long-term, it is in the best interests of Malaysian organisations to put in place effective mechanisms that support the tone from the top, corporate culture and ethical values, which encourages employees to do the right thing, ” concluded Shao Yen.

ENDS

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