Rethinking business fraud motivations

Viewpoints Economic crime

Why do individuals commit white-collar crime? Is it because of financial need or anxiety at work, or simply because they can? According to a recent survey on economic crime in the United States, the answer is—all of the above.1

Most people’s perceptions of a typical fraudster may be off base. For example, 76 percent of fraudulent activity is internal and perpetrated by employees. And despite the media attention given to several big cases of economic crimes committed by well-known senior executives, only 11 percent of reported fraud in the past year was committed by senior management. In contrast, middle management perpetrated nearly half of the internal fraud suffered by US companies. Another myth is that larger companies are safer because they have more resources to devote to robust fraud detection tools and processes. In fact, 52 percent of all white-collar crimes are committed at companies with more than 5,000 employees, whereas 12 percent of such crimes are committed at companies with fewer than 1,000 workers.

76% of fraudulent activity is internal and perpetrated by employees.

As one might expect, an economic recession adds to the likelihood of economic crime. And indeed, less than 10 percent of executives expect fraud levels to decrease in the current downturn. In the United States, there is a striking relationship between declining financial performance and increasing incidence of reported fraud. The fraud incidence rate among companies suffering a financial decline is 42 percent, which is higher than the rate of fraud among US companies with stable financial performance (17 percent).

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The recession has also impacted the perceived reasons economic misconduct is committed. Economic-crime experts point to the confluence of three underlying conditions when economic fraud occurs: pressure/incentive, opportunity, and rationalization/attitude. In other words, those who commit fraud often have an incentive for their misconduct (pressure), see gaps in a company’s fraud risk prevention scheme (opportunity), and are able to justify their actions (rationalization).
 


Why fraud occurs
Percent of respondents’ perceived reasons for the risk of fraud
Chart: Supply chain disruptions can affect profitability

Source: PwC, The 5th global economic crime survey—US supplement, 2009

The majority (53 percent) of US executives surveyed attributes the increased risk of fraud to increased pressures felt during the downturn. Those pressures include the fear of losing jobs, the difficulty of achieving financial targets, and the withholding of bonuses. Those who say opportunities heightened fraud risk cite the top reasons as staff reductions, fewer resources dedicated to internal controls, and a shift in management’s focus away from fraud risk. Last, increased rationalization for justifying misconduct appears to be driven by the desire to maintain a certain standard of living when wallets are lighter.

Though the downturn has certainly affected fraud risk, most executives say the root cause of increased economic crime is related to corporate culture, as reflected in the pressures and attitudes that permeate an organization. When companies reduce their resources— thereby creating more opportunity for fraud—company culture can sometimes be their only line of defense, assuring that employees behave ethically while management focuses on corporate survival. Strengthening that line of defense—by building a culture where fraud is not tolerated and those who report it need not fear retaliation—can help companies better deter economic crime.



1  PwC, The 5th global economic crime survey—US supplement, November 2009.