PricewaterhouseCoopers Finds 50% More Companies Report Financial Losses Since 2003

New York/London – 29 NOV 2005 – Rising economic crime poses a growing threat to companies, with nearly half of all organisations worldwide being victims of fraud in the past two years, according to PricewaterhouseCoopers’ Global Economic Crime Survey 2005. The number of companies reporting fraud increased from 37 percent to 45 percent since 2003, a 22 percent increase. The cost to companies was an average US$1.7 million in losses from “tangible frauds,” those which result in an immediate and direct financial loss. These include asset misappropriation, false pretences and counterfeiting.

The biennial survey involved 3,634 companies from 34 countries and was conducted in association with Germany’s Martin-Luther University, Halle-Wittenberg. It revealed that the total losses at 1,227 of these companies that could quantify their losses exceeded US$2 billion over the last two years; the number of companies reporting financial losses increased by 50 percent since 2003.

Companies around the world, on average, reported suffering eight fraud incidents since 2003. The larger the company, the more likely it experienced and detected acts of fraud. Larger companies reported an average of 12 incidents. Regardless of size, no company or industry, regulated or unregulated, was immune from fraud. Depending on industry, from 38 percent to 60 percent of surveyed companies reported significant frauds.

“The rise in economic crime is cause for concern. Companies may have a false sense of security when it comes to fraud. More companies are reporting financial crimes, they’re reporting a higher number of incidents, and most cases are detected by accidental means,” said Steven Skalak, Global Investigations Leader, PricewaterhouseCoopers. “Economic crime is not something to be taken lightly; companies need to tighten their controls to avoid not only direct financial losses, but also damage to their brand, to staff morale and to relationships with customers, suppliers and other business partners.”

An Increase in Fraud

According to PricewaterhouseCoopers, the 22 percent increase in companies reporting fraud since 2003 may be attributed to:

More incidents of fraud being committed.
Increased fraud reporting due to tighter regulations requiring increased transparency.
Introduction of risk management controls to detect fraud.
A “confess and remedy” environment among regulators that encourages fraud reporting.
Despite the growing number of companies reporting fraud, nearly 80 percent did not consider it likely that their company will suffer fraud over the next five years.

The survey also showed increases in the various types of fraud that can affect a company, from asset misappropriation to counterfeiting. In particular, there has been a 140 percent increase in the number reporting financial misrepresentation, a 133 percent increase in the number reporting money laundering, and a 71 percent increase in the number reporting corruption and bribery.

Nearly 90 percent of those responsible for fraud are male, between the ages of 31 and 40, with college educations or higher degrees. Half were employed by the defrauded company, almost one quarter of them in senior management. And of those who were caught, the most common means of detection was through accident or chance (34 percent).

The Cost of Economic Crime

In addition to the financial losses, 40 percent of companies reported suffering significant “collateral damage” to the day-to-day operations and success of their businesses. Of those, 43 percent suffered damage to their brand; 42 percent to their relations with other businesses (including suppliers and contractors); and 54 percent to staff morale.

“Despite the increase in the number of frauds being detected and the effectiveness of risk management systems, there are always individuals or groups who have the incentive and the ability to circumvent or override controls. Companies must not drop their guard, but must constantly develop new controls and build on the loyalty of their employees so that they do not provide an environment in which fraud can flourish,” said Skalak.

The Illusion of Safety

While the number of fraud reported has increased, companies on the whole believe the prevalence of fraud in their business was greater in 2003 than it is today. Only 21 percent consider it likely that their company will be a victim of fraud over the next five years. The most common means of detecting fraud was by accident or chance, 34 percent, followed by internal audit, 26 percent.

The more controls a company has, the better its chances of detecting fraud and recovering losses, the survey confirmed. Companies with a larger number of controls were better at discovering how much more damaging fraud was, uncovering three times as many losses as those with less controls. Additionally, companies with more than five fraud control measures were better able to recover their losses, (52 percent) than those with less than five control measures (43 percent). The internal audit is the most successful of all processes and controls in detecting fraud.

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