30 per cent of companies worldwide report fraud in last 12 months, PwC survey finds; Sharp rise in economic crime by middle management
NEW YORK and LONDON,19 November 2009 – Already beset by the global recession, nearly one in three organisations around the world reported they were the victims of economic crime during the past 12 months. Of those, 43 per cent said that the incidences of fraud in their organisations had increased during the period, according to PricewaterhouseCoopers’ Global Economic Crime Survey 2009.
The survey found that 30 per cent of respondents had experienced some form of economic crime during the period; 42 per cent of those said that the cost of fraud had increased since this time last year. Asset misappropriation or theft, cited by 67 per cent of those who reported economic crime, was the most pervasive, followed by financial statement fraud, cited by 38 per cent, and bribery and corruption, 27 per cent. Other reported crimes included intellectual property infringement, money laundering, tax fraud, insider trading and espionage.
The survey of more than 3,000 respondents in 54 countries is the most comprehensive study of its kind, and was conducted in conjunction with the INSEAD business school. It revealed that economic crime remains rampant among organisations of all sizes, in all countries and industries despite increased regulatory action and anti-fraud controls to prevent it.
In addition to direct financial losses, organisations also suffered significant “collateral damage” due to fraud. These include negative impact on employee morale, cited by 32 per cent of respondents who reported economic crime; business relationships, 23 per cent; reputation and brand, 19 per cent, and relationships with regulators, 16 per cent. Financial statement fraud was found to be the fastest growing form of economic crime and has more than tripled since 2003.
The survey found evidence that the impact of the global recession helped drive the incidence of economic crime, and 40 per cent of all respondents said that their organisation faced greater risk of economic crime in the downturn. Of those respondents that identified underlying business pressures or incentives as the main reason for rising incidence of fraud, 47 per cent said difficulty in achieving business targets was a motivating factor for fraud during the downturn. Fear of losing jobs was mentioned by 37 per cent. The desire to earn personal performance bonuses, or for senior management to achieve desired financial results, was cited by 27 and 25 per cent, respectively.
“The global economic downturn has heightened the pressures and incentives to commit fraud,” said Tony Parton, leader of PricewaterhouseCoopers’ forensics practice in London. “Economic crime is pervasive, persistent and pernicious. No organisation and no industry are immune from the threat of fraud.
“In these tough times, the temptation to inflate results or take part in other forms of financial statement fraud may overcome ethical values,” he added. “In an economic 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.”
Economic crime was most prevalent at large companies, with 46 per cent of organisations with more than 1000 employees reporting incidents. Among organisations who reported fraud, nearly a third said they had suffered more than 10 incidents in the last 12 months.
Industries most affected by fraud in the past 12 months were communications, 46 per cent; hospitality and leisure, 42 per cent; financial services, 44 per cent, and insurance 45 per cent. However, no industry is immune to economic crime, and different industries face different threats. For example, in the engineering and construction industry, 47 per cent of respondents reported incidents of bribery and corruption.
Territories reporting high levels of economic crime included Russia, 71 per cent of respondents, South Africa, 62 per cent, Kenya, 57 per cent, Canada, 56 per cent and Mexico, 51 per cent. Low levels of economic crime were reported in Japan, 10 per cent, Hong Kong/China 13 per cent, and the Netherlands and Turkey, 15 per cent each.
Most of those committing economic crime, 53 per cent, work inside the organisation they victimise, while 44 per cent were external. Internal fraud was highest in the aerospace, chemicals, manufacturing and pharmaceuticals industries. External fraud was most common in the insurance, technology, communication and financial services sectors. Of the respondents reporting fraud committed by an outside party, 45 per cent suffered fraud by customers and 20 per cent by agents or intermediaries.
The survey also found that the profile of the internal fraudster is changing. Economic crimes committed by middle managers rose strongly, accounting for 42 per cent of all internal frauds, up from 26 per cent in 2007. Conversely, the number of frauds involving senior management declined over the same period from 26 per cent to 14 per cent.
Informal tip offs, both internal and external were responsible for the detection of 27 per cent of reported economic crime, followed by internal audit, 17 per cent, and risk management systems, 14 per cent. Another 13 per cent was discovered by accident. Only 7 per cent of crimes were detected via official whistle blowing channels. Once internal fraud was discovered, 85 per cent of fraudsters were dismissed. Civil or criminal charges were brought against 48 per cent of internal fraudsters and 59 per cent of outsiders.
The survey found a correlation between the frauds reported and the frequency of fraud risk assessments performed. Organisations that carry out more frequent assessments report more fraud; in other words, if you look for fraud, you will find it. Yet, although nearly half of fraud victims said the level and cost of economic crime was rising, nearly two-thirds said they made no changes in efforts to detect it.
PwC’s 5th Global Economic Crime Survey was conducted between July and November 2009. There were 3,037 respondents from 54 countries who took part in an online questionnaire. Participants were asked to respond to the questions in regards to their company and the country in which they are located.
The Forensics Services groups of the PricewaterhouseCoopers global network of firms play a lead role in addressing the lifecycle of fraud and other avoidable losses, providing reactive investigative services and proactive remedial and compliance services to clients in the private and public sectors.
About INSEAD
As one of the world�s leading and largest graduate business schools, INSEAD brings together people, cultures and ideas from around the world to change lives and transform organisations. This worldly perspective and cultural diversity are reflected in all aspects of our research and teaching. With two campuses in Asia (Singapore) and Europe (France), two centres in Israel and Abu Dhabi, and an office in New York, INSEAD extends the reach of its business education and research across three continents.
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