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Average Losses From Fraud Increased By 40% In Two Years

15 October 2007 PricewaterhouseCoopers

Economic Crime Is Pervasive At Companies Worldwide, Average Losses From Fraud Increased By 40% In Two Years

PricewaterhouseCoopers Finds Controls Alone Are Not Enough Deterrent,
Corporate Culture, Ethics and Risk Management Needed To Effectively Fight Fraud

Despite heightened efforts at regulation and control, fraud remains a major threat to companies around the world. Nearly half of all organisations, about the same level as in 2005, reported they were victims of some form of economic crime in the past two years, according to PricewaterhouseCoopers' 2007 Global Economic Crime Survey. The average direct financial loss to companies rose nearly 40 percent to US$2.4 million from US$1.7 million during the period, with the average loss from fraud to SA companies being US$1.1 million.

Louis Strydom, of PricewaterhouseCoopers SA, says that the biennial survey of 5,400 global companies (including 103 SA companies of which 71% are listed) revealed that of the 43% that experienced economic crime in the last two years, the total direct losses exceeded US$4.2 billion. "In SA, a much higher 72% of respondents have experienced this form of crime in the same period."

The losses arose from a variety of economic crimes, including asset misappropriation, accounting fraud, bribery and corruption, money laundering, and intellectual property infringement. In SA, asset misappropriation is the most common incident of economic crime.

Strydom says that in addition to the direct financial costs of fraud, companies also reported suffering significant "collateral damage" such as damage to brands, decreased staff morale, impaired relations with other companies and increased costs of dealing with regulators. Sixty nine percent of respondents said it had negatively affected their share price.

SA companies reported an average of 23 incidents each in the past two years (compared to the global average of 8 incidents), an increase of 110% since 2005.

Strydom says that SA businesses are more intent on prosecuting this type of crime than their global peers. "Sixty-four percent of SA companies took criminal action versus 50% globally. Fifty-one percent dismissed the employees committing the fraud whereas the global norm is 40%. And 30% of perpetrators were criminally sentenced compared to the global standard of 20%, with 32% of cases pending versus 30% globally."

The 2007 global survey also revealed a direct correlation between the size of a company and the prevalence of fraud. Among companies of 5,000 or more employees, 62 percent reported being victims of fraud. That number dropped to 52 percent for companies with 1001 to 5000 employees and to 32 percent for small companies of less than 200 workers.

Fraud was most prevalent in the insurance and retail sectors, where 57 percent of companies reported fraud, followed by the government and the public sector, with 54 percent, financial services, 46 percent, and automotive, 44 percent.

Of those responsible for committing fraud in South Africa, 76% are male, most often between the ages of 31 and 50, with 36% having college educations or advanced degrees. More than half (61%) were employed by the defrauded company, 17% in senior management, and 29% had more than five years with the company.

According to the survey, reasons cited to explain why individuals committed fraud in South Africa included financial incentives (60%), expensive lifestyle (44%), and career disappointment (11%). Weak controls were cited in 41% of cases, a low level of commitment to the company (44%), relative anonymity (22%), lack of clarity about the company's ethics (16%) and temptation (54%).

Forty-nine percent of fraud in South Africa was initially detected via a whistleblower hotline or other tip off -- while the most effective control measure -- internal audit -- was the initial detection method in 20% of reported cases, highlighting the importance of a transparent corporate culture that enables employees to recognize and expose improper conduct.

Companies that experienced at least one significant structural change a merger, acquisition, reorganization, or staff reductions reported increased levels of fraud.

Fraud was as prevalent in the fast-growing E7 emerging economies, (Brazil, China, India, Indonesia, Mexico, Russia and Turkey) as in more developed countries, but the cost of fraud was significantly higher in emerging economies. In total the E7 countries accounted for more than 45 percent of the US$4.2 billion in financial losses reported globally. Companies with operations in E7 countries reported average losses from fraud of $5.1million; more than double that of companies not operating in such territories.

Strydom says that to fight economic crime, efficient controls alone are not enough. "The answer lies in establishing a culture that supports control efforts and whistle-blowing with clear ethical guidelines. Companies need to build loyalty to the organisation give employees the confidence to do the right thing, and identify clear sanctions for those who commit fraud, regardless of their position in the company."


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