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Economic crime hits home in Africa

16 October 2007 Gareth Stokes

72% of South African companies have fallen victim to economic crime in the past two years. This statistic emerged in the biennial PriceWaterhouseCoopers' Global Economic Crime Survey released to the media on 16 October 2007. The report is compiled from computer assisted interviews with CEOs, CFOs and other executives at nearly 5, 400 companies located in 40 countries around the world. Despite improvements in ethics and corporate culture, South African business continues to under-perform against global benchmarks.

It is extremely difficult to estimate the total cost of economic crime to the local economy. The survey reveals that, on average, each South African business surveyed lost USD 1, 088, 082 to fraud over the last two years. These companies reported an average of 23 instances of such crimes over the period in stark contrast to the eight instances suffered by global companies.

The local survey results are based on responses from 103 South African companies, of which 71% are JSE listed entities.

Less of a bad thing is still bad

We are all familiar with the expression "too much of a good thing is bad." It takes little imagination to rework this expression and create a new phrase. We venture that a bit less of a bad thing remains bad! Thus the slight drop in the number of South African companies affected by economic crime (from 83% to 72%) is as newsworthy as a slight reduction in any other criminal activity. One would for instance not be too heartened by a 13% reduction in the number of violent crimes in your country, if the base was in excess of 200,000 incidents per annum.

In a similar fashion to the insurance fraud figures we reported on late last week, the drop in number of companies falling victim to economic crime has not led to a similar reduction in the losses suffered due to this crime. Instead, economic criminals are becoming cleverer taking companies for larger amounts as the scams become more fool proof.

And as mentioned earlier, each of the 72% of companies that reported being affected by economic crime in the two years to 2007 had been 'hit' on average 23 times, a 110% increase on the two years to 2005. The reduction in companies reporting economic crimes in South Africa is thus likely to be lost in the significant rise in both number and rand value of economic crimes reported in the period.
 
Whistleblowers fear the worst

The survey also reveals that African companies consider whistle-blowing to be a less effective preventative measure for economic crime than their global peers. 38% of African companies operated some form of whistle-blowing system and 74% believed the system to be effective. This is not surprising given the treatment meted out to government employed whistle-blowers in recent months. Other African participants in the survey were from Kenya (75 companies) and Egypt (76 companies).

On the other hand, South African companies are far more likely to lay criminal charges against internal fraud perpetrators than the global average. Local companies laid charges 64% of the time as opposed to 50% globally. Dismissal occurred in 51% of local companies against 40% around the world. The focus on prosecution might reflect the tough domestic labour market, where workers enjoy significant job protection.

Internal fraudsters remain the most significant perpetrators economic crime in South Africa according to 61% of the companies polled. The report also highlights the emerging threat of fraud perpetrated by parties without any business affiliation. This category includes hackers who compromise company information technology platforms to commit the fraud. As economic criminals become more technically skilled this type of fraud is likely to affect more than the 17% of companies in coming years.

Two fraud paradoxes

The report has this to say about the perpetrators of fraud: "It is generally accepted, by criminologists and fraud investigators that three things must be present for a fraudster to set to work: the opportunity to commit fraud, the incentive to commit fraud and the fraudster's ability to rationalise their own actions." In South Africa, the fraudster often operates at senior levels in the business structures with as many as 17% of economic crimes committed by figureheads at the company concerned.

The first fraud paradox relates to individual character traits. "Most fraudsters tend to be risk takers, very decisive, extroverted, career or success orientated individuals," and these are often the exact skills a company looks for when making a senior management appointment.

The second fraud paradox is that the more controls a company implements to spot fraud, the more fraud it uncovers. This paradox is clearly illustrated in the report which compares results in companies using five or less controls against those using five or more. The average loss suffered due to detected fraud at global companies using less controls was USD 901, 285 compared to more than USD 3 .4 million at companies with more controls in place Cast more nets and you catch more fish! 

An important conclusion from the study into fraud control systems is that "Controls on their own will not be sufficient to mitigate fraud risk. Companies must establish a culture that supports these controls with clear and ethical guidelines."

Editor's thoughts:
Earlier this evening we watched a newscast in which it was claimed that more than 300,000 beneficiaries did not qualify for their social security benefits, or simply did not exist. This means that as many as 20,000 government employees had to rationalise questionable actions at some point in time. Perhaps greed or poverty is the motivation behind many of these white collar crimes; but what about rationalising these actions? How do white collar criminals rationalise their actions? Send your thoughts to
gareth@fanews.co.za

 

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