pwc global economic crime survey 09 e

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The Global Economic Crime SurveyEconomic crime in a downturnNovember 2009


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Global Economic Crime Survey November 2009 PricewaterhouseCoopers 2

We are pleased to present our th Global Economic Crime Survey. Our 2009 survey scrutinisedraud and associated integrity risks during a period in which most territories around the worldexperienced either a dramatic economic downturn or at least a signicant slowdown. Against this

backdrop, the survey investigated the root causes o economic crime, and the way in which itaects businesses worldwide.

Economic crime is a truly global phenomenon. Over 3,000 senior representatives o organisations in54 countries (including respondents spread rom Australia to Venezuela) completed our web-basedsurvey. To enable us to determine long-term trends, respondents were asked a number o corequestions on raud. They were also asked a number o other questions specically on the raud threatsthat emerge in an economic downturn. With 62% o respondents reporting that their organisationshad suered a decline in revenues during the last 12 months, we were able to obtain some valuableinsights into the types and causes o raud in an economic downturn. Further details o the survey

demographics are presented in the methodology and acknowledgements section o this report.

Introduction

quitprintEconomic crime thrivingin the downturn

A deeper dive into

the statistics

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Methodology and

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more incentives or rauds, andgenerating more opportunities orraudsters to perpetrate their crime.

In this climate, we are continuingto develop our knowledge andunderstanding o raud and itsperpetrators. With this insight, we areable to recommend what organisationscan do when it comes to tacklingraud. We are very grateul to all therespondents and organisations thatparticipated in the survey, withoutwhom we would not have been ableto produce this report. Crucially, we

hope that our ndings will urtherassist readers in their ongoing ghtagainst economic crime.

Global Economic Crime Survey

Leadership Team:

Tony PartonPartner, London, United Kingdom

Vidya RajaraoPartner, Mumbai, India

Steven SkalakPartner, New York, USA

November 2009

We have divided the report into theollowing sections:

Fraud thriving in the downturn

in which we outline topical areaso interest arising rom an economicdownturn and the heightened risko raud, as well as the key themesarising rom the core survey questions.

A deeper dive into the statistics where we take a closer look at thestatistics and at trends related tovictims, types and perpetrators oraud, the underlying causes andactors behind raud and the impacton management and regulatorybodies. This section also highlightsdierences in results reported byrespondents across the world.

The fraud horizon here we identiyraud trends in the uture, as well aswhat organisations may be able todo to combat them.

Our survey shows that economiccrime continues to be a serious issue

aecting organisations worldwide,despite increasing regulatory actions.This is particularly so today, in anenvironment where the globaleconomic downturn has signicantlyincreased pressures on organisationsand individuals to perorm, creating

the respondents to obtaininormation on the dierent typeso economic crime, the impact

o such economic crime, bothnancial and in terms o collateraldamage, and the concrete causeso economic crime, as well as therange o remedial actions taken.

2. Questions related to fraud ina downturn. Our survey givesin-depth insights into raud acedby organisations in times oeconomic downturn. Our ocusedinvestigation into this area has

enabled us to understand theimpact the downturn has hadon levels, types and causes oeconomic crime.

3.Analysis of trends over time.Since beginning these surveys,we have continued to ask a coregroup o questions, and additionalquestions as appropriate torefect current issues likely to beimpacting businesses around the

world. Because our data nowencompasses a 10-year period,we are equipped to identiy andassess long-term developmentsand trends in the ght againsteconomic crime.

We are particularly grateul or theassistance o the INSEAD businessschool with the scope, content and

subsequent interpretation o thesurvey data. Their involvement hasadded an extra dimension to thesurvey, bringing signicant valueto this years report. We would liketo take this opportunity to thankProessor Douglas Frank o INSEADbusiness school or his insights andcontribution to the survey.

The aim o the 2009 survey wasprimarily to:

Assess corporate attitudes towardseconomic crime in the currenteconomic environment, particularlyto understand how economiccrime changes during an economicdownturn; and

Understand and explore the trendsin relation to economic crime andthe reasons why these might arise.

The 2009 survey was based on the

ollowing research strategies:

1. Survey of organisation executives.This survey delivers ndings inwhich executives report their ownexperiences in the ght againsteconomic crime. We surveyed

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had declined. We also expected thatrespondents reporting a stable levelo nancial perormance would havereported ewer rauds, but they reportthe same requency o incidents asthe 62% o respondents reporting adecline. This demonstrates that allorganisations, whether or notsuering a decline in nancialperormance in a downturn, are atrisk o economic crime. Hence, weconclude that economic crimeremains a pervasive business risk,which does not discriminate among

(43% and 42%, respectively)experienced in the past year weregreater compared to 12 months ago.

Given the 40%-60% split in viewsas to whether the recession hadincreased the risk or the incidence

o economic crime, we expected thatthe 38% o organisations reportingno impact o a downturn would havebetter, that is lower economic crimeexperience. We ound, however, thatorganisations that had not sueredrom an economic downturn reportedsimilar levels o economic crime ascompared to those whose businesses

Fraud pervasive, persistentand pernicious

One in three respondents reported

economic crimes in the last 12months within their organisationsin the country in which they wereprimarily based. The survey datashows that the incidence o economiccrime varies by territory; somecountries, mainly those in emergingmarkets, experienced much higherlevels o raud than the average,as much as 71% in one country(see table under the global picture

section); by industry sector, some(notably insurance, nancial servicesand communications) reporting higherlevels o raud than others; by sizeand type o organisation. But noorganisation is immune.

O the 3,037 respondents to oursurvey globally, 905 (30%) reportedhaving experienced at least oneincident o raud in the last 12 monthsalone. Not surprisingly, the global

economic downturn has signicantlyaected most organisations, with 62%o respondents having reported adecline in nancial perormance overthe last 12 months and 40% o allrespondents saying that the risk oeconomic crime had risen due tothe recession. Indeed, almost halo our respondents believed that theincidences and cost o raud

Economic crimethriving in thedownturn

quitIntroduction A deeper dive intothe statistics

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Economic crime thriving

in the downturn

the global picture

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Figure 2: Factors contributing towards increased

incentives/pressures to commit raud

0 10 20 30 40 50

25

23

18

14

13

Financial targets more

difficult to achieve

Fear of losing jobs

Desire to earn personalperformance bonuses

For senior executivesto achieve desired

financial results

Bonuses not paid this year

Maintain financial performanceto ensure lenders do not

cancel debt facilities

Other factors

There is a belief thatcompetitors are paying bribesto win contracts

47

37

27

% Incentives/pressures

% respondents who believe increased incentives/pressures are the most

likely reason for greater risk of economic crime in a downturn

Among the 40% o respondents who

believed that there is a greater risk

o raud in the current economic

environment, 18% identied increased

opportunities or committing raud as

the root cause (see gure 1). In this

respect, Sta reductions resulting in

ewer resources deployed on internal

controls was identied as the main

contributory actor (62%, see gure 3).

Financial diculties in a downturn

when aced with evidence o a

downturn. Our survey highlighted that

no industry or organisation is immune

to raud and it would appear that the

current economic situation is leading

to severe, oten cut-throat competition.

Individuals eel under pressure to

achieve targets when times become

dicult, or when it seems impossible

to achieve targets. Furthermore, an

individuals personal position may

be threatened by reductions in pay

or the risk o possible unemployment.

Consequently, the temptation to infate

revenues, and/or omit expenses, is

more likely to overrule ethical values.

Our survey revealed that a key actor

resulting in increased pressure to

commit raud is job security. O the

respondents who believed that

underlying pressures or incentives

are the main drivers or greater raud

risk, 37% reported that People are

araid they might lose their jobs

(see gure 2). Furthermore, when

employees are terminated, those

who remain employed eel increasinglypressured where they eel that their

own jobs are under threat. Employee

termination and additional cost

reduction measures may be inevitable

in a downturn, but management

should consider whether such

actions could, in turn, compromise

the organisations ability to ght

economic crime.

Figure 1: Fraud triangle

Attitude/Rationalisation

14%

!FRAUD RISK

Incentive or Pressure

68%

Opportunity

18%

Interestingly, among the respondents

who believed that there is a greater

risk o raud in the current economic

environment, two-thirds elt that

increased incentives or pressures

are the most likely underlying cause.

The most commonly reported actor

contributing to these increased

pressures and incentives was that

fnancial targets were more difcult

to achieve, covering both individual

targets and those or the business

as a whole.

Clearly, in an economic downturn,

nancial targets are more dicult to

achieve, and are oten over ambitious.

Organisations would thereore be well

advised to be realistic when setting

their targets, as well as being more

prepared to adjust targets downwards

its victims based on the relative

degree o their nancial perormance.

However, our survey results show that

those organisations suering rom

a downturn reported notably higher

levels o one type o economic crime,

that is accounting raud, which we

address later in this report.

Fraud practitioners oten point to

three actors that are commonly ound

when raud occurs (Fraud Triangle).

First, perpetrators o raud need an

incentive orpressure to engage in

misconduct. Second, there needs to

be an opportunityto commit raud,and third, perpetrators are oten able

torationalise or justiy their actions.

Our survey probed deeper into the

impact o these three actors and

ound that among the respondents

who believed that there is a greater

risk o raud in the current economic

environment:

68% attributed greater risk o raud

to increased incentives or pressures;

18% reported that more

opportunities to commit raud was

the most likely reason or greater

risk o raud; and

14% believed that peoples ability

to rationalise was the main actor

contributing to greater risk o raud

(see gure 1).


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accounting raud and bribery and

corruption. Figure 5 shows the trend

in these three main types o raud

reported in our last our surveys.

Figure 5: Trends in reported rauds

0 10 2 0 3 0 4 0 5 0 6 0 7 0

Asset misappropriation

Accounting fraud

Bribery and corruption

% Companies

67

70

62

60

38

27

24

10

27

24

14

30

2009 2007 2005 2003

% respondents who experienced economic crimes

Two-thirds o those respondents who

have experienced economic crime in

the last 12 months reported having

suered asset misappropriation(see fgure 5). This type o raud

the most prevalent since we began

these surveys 10 years ago covers

a variety o misdemeanours and

while it is the hardest to prevent,

it is arguably the easiest to detect.

Sharp rise in accounting rauds

Economic crime takes on many

dierent orms, some more common

than others. Figure 4 shows the typeso economic crime suered by those

respondents who reported experiencing

economic crime in the last 12 months.

Figure 4: Types o economic crimes

0 10 20 30 40 50 60 70

15

12

5

4

3

5

3


Accounting fraud

Bribery and corruption

IP infringement

Money laundering

Tax fraud

Illegal insider trading

Market fraud involving cartelscolluding to fix prices

Espionage

Others

67

38

27

% reported frauds

% respondents who experienced economic crimes in the last 12 months

Figure 4 shows that the three most

common types o economic crimes

experienced in the last 12 months

were asset misappropriation,

orce organisations to reduce costs

and explore areas where efciencies

can be generated. Sta reductions

can result in reduced segregation

o duties and less monitoring o

suspicious transactions and activities.

This, in turn, weakens the internal

control environment and is oten likely

to result in more opportunities to

commit raud.

Figure 3: Factors contributing towards creating

more opportunities to commit raud

0 10 20 30 40 50 60 70

22

22

15

12

6

Staff reductions resulting infewer resources being deployed

on internal controls

Shift of management's focustowards survival of business

Increased workload ofinternal audit staff

Weakening of IT controls resultingin increased vulnerability of

external penetration

Transfer of operationsto new territories

Diversification ofproduct portfolio

Reduced regulatory oversight

Other factors

% Opportunities

62

49

34

% respondents who believe more opportunities constitute the most likely

reason for greater risk of economic crime in a downturn


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resulting in increased regulatoryenorcement. Regulators are takingan increasingly dim view oorganisations and individuals thathave paid or received bribes in orderto secure contracts and business

organisation uses sales agentsand distributors, and thereore controlis reduced.

In recent years there has been asea change in attitudes towardsbribery and corruption globally,

Globally, 27% o respondentsexperiencing economic crimereported having experienced bribery

and corruption cases in the last12 months (see gure 5). The risko bribery and corruption is present inmost transactions and in all territoriesin which an organisation operates,but o particular concern are dealingswith government ocials in emergingmarkets, where bribery and corruptionis more prevalent, and where an

However, in our 2009 survey,accounting raud has becomeincreasingly prevalent. O thoserespondents who reported economiccrime in the last 12 months, 38%reported experiencing accountingraud. This orm o economic crimehas signicantly increased since2007 (see gure 5), and this appearsto be linked to the economic cycle.

The survey results highlight thataccounting manipulations are mostcommon within listed organisationsand least common in amily-owned

organisations. When we looked atthe actors prevalent in this type oraud, respondents pointed tofnancial targets being more difcult

to achieve (47%), and seniormanagement wanting to report

a desired level o fnancial

perormance (25%).

Accounting raud encompassesa variety o raudulent actionsincluding accounting manipulations,

raudulent borrowing/raising onance, raudulent application orcredit and unauthorisedtransactions/rogue trading.

Accounting fraud a case study:

There have been allegations by awhistle-blower o earnings manipulation at

a subsidiary, XYZ Plc/Inc/Ltd/SA (it couldhappen anywhere). The organisation hasoperations in 140 countries, has 55,000employees and a turnover o $33.6bn.

What actions are needed to investigate?

Appointanindependentcounseland

orensic team with the right skills andexperience.

Setthescopecorrectly/seek

independent advice on scope.

Lookbeyondtheallegationsconsider

other areas o the business/individuals

indirectly implicated by allegations.Engagefullywiththeauditrmastothe

scope and approach and allow themaccess to the detailed results.

Donotlettimepressuresdictateactions,

delay the audited results, i necessary.

Accounting raudhas more than tripledsince 2003


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due to a lack o support withinorganisations, insucient publicityand/or leadership not being seento take whistle-blowing seriously.

Globally, 7% o rauds were detectedthrough ormal whistle-blowingprocedures. This may suggest eitherthe ineectiveness or the absenceo such procedures, which could be

Our survey statistics also showthat 17% o the rauds reportedwere detected by internal audit(see gure 7), which emerged oncemore as the means by which mostrauds were detected. As notedearlier, almost two-thirds o thosewho suered economic crime in thelast 12 months believed that theopportunities to commit raud haveincreased with reduced resourcesdeployed in internal controls.Perhaps the detection o raudincidences has allen with reducedsta within the internal controls team.

As such, it is apparent that, i therehad not been any reductions ininternal control sta levels, morerauds could have been detected.

While internal audit remains keyto the detection o raud, there isa clear trend in recent surveys internal audit is consistentlydetecting less o the rauds reported(see gure 7). Anti-raud controls,especially risk management, were

reported having detected morerauds in our current survey. Thusthe combination o an anti-raudculture and eective anti-raudcontrols, as we recommended inour 2007 survey report, appearsto be improving the detection oeconomic crime.

As noted earlier, 43% o therespondents who reported raudbelieved there has been an increasein the level o economic crime comparedto 12 months ago. However, 63% orespondents have made no change tothe requency o raud risk assessmentsin the same period. Since raud is nota static threat, organisations continuallyneed to assess their raud risks. Theimportance o addressing raud risksshould be conveyed rom the topdown, with the objective being todevelop a robust anti-raud ramework.

Figure 7: Detection methods

414

23Other detection methods

0 10 20 30

54

0

144

3

544

533

78

3

1621

17

11 1411

33

0

136

10

Internal audit

Corporate

controls

Corporateculture

Beyond the

influence of

management

Suspicious transaction reporting

Fraud risk management

Corporate security

Rotation of personnel

Whistle-blowing system

Tip-off (internal)

Tip-off (external)

By law enforcement

By accident

% reported frauds

1719

26

2009 2007 2005

% respondents who experienced economic crimes in the last 12 months for 2009; and in the last 2 years for 2007 and 2005

A comprehensive fraud risk

assessment should:

Identifythepotentialinherentfraudrisks.

Assessthelikelihoodandsignicanceof

occurrence o the identied raud risks.

Evaluatewhichpeopleanddepartments are most likely to commitraud and identiy the methods theyare likely to use.

Identifyandmapexistingpreventiveand detective controls to the relevantraud risks.

Evaluatewhetherrelevantcontrolsand processes are eectively designedto address identied raud risks

Identifyandevaluateresidualraud risks resulting rom ineectiveor non-existent controls.

Respondtoresidualfraudrisks.


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detect it or have been reluctant toreport it once uncovered.

While there are some exceptions, our

survey shows relatively ew raudsbeing reported by respondents in Asiaand some territories in Scandinavia.Conversely, respondents in Easternand Western Europe were amongthose reporting the highest incidenceo raud. Those territories where morethan 40% o respondents reportedraud consisted o a mix o developedeconomies and emerging territories.

The bigger the organisation,the harder the all

Size matters when it comes to thenumber o incidences o raud reported.The respondents to our survey wereemployed in small, medium andlarge organisations, in almost equalproportion as shown in the surveydemographics in the methodologyand acknowledgements section o thereport. Our survey shows a correlation

between the size o the organisation(as measured by the number oemployees) and reported incidenceso raud in the last 12 months. In our2009 survey, 46% o organisationswith more than 1,000 employeesreported having experienced at leastone incident o economic crime(see gure 8).

Table 2: O the territory respondents,percentage that reported raud

Territories that

reported high levels o

raud (40% or more)

% Organisations

Russia 71%

South Arica 62%

Kenya 57%

Canada 56%

Mexico 51%

Ukraine 45%

UK 43%

New Zealand 42%

Australia 40%

Territories that

reported low levels o

raud (20% or less)

% Organisations

Italy 19%

Sweden 19%

Singapore 18%

India 18%

Indonesia 18%

Switzerland 17%

Finland 17%

Romania 16%

Netherlands 15%

Turkey 15%

Hong Kong 13%

Japan 10%

The depth and breadth o our

research allowed us to drill downdeeply into the responses weobtained, beore grouping data andcomparing it in the ollowing ways.

The global picture raudreporting diers rom territoryto territory

O the 3,037 respondents globally,905 (30%) reported having experienced

raud in the last 12 months. However,the level o raud reporting dierssignicantly rom territory to territory.Table 2 illustrates the wide variationo reported rauds by territory.

Organisations in territories whererelatively low levels o raud werereported have either ailed to

A deeper dive intothe statistics

quitIntroduction Economic crime thrivingin the downturn

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In light o this, it is interesting thatgovernment/state-owned enterprisesshould also be the most satisedwith current regulations (32% thought

that regulatory/legal authorities werequite or very eective). While theseorganisations may be the targeto certain raudsters, the surveysuggests that the main actorcontributing to such high levels oraud in government/state-ownedenterprises is a lack o internal raudprevention know-how and/or raudprevention procedures.

This is supported by the act thata relatively large proportion o therauds in government/state-ownedenterprises (18%) were detectedby accident, with just 5% beinguncovered through ormal whistle-blowing procedures. One-third ogovernment/state-owned enterprisesdetected raud through inormalprocedures (via tip-os). This ishigher than the global averageo 27% (and perhaps due to a

lack o trust in ormal procedures).In addition, although 47% ogovernment/state-ownedenterprises respondents believedthat they were at a greater risk romraud, only 22% increased therequency o their raud riskassessments.

Organisation type dogovernment/state-ownedenterprises have a greater

threat o economic crime?The results o our survey show apossible link between the type oorganisation and the level o economiccrime experienced. Between 21% and37% o organisations, when groupedby type, reported having sueredeconomic crime in the last 12 months(see gure 9). This underlines the actthat all organisations are susceptibleto raud. Those in government/

state-owned enterprises, however,reported the highest level o economiccrime (37%). They also believedthemselves to be exposed to thegreatest risk o economic crime (47%)in the current economic climate.

Figure 9: Frauds reported by various typeso organisations

21

28

37

31

Listed on thestock exchange

Government/state-ownedenterprises

Private sector

Others

% reported frauds

% respondents representing individual organisational types

This has been a consistent picture inall o our previous surveys, where thelarger organisations report the highestnumber o rauds. Figure 8 shows that

organisations with more employeesare more likely to report at least oneraud event. This is not surprisingsince the bigger the bag o applesthe more likely it will contain at leastone rotten one. In addition, largerorganisations will typically be the oneswith the most robust raud detectionstructures. That said, it is also worthremembering that there are moreplaces to hide in large organisations.

In other words, there may be evenmore rauds taking place in thoseorganisations but they have, or thetime being, escaped detection.

Figure 8: Large organisations report more rauds

0 10 20 30 40 50

More than 1000

employees46

201 1000

employees26

Up to 200 15

Don't know 13

% all respondents

% respondents representing different sizes of organisations


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and energy and mining industry(43%). These industries arerenowned or their exposure to bidrigging and kickbacks. Organisationsin these sectors clearly need to payparticular attention to this area overthe coming years.

The industry sectors that reportedhaving experienced most economiccrimes are communications, insurance,nancial services, and hospitality

and leisure. These industries tendto be targeted by raudsters becauseo their product or service; equally,organisations in these industrysectors tend to have more robustand proactive anti-raud measures.In eect, they both suer and detectmore raud than other sectors.

In 2007, the top our industriesreporting raud were insurance, retailand consumer, government/state-owned enterprises, and nancialservices. Indeed, due to the nature otheir business, insurance and nancialservices have reported consistentlyhigh levels o raud over the last 10years. The 2009 survey also showsthat nancial services is the sectorthat has experienced the largestincrease in raud (56% o respondentsreported an increase in the numbero incidences in the last 12 months).

This compares with the averageglobal gure o 43% o organisationsacross all sectors reporting anincrease over the same period.

Relatively high levels o briberyand corruption were reported byrespondents in the engineeringand construction industry (47%),

No industry is immune

Turning to the most raud-proneindustry sectors, a pattern that

will be amiliar to readers romour previous surveys emerges:

Figure 11: Fraud reported by industries

0 10 20 30 40 50

27

26

24

24

20

15

36

21

Communications

Insurance

Financial services

Hospitality and leisure

Transportation and logistics


Retail and consumer

Energy, utilities and mining

Entertainment and media

Automotive

Aerospace and defence

Engineering and construction

Manufacturing

Pharmaceuticals and

life sciences

Chemicals

Other industries/business

37

37

27

42

38

46

45

44

% reported frauds

% respondents representing individual industry sectors

The government/state-ownedenterprises are consistently plaguedby cost issues. Many o theseorganisations have been presented

with increasingly tough cost-reductiontargets in recent years, and theseare becoming even more onerousin the current economic climate.

While government/state-ownedenterprises are most likely to reportraud, listed organisations are mostexposed to repeat attacks (15%o listed organisation respondentsexperienced 100-plus incidenceso raud in the last year seegure 10).

Figure 10: More than 100 incidences o raudreported by various types o organisations

12

8

13

15

Listed on thestock exchange


Private sector

Others

% reported frauds

% respondents representing individual organisational types


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November 2009 PricewaterhouseCoopers 13

take an active interest in raud riskswithin their organisation. By doingso, and by demonstrating the highestethical behaviour, together with

robust disciplinary action wherethe perpetrators o raud have beenidentied, the right tone rom thetop can be established. Conversely,senior executives who appearunconcerned about raud withintheir organisation may througha lack o attention and ocus unwittingly oster environmentswhere certain types o raud areperceived to be permissible.

Establishing the right tone at the topis acknowledged to be key in theght against raud. Certainly, oneuseul deterrent or economic crimehas proved to be a corporategovernance structure, setting outrobust escalation procedures throughwhich employees can report theirconcerns on a condential basis,secure in the knowledge that anyoneound to have committed raud will

be severely dealt with.

As we have seen, the impact oraud on employee morale can causecollateral damage. Furthermore,o the respondents who attributedgreater levels o raud to increasedrationalisation within their organisations,

employees, but also investors, suppliers,customers and potential recruits.

Building a zero-tolerance cultureSenior executives reported less raudthan other employees, suggestingthat they may not be sucientlyaware o the ull extent o economiccrimes in their organisation. However,undamental to the ght against raudis the attitude and ethical stancedemonstrated by those at the top.I organisations want to get the toneat the top right, senior executives

need to be better inormed aboutthe raud risks they are acing.

Our survey urther revealed that just26% o senior executives reported anincidence o economic crime in theirorganisation in the last 12 months.By contrast, 34% o respondentsother than senior executives reportedan incidence o economic crime in thesame period. Either senior executivesare not reporting incidences o crime

or they are not being made aware ocertain types o economic crime.

While smaller-value rauds may not beescalated to senior management, it isthe case that even a relatively minorincident can cause signicantreputational damage. We stronglybelieve that senior executives should

perhaps because it is very dicult toquantiy such costs.

Figure 12: Collateral damage

0 10 20 30 40

Employee morale 32

Business relations 23

Relations with regulators

Organisationsreputation/brand

19

Others

Share price

16

6

4

% reported frauds


However, most damaging, accordingto our survey, is the impact o raudon employee morale (reported asvery signicant or signicant by32% o respondents). In reality, it isimpossible to quantiy the cost o thistype o collateral damage (or anyother type), but it should be o realconcern to organisations no onelikes to see headlines about raudwithin the business, and this type ocoverage can put o, not just

Beyond the nancialconsequences

O the respondents that reported

incidences o raud over the last12 months, 27% said that the directnancial impact o this exposure wasmore than US$500,000. But the costo raud varies, depending on thetype o raud suered. One-quartero the respondents who reportedaccounting raud believed that it hadcost them more than US$1 millionin the last 12 months. By contrast,among respondents reportingincidences o asset misappropriation,only 17% believed that it had costthem over US$1 million. In view othe high incidence o accountingraud reported by our respondents,the comparatively costly nancialimpact o this exposure is evidentlya signicant problem or manyorganisations.

However, the allout rom raud is notsimply the direct cost. Our survey also

investigated the collateral damagesuered by organisations and askedabout the impact economic crimehad on their reputation/brand, shareprice, employee morale, businessrelations, and relations with regulators(see gure 12). Interestingly, mostrespondents do not see collateraldamage to cause signicant impact,


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said that the senior executivecompensation had no variablecomponent. In organisations wheresenior executive compensation

includes a perormance-basedvariable component o more than50%, 36% reported having sueredraud. In contrast, where there wasno variable perormance-basedcomponent, only 20% reportedhaving suered raud. This starkcontrast may suggest that thereis a correlation between the two.

Additionally, it appears that eacho the most common types o raud

asset misappropriation, accountingraud, and bribery and corruption are most prevalent when there isa higher variable component in thesenior executives compensationstructure. It may, at rst sight, seemodd that higher levels o assetmisappropriation, or example, arisewhere the senior executives receivea relatively high perormance-basedcompensation. However, in timeso economic uncertainty, and aced

with increased personal nancialpressures, it could be that someindividuals are tempted to increasetheir earnings by oul means,possibly because o perceivedunairness o their own earningscompared to those o seniorexecutives.

relationships (51%) and/or notiy therelevant regulatory authorities(see gure 14).

Figure 14:Actions brought againstexternal raudsters

0 10 20 30 40 50 60

59

51

46

4

16

5

Civil action/criminal charges

were brought

Notify relevantregulatoryauthorities

Cessation ofbusiness

relationships

Other actions

Did nothing

Dont know

% reported frauds


Compensation structure is this

a breeding ground or rauds?Our survey shows that amongrespondents who reported economiccrime, 12% said that, in theirorganisation, the senior executivecompensation includes more than50% based on perormance, that is,variable component, whereas 11%

Figure 13:Actions brought againstinternal raudsters

0 10 20 30 40 50 60 70 80 90

Dismissal 85

Civil action/criminalcharges were brought

48

Warning/reprimand

Notify relevantregulatory authorities

24

Did nothing

Other actions

Transfer

22

4

5

2

% reported frauds


But although there has been anincrease in the number o dismissals,another 22% o respondents reportedissuing only warnings or reprimands.This may refect the varying severityo rauds that were uncovered bythese organisations but, i a raudsterbelieves that the punishment orcommitting the crime will be minimal,he or she may be encouraged toperpetrate it. For external perpetrators,the majority o organisations chose tobring civil and/or criminal charges(59%), to terminate the business

35% identied others do it so its okayas being a contributory actor. Theseresults emphasise the importanceo eective communication (a zero-

tolerance policy) between managementand employees where attitudes to raudare concerned.

When the appropriate message romsenior management is not conveyedand/or reinorced through appropriateactions and behaviours, raud canhave a much more damaging impacton an organisation. The complexcultural challenges that arise in the ghtagainst raud can only be overcome ithe workorce has been equipped withthe right skills. A crucial part o thisprocess involves senior managementempowering and motivatingemployees to do the right thing,because it is the right thing to do.

Once a nancial crime has beenidentied, there are a variety o actionsthat can be taken by an organisation.Our survey shows that, in the majorityo cases, internal perpetrators tend tobe dismissed. Interestingly, levels odismissals or these crimes havedoubled in the last two years (85%in 2009 see gure 13, 40% in 2007).In eect, organisations looking or areason to reduce labour and itsassociated costs in the economicdownturn, have been presented witheasy pickings.


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Know your enemy

As with previous surveys, the splitbetween internal and externalperpetrators o economic crime wasairly evenly matched. Organisations thatsuered rom economic crime reportedthat 53% o perpetrators were internaland 44% were external. However,when we reviewed the responses by

industry sectors, we ound thatthere were our industries (nancialservices, insurance, technology andcommunications) that reported theirmost signicant rauds being committedby external perpetrators. Respondentsrom these our industries alonerepresent 28% o all responses to oursurvey. Respondents rom all other

Figure 15:Accounting raud reported by allrespondents versus those who reported that thesenior executives compensation includes morethan 50% perormance-based variable component

0 10 20 30 40 50

% reported frauds

44

38

More than 50%performance basedvariable component

All respondents


and % respondents from organisations where senior executives compensation

includes more than 50% performance-based incentives

Among organisations wheresenior executives compensationstructure includes more thana 50% variable component,44% o those reporting raudin the last 12 months sueredaccounting raud, whereas,rom all respondents, 38%o those reporting raudexperienced accounting raud

(see gure 15).

Organisations need to be awareo the apparent heightened raudrisks in this situation. They shouldimplement appropriate controlsand monitor closely to combatthe risk.

industry sectors reported sueringthe most signicant rauds at thehands o internal perpetrators.

Figure 16: Perpetrators o raud by industry

0 20 40 60 80 100

Industries

thatreported

higherexternal

perpetrators

offraud

Industries

thatreported

higherinternal

perpetrators

offraud

Insurance

Financial services

Communication

Aerospace anddefence

Technology

Manufacturing

Hospitality andleisure

Chemicals

Pharmaceuticals

and life sciences

Transportation andlogistics

Engineering andconstruction

Retail andconsumer

Automotive

Energy, utilitiesand mining

Government/state-owned enterprises

Entertainmentand media

Other industries/business

Professionalservices

Global

35

25

45

39

76

80

74

74

69

70

67

67

67

36 64

64

57

57

59

53

65

73

50

55

24

20

23

23

29

30

30

31

37

41

34

33

44

External Internal Unknown

% reported frauds

% respondents representing individual industry sectors

Do the rightthing, becauseit is the rightthing to do


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Figure 18: Prole o internal raudsters

0 10 20 30 40 50

42

42

14

2

Junior staffmembers

Middlemanagement

Seniorexecutives

Other employees

% reported frauds

% respondents who reported that an internal employee was the main

perpetrator of fraud

The rise in rauds being committed bymiddle management could be viewedin the context o increased nancialpressures in the current economicclimate. O respondents who saidraudsters increased ability to

rationalise their actions was the mostlikely cause o raud, 70% believedthat crimes are committed to maintainliving standards. O this group, onein ve believed these crimes arecommitted by those jealous o higherearners whose compensation orbonuses were believed to be unair.

O the respondents who reportedattack by external perpetrators,45% had suered raud by customersand 20% by agents/intermediaries

(see gure 17).

Figure 17: Prole o external raudsters

0 10 20 30 40 50

45

20

10

25

Customers

Agents/intermediaries

Vendors

Other third parties

% reported frauds

% respondents who reported that an external person was the main

perpetrator of fraud

The survey also ound that the proleo the internal raudster is changingrapidly. Economic crimes committedby middle managers have risen verystrongly, now accounting or 42% oall internal rauds, up rom 26% in2007 (see gure 18).

Middle managers deraud

employers to maintain livingstandards


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The raud horizon

Respondents to our surveys haveconsistently estimated that their utureraud exposure is less than theircurrent experience. With hindsight,however, this condence is otenshown to have been misplaced.

When asked about the most likelyraud threats in the next 12 months,respondents to our survey identiedasset misappropriation, accountingraud and bribery and corruption.

Hardly surprising since these typeso economic crimes were, ater all,the most commonly experiencedrauds over the last 12 months.However, as we explore later, suchexpectations have oten been shownto be incorrect in the past andmay well prove to be so in uture.

Figure 19: Trends in perception o raud

0 10 20 30

13

22

6

10

11

16

Assetmisappropriation

Accountingfraud

Bribery andcorruption

2007 Perception 2009 Perception

% all respondents

% all respondents perception over the next 12 months for 2009; and over

the next 2 years in the 2007 survey

Overall, there has been an increasein perception levels around the threemost common types o raud. 22%o all respondents believe that theirorganisation is susceptible to assetmisappropriation within the next12 months. Similarly, 11% and 16%o all respondents believe that theirorganisations may suer accountingraud or bribery and corruption,respectively (see Figure 19). This isconsistent with the overall greater raud

risk in the current economic climate more raud is expected to lie ahead.

While general awareness o thesusceptibility to economic crime hasincreased, the ndings o our surveysover time typically highlight a gapbetween perception and reality.


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Respondentshave consistentlyunderestimatedtheir uture

raud exposure

Figure 20: Perception in 2007 vs Realityin 2009

0 10 20 30

13

20

6

10

11

8

Assetmisappropriation

Accountingfraud

Bribery andcorruption

2007 Perception 2009 Reality

% all respondents

% all respondents perception over the next 12 months for 2009; and over

the next 2 years in the 2007 survey

Figure 20 shows that 13% o allrespondents in 2007 thought it waslikely that they would experience assetmisappropriation in the subsequenttwo years. However, in our 2009survey, 20% o all respondents(67% o those who reportedexperiencing economic crime seegure 4) had been victims o assetmisappropriation in the last yearalone. There is a similar gap withthe perception and experience oaccounting raud where the

perception o risk was only 6% in2007, while the reality in 2009 wasthat 11% o all respondents (38%o those who reported experiencing

economic crime see gure 4) hadactually suered this type o raudin the preceding year.

Bribery and corruption is the onlyeconomic crime where perception orisk outweighs reality. In 2007, 10% oall respondents considered themselvesto be at risk rom bribery and corruptionin the subsequent two years. However,according to our current survey, only8% o all respondents (27% o those

who reported experiencing economiccrime see gure 4) actually sueredthis type o raud. Certainly, bribery andcorruption has received extensivemedia coverage during recent yearsand has thereore come onto theradar o the larger multinationals.Consequently, more organisationsare taking pre-emptive measuresto prevent bribery and corruption,or is it simply that they have not been

caught yet?In our survey, respondents wereasked who they thought is most likelyto perpetrate a raud external orinternal raudsters in the next year.Fascinatingly, or 10 o the 12 raudlisted, respondents on a global basisexpect external raudsters to be the

main perpetrators in the year ahead.The reality is, o course, that whilesome organisations will continue toace threats rom external raudsters,

a signicant threat lies within the

organisation. This rose-tinted viewneeds to be promptly addressed,otherwise, organisations will struggleto implement adequate detective and

preventive internal procedures.


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I d i E i i h i i A d di i Th f d CM h d l d


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Methodology

Our th Global Economic Crime Survey was conducted between July and November 2009. A total o 3,037 respondentsrom 54 countries completed our online questionnaire. The participants were asked to respond to the questions regarding

(a) their organisation and (b) the country in which they are located.

Methodology andacknowledgements

Asia Pacifc 652

Australia 75

Hong Kong (and China) 67

India 145

Indonesia 50

Japan 73

Malaysia 65

Middle East countries* 14New Zealand 85

Philippines** 1

Singapore 51

South Korea** 1

Thailand 25

South & Central America 275

Argentina 39

Brazil 62

Chile 76

Dominican Republic** 1

Ecuador** 1

Mexico 94

Peru** 1

Venezuela** 1

Western Europe 1,243

Austria 34

Belgium 62

Cyprus** 1

Denmark 105

Finland 52

France 52

Germany*** 17Greece 96

Ireland 91

Italy 90

Netherlands 76

Norway 75

Portugal** 1

Spain 55

Sweden 78

Switzerland 129

UK 229

North America 123

Canada 52

USA 71

Central & Eastern Europe 589

Bulgaria 59

Czech Republic 83

Hungary 53

Poland 63

Romania 55

Russia 86

Serbia 4Slovakia 69

Turkey 52

Ukraine 65

Arica 145

Ghana 27

Kenya 53

Namibia** 1

South Arica 63

Sierra Leone** 1

No primary country specifed 10

TOTAL 3,037

*Middle East countries included participants from Israel, Jordan, Kuwait, Oman, Saudi Arabia and UAE.

**These are individual participants from 10 countries who found our survey and participated in it online.

***500 participants were surveyed separately in Germany. Visit http://www.pwc-wikri2009.de/to read the German survey results.

Table 3: Participating territory counts


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Table 8: Job title o participants in the organisation

% organisations

Senior executives 52%Chie Executive Ocer/President/ManagingDirector

12%

Chie Financial Ocer/Treasurer/Controller

30%

Chie Operating Ocer 2%

Chie Inormation Ocer/Technology Director

1%

Other senior executive 4%

Board member 3%

Non-senior executives: 48%

Senior Vice President/VicePresident/Director

8%

Head o business unit 3%

Head o department 15%

Manager 15%

Others 7%

Table 5: Organisation types participating

% organisations

Listed on a stockexchange 43%

Private sector 42%

Government andpublic sector

10%

Others 5%

Table 6: Size o participating organisations

% organisations

Up to 200 employees 32%

201 to 1,000 employees 33%

More than 1,000 employees 34%

Dont know 1%

Table 7: Function (main responsibility) oparticipants in the organisation

% organisations

Executive managementor nance

58%

Audit 12%Risk management 5%

Compliance 4%

Security 4%

Advisory/consultancy 3%

Legal 3%

Operations and production 3%

Others 8%

Table 4: Participating industry groups

% organisations

Aerospace & Deence 1%

Automotive 4%

Chemicals 2%

Communication 2%

Energy, Utilities & Mining 7%

Engineering & Construction 7%

Entertainment & Media 3%

Financial Services 16%

Government andPublic Sector

6%

Hospitality and Leisure 2%Insurance 5%

Manuacturing 14%

Pharmaceuticals andLie Sciences

5%

Proessional Services 6%

Retail & Consumer 9%

Technology 5%

Transportation& Logistics

5%

Other Industries/business 1%

Table 9: Organisations where senior executivecompensation includes a perormance-basedvariable component

% organisations

Less than 20% 24%

20% to 50% 36%

More than 50% 10%

No perormance-basedvariable component

16%

Dont know 14%


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Money laundering

Actions intended to legitimise theproceeds o crime by disguisingtheir true origin.

IP inringement (including

trademarks, patents, countereit

products and services)

This includes the illegal copyingand/or distribution o ake goods inbreach o patent or copyright, andthe creation o alse currency notesand coins with the intention opassing them o as genuine.

Illegal insider trading

Illegal insider trading reers generallyto buying or selling a security, in breacho a duciary duty or other relationshipo trust and condence, while inpossession o material, non-publicinormation about the security. Insidertrading violations may also includetipping such inormation, securitiestrading by the person tipped, andsecurities trading by those who

misappropriate such inormation.

Espionage

Espionage is the act or practice ospying or o using spies to obtainsecret inormation.

o the organisation. This can involveaccounting manipulations, raudulentborrowings/raising o nance, raudulentapplication or credit and unauthorisedtransactions/rogue trading.

Corruption and bribery (including

racketeering and extortion)The unlawul use o an ocial positionto gain an advantage in contraventiono duty. This can involve the promiseo an economic benet or other avour,the use o intimidation or blackmail.It can also reer to the acceptance osuch inducements.


(including embezzlement/

deception by employees)

The thet o assets (including monetaryassets/cash or supplies and equipment)by directors, others in duciarypositions or an employee or their

own benet.

Accounting raud

Financial statements and/or otherdocuments are altered or presentedin such a way that they do not refectthe true value or nancial activities

Terminology

Due to the diverse descriptionso individual types o economiccrime in countries legal statutes,we developed the ollowingcategories or the purposes othis survey. These descriptionswere dened as such in oursurvey questionnaire.

Economic crime or raud

The intentional use o deceitto deprive another o money,property or a legal right.


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Fraud triangle

Fraud triangle describes the

interconnected conditions that act

as harbingers to raud: opportunity

to commit raud, incentive (or pressure)to commit raud, and the ability o

the perpetrator to rationalise the act.

Senior executive

The senior executive (or example the

CEO, Managing Director or Executive

Director) is the main decision-maker

in the organisation.

Note:In some cases percentages may total

more or less than 100 percent as respondentswere able to provide multiple answers.

About PwC Forensic Services

The Forensic Services group o the

PricewaterhouseCoopers globalnetwork o rms plays a lead role in

addressing the lie cycle o raud and

other avoidable losses, providing

reactive investigative services and

proactive remedial and compliance

services to clients in the private and

public sectors.

Financial performance

This can be dened as measuring the

results o an organisations policies

and operations in monetary terms.

These results are refected in returnon investment, return on assets and

value added; typically, In the private

sector, returns will be measured in

terms o revenue; in the government/

state-owned enterprises, returns will

be measured in terms o service delivery.

Fraud risk assessment

Fraud risk assessments are used

to ascertain whether an organisation

has undertaken an exercise tospecically consider:

(i) the raud risks to which operations

are exposed;

(ii) an assessment o the most

threatening risks (i.e. evaluate risks

or signicance and likelihood o

occurrence);

(iii) identication and evaluation o the

controls (i any) that are in place tomitigate the key risks;

(iv) assessment o the general anti-raud

programmes and controls in an

organisation; and

(v) actions to remedy any gaps in

the controls.


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INSEAD

As one o the worlds leading and largest graduate business schools, INSEAD(www.insead.edu) brings together people, cultures and ideas rom around the worldto change lives and transorm organisations. This worldly perspective and culturaldiversity are refected in all aspects o our research and teaching. With two campusesin Asia (Singapore) and Europe (France), two centres in Israel and Abu Dhabi, and anoce in New York, INSEAD extends the reach o its business education and research

across three continents. Our 145 renowned aculty members rom 37 countriesinspire more than 1,000 degree participants in our MBA, Executive MBA and PhDprogrammes. In addition, more than 9,500 executives participate in INSEADsexecutive education programmes. We oer 38 open-enrolment programmes orall business disciplines and design 184 custom learning solutions or groups oexecutives rom a specic organisation yearly. Should you wish to nd out moreabout Executive Development or individual executives or about our Company-specic Programmes, please contact us at [email protected]@insead.edu.

Acknowledgements

The 2009 Global Economic Crime Survey editorial team consisted o theollowing individuals:

Survey Leadership Team

Tony Parton, Partner,United Kingdom

Vidya Rajarao, Partner,India

Steven Skalak, Partner,USA

Survey Management Team

Faisal Ahmed, Project Manager,United Kingdom

Neil Cormack, Marketing Consultant,United Kingdom

INSEAD (France)Douglas H. Frank,

Assistant Proessor o Strategy, INSEAD

Editorial Team members

Mona Clayton, Partner,Brazil

John Donker, Partner,Hong Kong

Peter Forwood, Manager,Australia

Linda Macphail, Associate Director,South Arica

Malcolm Shackell, Partner,Australia

Louis Strydom, Partner,South Arica

Pierre Tailleer, Partner,

Canada

John Wilkinson, Partner,Russia

Particular thanks in compiling this report are also due to the ollowing individuals at PricewaterhouseCoopers:Mike Ascolese, Paul Bell, Steven Burke, Jonti Campbell, Arijit Chakraborti, Jennier Cibinic, Tirthankar Ghosh,Tracey Groves, Karena Kay, Tim Kau, Elaine Keown, Ruth Lawson, Noel McCarthy, Joel Osborne, Amrita Sidhuand Suzanne Snowden.

quitt oduct o co o c c e t gin the downturn

deepe d e to

the statistics

e aud

horizon

Contactset odo ogy a d

acknowledgements

print

quitIntroduction Economic crime thriving A deeper dive into The fraud Methodology and Contacts

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http://www.insead.edu/mailto:[email protected]:[email protected]:[email protected]:[email protected]://www.insead.edu/


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pwc.com/crimesurveyPricewaterhouseCoopers provides industry-ocused assurance, tax and advisory services to build public trust and enhance value or our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience andsolutions to develop resh perspectives and practical advice.

2009 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers reers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network orother member rms o the network, each o which is a separate and independent legal entity.

Designed by studioec4 19901 (11/09)

Contacts

Tony Parton

Partner, United Kingdom+44 (0) 20 721 [email protected]

Vidya Rajarao

Partner, India+91 (0) 22 6669 [email protected]

Steven Skalak

Partner, USA+1 (646) 471 [email protected]

PricewaterhouseCoopers Forensic Services

Survey Leadership Team contact details:

Forensic Services Leaders contact details:

Chris Barbee

Partner, USA, Global Leader

+1 267 330 [email protected]

John Donker

Partner, Hong Kong, East Cluster Leader

+852 2289 [email protected]

Andrew Palmer

Partner, London, Central Cluster Leader

+44 (0) 20 7212 [email protected]

Erik Skramstad

Partner, USA, West Cluster Leader

+1 617 530 [email protected]

Survey Management Team contact details:

Neil Cormack

Marketing Consultant, United Kingdom+ 44 (0) 113 289 [email protected]

Faisal Ahmed

Project Manager, United Kingdom+ 44 (0) 20 780 [email protected]

qgin the downturn

p

the statistics horizon

gy

acknowledgements

[email protected] [email protected] [email protected]

[email protected] [email protected] [email protected] [email protected]

[email protected] [email protected]

p
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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