19 December 2009

Accounting fraud is the fastest growing economic crime experienced by organisations in the UK and the world, says PricewaterhouseCoopers (PwC) in its Global Economic Crime Survey (GECS) of over 3,000 senior representatives of organisations in 54 countries, published today. The GECS survey found almost half of organisations in the UK had experienced some form of economic crime in the last 12 months. Asset misappropriation (suffered by 77% of organisations reporting economic crime), was the most common; followed by financial statement fraud (40%). Reports of accounting fraud have more than tripled in the UK, rising steadily from just 11% since the first edition of the report in 2003.

And there is strong evidence that economic pressures are driving trends in financial statement fraud. In the UK, fear of losing jobs (46%) is cited as the biggest contributing reason why fraud is committed, followed by targets being more difficult to attain (40%) and difficulties reaching the performance numbers to achieve bonuses (28%). Another notable feature of the findings is the rapidly changing profile of the internal fraudster. Some 47% of all economic crimes in the UK were perpetrated by middle managers, as opposed to junior or senior staff, up from 32% in 2007.

Of those who believe that peoples’ increased ability to rationalise their actions is the main reason for increasing fraud, some 77% say crimes are committed to maintain current living standards. The second most popular ‘rationalisation’ for economic crime is a perception that the higher bonuses earned by others are unfair. Both these measures are higher in the UK compared with the global sample.

Tony Parton, PwC partner, said: “We are in a perfect storm of economic crime right now with increased pressures and opportunities to commit fraud accompanied by fraudsters’ growing ability to convince themselves their actions are defensible.

“Fraudsters can come from anywhere, but those feeling the tightest financial pinch are more likely to get involved. Middle managers on middle incomes may have stretched themselves with high mortgage repayments or school fees and are now facing pay freezes and less certain prospects for future employment.”

A striking 70% of UK respondents believe their organisation is at a greater risk of economic crime in the current economic environment, compared to only 40% globally. However, this feeling of exposure and risk is not translating into action. Only half of UK organisations have reviewed anti-fraud policies in the last year and only a quarter have amended processes and controls.

Those who believe that opportunities to commit economic crime have increased cite staff resources being more thinly spread over internal controls and internal auditors being asked to do more with less resource. Other reasons given for increased opportunities for fraud are senior management’s attention being focused on the survival of the business and the transfer of operations to new territories. Others say IT controls are weakening, making their systems more vulnerable to penetration from outside.

Respondents to the UK survey reported far less bribery and corruption (only 9% of those reporting economic crime identified cases) than their global counterparts where 27% reported this type of crime.

Tony Parton, PwC partner, said: “This is likely to change very soon. Increased regulatory and enforcement actions are on their way to the UK, not least in the form of the new Bribery laws which are likely to be enacted next year. UK organisations need to act now or pay later when it comes to these more robust procedures to prevent bribery both at home and overseas.”

Large organisations report the most fraud with 46% of those with over 1,000 employees reporting incidents in their businesses. The most affected industries are communications (46%), hospitality and leisure (42%), financial services (44%) and insurance (45%) with the public sector in sixth place. PwC forensic accountants expect this to change over the next two years as budget shortfalls and staffing cuts bring real pressure to government organisations in the UK and all over the world.

Another feature of the global results (reports for individual countries are available) is the apparent correlation between incidence of fraud and the pay packages of top executives. Where the performance-related element of the top executive’s pay is greater than 50%, there is a significant increase in the chances that the company will have experienced financial statement fraud in the past year. In the UK, a third of companies where the top executive has no variable component experienced financial statement fraud but the proportion was significantly higher (56%) in organisations where the top executive has a variable component of over 50%.

Tony Parton, PwC partner, said: “The report shows how the vast majority of economic crime is perpetrated at middle and junior levels. Only a very small number of bosses set out to commit financial statement fraud to ensure their bonuses are paid.

“However, if a small number of individuals are earning very high sums due to performance related pay arrangements, this may lead to a heightened risk of fraud, especially if these rewards are perceived to be unfair. This may perpetuate a culture where other employees are more able to rationalise their own fraudulent behaviour. In such organisations, a heightened awareness of the tone being set from the top is advisable, as are regular reviews of governance and fraud controls.”

Risk management systems and internal audit are the most common way economic crime is detected, closely followed by informal internal tip-offs. But employees appear to be scorning official whistle blowing channels. Only 8% of UK economic crime at businesses is detected in this way, fuelling speculation in the forensic community that official whistle blowing mechanisms are often unreliable and not trusted by users.

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