Middle managements engaging in more fraud

A recent survey has found that not only are firms falling prey more often to fraud as a result of the recession, but the profile of the typical fraudster has evolved as well.

Surveying more than 3,000 businesses in 54 countries, the poll by accounting firm PricewaterhouseCoopers and business school INSEAD found one in three companies has suffered as victims of economic crime in the last 12 months.
It also found that of companies which reported fraud, 53 per cent said it came from inside the organisation, and 44 per cent said it was external. Internal fraud was highest in the aerospace, chemicals, manufacturing, and pharmaceuticals industries, while external fraud was common in insurance, technology, communications, and financial services sectors.

Particularly alarming was the increasing likelihood that middle management was complicit in fraud. It accounted for 42 per cent of all internal fraud reported by respondents, compared to 26 per cent in 2007, the last time the survey was carried out. On the other hand, the number of fraud reported to be committed by senior management has declined from 26 per cent in 2007, to 14 per cent.

For companies which reported fraud from external sources, 45 per cent said it was committed by customers, and 20 per cent said it was either agents or intermediaries.
The survey also found 43 per cent of respondents said the incidences of fraud had increased during the last 12 months, and 42 per cent said that the cost of fraud had gone up compared to a year ago.

The greatest risk came from asset misappropriation or theft, with 67 per cent of respondents who had suffered from economic crime citing fallen victim to it in the last 12 months. This was followed by financial statement fraud (38 per cent), and bribery and corruption (27 per cent).

On top of monetary loss, respondents also said fraud caused “collateral damage”, the top four of which were damage to employee morale (32 per cent), business relationships (23 per cent), reputation and brand (19 per cent), and relationships with regulators (16 per cent).

“In these tough times, the temptation to inflate results or take part in other forms of financial statement fraud may overcome ethical values. 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.
Countries that reported the highest incidents of fraud were Russia (71 per cent), South Africa (62 per cent), and Kenya (40 per cent). At low end of the scale were Turkey (15 per cent), Hong Kong (13 per cent), and Japan (10 per cent). The industries most affected by fraud were communications (46 per cent), hospitality and leisure (42 per cent), and financial services (44 per cent).