SOFIA, Thursday 12 January 2006
Rising economic crime worldwide poses a growing threat to companies, with nearly half of all organisations being victims of fraud in the past two years, according to PricewaterhouseCoopers' Global Economic Crime Survey 2005. Specifically, 41% percent of Bulgarian companies experienced fraud in the past two years.
Globally, the number of companies reporting fraud increased from 37 percent to 45 percent since 2003, an 8 percent increase. The cost to companies was an average USD 1.7 million in losses from “tangible frauds”, those which result in an immediate and direct financial loss. These include asset misappropriation, false pretences and counterfeiting. In Bulgaria, 15% of the companies surveyed reported losses in excess of USD 250 000.
The biennial survey involved 3,634 companies from 34 countries including Bulgaria and was conducted in association with Germany’s Martin-Luther University, Halle-Wittenberg.
This year additional research has been commissioned to enable a separate survey report on Bulgaria. This is based on 75 interviews with senior executives of large Bulgarian companies, 57% of which are executive board members and 21% have a financial role.
Bulgarian respondents, on average, reported suffering four fraud incidents since 2003, compared to eight cases reported by companies around the world. Regardless of size, no company or industry, regulated or unregulated, was immune from fraud.
Roger Stanley, Partner for Investigations and Forensic Services of PricewaterhouseCoopers for Central and Eastern Europe, said:
“I believe that these statistics belie the response of those companies which reported having found no fraud at all and further suggest that there is room for improvement in the risk management and prevention systems that do exist. Economic crime is not something to be taken lightly; companies need to tighten their controls to avoid not only direct financial losses, but also damage to their brand, to staff morale and to relationships with customers, suppliers and other business partners.”
Types of Economic Crime Although corruption continues to be perceived as the most prevalent type of fraud in the country, the level of actually reported cases by the participants in the survey is significantly lower. The most common types of fraud encountered by respondent companies were asset misappropriation (68%) and false pretences (52%). This is not surprising, as these are among the easiest frauds to detect as they involve the taking of items with a defined value, and provides a clear indication of where management should concentrate its immediate attention in order to manage avoidable losses.
In addition, counterfeiting (including product piracy and industrial espionage) is a more serious threat that many business leaders anticipated. One in every 5 reported frauds occurred in this area. This suggests that greater management priority needs to be placed on safeguarding corporate trademarks and key business information.
In Bulgaria, 93 percent of fraud perpetrators were male, in most cases they were between the ages of 31 and 50, and 92% were educated to degree level or higher. 40 percent were employed by the defrauded company, 33 percent of them in senior and top management.
The Cost of Economic Crime
In addition to the financial losses, 57
percent of the Bulgarian
companies surveyed reported suffering “collateral damage” to the day-to-day operations and success of their businesses. Of those, 71 percent suffered damage to their relations with other businesses (including suppliers and contractors); 29
percent to their brand; and 14 percent to staff morale.
“Incidences of economic crime can lead to employees questioning the company’s corporate governance, ethics, and work environment. Where such problems persist, it can lead to staff loyalty being undermined and subsequently to issues of workplace and product quality.” Stanley added.
The Illusion of Safety
In Bulgaria, internal audit remains the most successful control by detecting 30 percent of the cases of economic crime, however 25 percent of cases were detected by accident.
Bojidar Neitchev, Partner Advisory Services, PricewaterhouseCoopers, commented:
“Despite the increase in the number of frauds being detected and the effectiveness of risk management systems, there are always individuals or groups who have the incentive and the ability to circumvent or override controls. Suprisingly, only 20% of companies in Bulgaria felt it was likely that their organisation would be at risk of economic crime over the next five years. In our opinion this may well be a sign of over-confidence, especially given the large proportion which was detected by chance”.
The more controls a
company has, the better its chances of detecting fraud and recovering losses, the survey confirmed.
On average, Bulgarian companies managed to recover only 28 percent of amount lost. 47 percent of respondents indicated that they had not recovered any funds from the amount lost.
Companies must not drop their guard, but must constantly develop new controls and build on the loyalty of their employees so that they do not provide an environment in which fraud can flourish.
-ENDS-
Notes to Editors:
1. Definition of fraud terms used in the PricewaterhouseCoopers Global Economic Crime Survey 2005:
- Economic Crime or Fraud: Generic term used in this survey to denote wrongful or criminal activities to or in an organisation, intended to result in the gain of money or benefits for the perpetrator(s).
- Asset Misappropriation (inc. embezzlement): The theft of company assets (including monetary assets/cash or supplies and equipment) by company directors, others in fiduciary positions or an employee for their own benefit.
- False Pretences (inc. confidence game): The intentional action of a perpetrator to deceive those in fiduciary positions and make a personal or financial gain.
- Financial Misrepresentation: Company accounts are altered or presented in such a way that they do not reflect the true value or financial activities of the company.
- Corruption & Bribery (inc. racketeering and extortion): The unlawful use of an official position to gain an advantage in contravention of duty. This can involve the promise of an economic benefit or other favour, the use of intimidation or blackmail. It can also refer to the acceptance of such inducements.
- Insider Trading (only asked to listed companies): Trading of securities by a person inside a company based on non-public information.
- Money Laundering: Actions intended to legitimise the proceeds of crime by disguising their true origin.
- Counterfeiting (inc. product piracy and industrial espionage): This includes the illegal copying and/or distribution of fake goods in breach of patent or copyright, and the creation of false currency notes and coins with the intention of passing them off as genuine. It also includes the illegal acquisition of trade secrets or company information.
2. PricewaterhouseCoopers Global Economic Crime Survey 2005 was conducted on behalf of PricewaterhouseCoopers and the leading criminological scholars at Martin-Luther University, Halle-Wittenberg by TNS-Emnid in Germany. The survey was conducted in 34 countries including Bulgaria between May and September 2005. Over 3,634 computer-assisted telephone interviews were conducted with CEOs, CFOs and other executives who claimed responsibility for crime prevention and detection within their respective companies. More than half of the respondents (52 percent) are members of the executive board or company management; 43 percent stated that their main responsibility was in the field of finance.
The companies were randomly selected with preference given to the 1,000 largest companies of a country and the target number of respondents for each country was determined according to its GDP.
A full copy of the report can be found at:
www.pwc.com/crimesurvey
3. PricewaterhouseCoopers Dispute Analysis & Investigations practice operates across over 50 countries including Bulgaria and can deploy experienced and knowledgeable teams to manage and mitigate the threat of corporate crimes and achieve the best possible outcomes. Using in-depth forensic accounting and corporate investigation skills allows clients to continue their business, recover lost funds, and halt further economic losses. The expertise to assist organisations investigate and manage the many risks associated with fraud, abuse and dishonesty comes from the experience of the international staff and their backgrounds in forensic accountancy, forensic IT and private sector investigations as well as regulatory work and law enforcement.
4. PricewaterhouseCoopers (
www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries work collaboratively using Connected Thinking to develop fresh perspectives and practical advice. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
