BusinessCompany NewsBusiness fraud: face up to the facts

Business fraud: face up to the facts

Cases of business fraud in the UK continue to rise, according to the latest PricewaterhouseCoopers’ global economic crime survey published last week. So why are so many businesses still in denial?

Ever thought fraud was something that happened in other companies? That you
have a good workforce, a thriving business, effective anti-fraud controls and
regular audits? Well you’re not alone. Only 17% of companies questioned as part
of the biennial 2007 PricewaterhouseCoopers global economic crime survey
believed they would be victims of fraud. Regrettably, 48% of UK companies can
expect to be hit by economic crime.

This complacency among UK business is not a new phenomenon, but stems from a
lack of understanding of the scale of the problem facing UK plc. Businesses
suffering fraud in this country were, on average, hit 15 times in the past two
years, which is twice the global average and three times that of western Europe.

Not only are businesses suffering more frauds than other members of the
global business community, but it is costing them more than ever. Since the 2005
survey, the direct cost to UK businesses affected by fraud has doubled from
£0.8m to £1.75m. So, faced with a costly bill, and a one-in-two chance of being
struck by economic crime, it is high time business heeded the wake up call to
the true size of the problem. What’s more, a high proportion of companies report
significant collateral damage such as share price falls, costs of dealing with
the regulators and serious damage to staff morale.

What’s pushing business to address the issue? Despite legislation such as the
Fraud Act and Foreign Corrupt Practices Act (FCPA], fraud remains a dirty secret
for many organisations. Concerned about the inherent reputational damage, very
few cases ever go to court. This is not, in itself a problem, as long as
business takes the threat sufficiently seriously.

If the shock value of the potential damage to the bottom line was not
significant enough, the prohibitively strict US regulatory environment has
undoubtedly ensured companies engaged in international business are forced to
think again about their approach. Faced by Sarbanes-Oxley and the SEC’s vigorous
investigation and punishment of white-collar crime, companies have been paying
close attention to their anti-fraud regime. Of the respondents in the
PricewaterhouseCoopers survey, 94% cite Sarbanes-Oxley as a motivation for
introducing anti-fraud measures.

The deeper you dig

However, have any of these incentives to act on fraud actually had an impact?
Businesses have undoubtedly stepped up their anti-fraud measures. The GECS
revealed that UK businesses average ten anti-fraud controls per company, higher
than elsewhere on the continent or, indeed, globally. But here’s the paradox:
the more controls that are implemented, the more that is detected. To reduce
fraud, companies need a robust ethical culture and adopt a zero tolerance

While it is positive that UK Plc leads the world in implementing
self-imposed, anti-fraud measures, it is important that this vigilance is as
cost efficient as possible. If we take whistleblowing systems, 21% more
respondents now have them in place than in 2005, yet only 51% of companies
reported them as effective. When compared with the financial and reputational
damage resulting from falling victim to fraudsters, it is evidently a price
worth paying.

As fraud is on the rise, businesses need to question if they face a different
threat, or more of the same. White-collar criminals are still largely relying on
the classic offences and asset misappropriation remains the most common type of
fraud, with 77% of victim businesses hit by this particular crime. Accounting
fraud affected 40% of businesses, while intellectual property infringement [32%]
and money laundering [20%] remained prevalent.

But there’s a new crime on the rise in Britain and it is international in
scope. Incidents of corruption and bribery, traditionally viewed as an emerging
markets issue, have doubled since the PricewaterhouseCoopers 2005 survey.
One-in-ten companies reported they had lost a business opportunity to a
bribe-paying competitor. This trend is worrying and will be an area that
business will need to pay close attention to in the future. A one-size-fits-all
approach to anti-fraud controls will not work ­ companies need to understand
their fraud risks in the emerging markets. Many appear not to be doing so.

Knowing the types of crime to watch out for doesn’t help if you’re unsure who
to look for. The average white collar criminal is now younger, better educated
and often non-managerial, and highlights one inescapable aspect of economic
crime; that responsibility lies with people. Pre-employment screening is one
measure which can be taken to ensure the trust-worthiness of new staff, as well
as engaging short-term workers, who form an increasing proportion of the
workforce, in an anti-fraud culture. This cultural change, however, must start
at the top, providing the right culture from management to ensure behaviour at
all levels is beyond reproach.

Emerging risks

Introspection is essential for UK business to beat fraud, but with an
increasingly globalised business community, one eye must also be kept on trends
further afield. The rise of corruption and bribery demonstrates the impact of
emerging markets on UK economic crime and is further underlined by the fact that
the PricewaterhouseCoopers survey found that 49% of UK fraud cases involved an
overseas party. Despite this, 30% of UK companies have no specific action
planned to mitigate the risk. There are no quick solutions to this problem and
businesses cannot afford not to trade with these emerging economies, so the best
solution is to ensure effective fraud risk controls and ethics are observed.

Economic crime is a constant battle, yet the signs are encouraging with
attitudes toughening and business looking to actively take steps to beat the
criminals. However, fraud is rising and there are question marks over the
effectiveness of some measures taken, which means that complacency among the
majority has to be challenged. UK business must be better educated about the
problems and their solutions and be prepared to take the fight against fraud
forward, particularly in their operations overseas.

Don’t be a business victim

?Tone at the top – set the right example at board level

? Prevention is better than cure – invest in fraud risk controls measures
before it’s too late

? Ensure clear processes for reporting suspicions –whistleblowing hotlines
are one option, but, whatever you do, make sure it is well publicised

? Carry out pre-employment screening on new staff – you want to be certain
you’re employing the person the CV recommended

? Vive la différence – consider cultural differences and the impact these
have on anti-fraud controls when operating in the emerging markets

Tony Parton is a forensic services partner at
PricewaterhouseCoopers LLP

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