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Striking Jump in Business Fraud and Crime

By Curtis C. Verschoor, CMA, CPA
June 1, 2018
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A global survey from PwC shows increasing fraud and economic crime.

 

Since 2011, PwC, one of the Big 4 accounting and consulting firms, has conducted a global survey of more than 7,200 respondents across 123 different territories. The most important finding of the study is that although awareness of the harm of economic crime is growing, too few companies have complete recognition of its extent and the risks involved. The 2018 Global Economic Crime and Fraud Survey called “Pulling fraud out of the shadows” (http://pwc.to/2sbBv7k) attempts to correct this.

 

PwC authors believe the extent of economic crime and fraud is far beyond the two-year rise from 36% to 49% that the survey found, concluding that fighting fraud is a core business issue. This is because today’s digital world has enabled the scale and extent of fraud to increase significantly. The report calls fraud a big competitor business in its own right, a business that’s innovative, technology-enabled, pervasive, and opportunistic. Media coverage of corruption and other corporate scandals has triggered higher public awareness and expectations of greater transparency and accountability.

 

FOUR STEPS TO FIGHTING FRAUD

 

“Pulling fraud out of the shadows” provides four steps to fight fraud.

 

  1. “Recognize fraud when you see it.” Increases occurred in all areas of the world, with North America at 54%, up from 37% in 2016, and Africa has the highest incidence at 62% of companies, an increase of five percentage points from 2016. The report states that explanations for this jump include “growing global awareness of fraud, a larger number of survey responses, and greater clarity about what ‘fraud’ actually means.” The authors believe that this understates the fraud problem because vulnerabilities or blind spots only show up in hindsight and already exist without discovery in many companies.

 

The report notes that 42% of companies are spending more on fighting economic crime and fraud, and 42% plan to spend more in the next two years. But the authors believe that this only represents a reaction to increasing regulatory oversight measures rather than a more proactive and forward-looking strategy designed to prevent future fraud and economic crime. Twenty-nine percent of respondents said they spent at least twice as much to investigate and prevent fraud as the losses from even the most destructive economic crime.

 

The survey presented some surprising findings:

 

* “Only 54% of global organizations said they have conducted a general fraud or economic crime risk assessment in the past 2 years.

 

* Less than half said they had conducted a cybercrime risk assessment.

 

* Fewer than a third said their company performed risk assessments in the critical areas of antibribery and corruption, anti-money laundering, or sanctions and export controls.

 

* One in ten respondents had not performed any risk assessments at all in the past 2 years.”

 

  1. “Take a dynamic approach.” The survey found that significant changes have occurred in the past few years on how the world views corruption and fraud. This has resulted in a greater global demand for more accountability on the part of business leaders. The authors believe that reputation risk now exceeds regulatory risk. The major item is that effective responses to smaller crises result in better preparation to leverage a mature ethics and compliance program and a tested top-management structure when and if a significant event does occur.

 

  1. “Harness the protective power of technology.” The IT tools for predicting human behavior and fighting discovered fraud are increasing, including predictive analytics, machine learning, and other artificial intelligence techniques. At the high end of the findings, at or near 40% of companies find value in using continuous monitoring, email monitoring, or periodic analysis. About a third experience value from transaction testing, proactive detection, communications monitoring, anomaly detection, data visualization dashboards, or government risk and compliance solutions.

 

One drawback of the use of sophisticated IT tools to combat fraud and economic crime is the risk of what’s known as customer friction. At first it may be reassuring for customers to know that their supplier is closely monitoring the possibility of fraud in the services it provides. Yet that reassurance can quickly turn to irritation if there are frequent or repetitive alerts. About a third of respondents thought that the use of technology to fight fraud and/or economic crime on their organization produced too many false positives.

 

Cybercrime has been experienced by more than a third of all survey respondents and is the most likely crime or fraud expected in the next two years: 29% of respondents expect a disruptive cyberattack, 12% expect bribery and corruption to be most disruptive, and 11% believe the same about asset misappropriation.

 

  1. “Invest in people, not just in machines.” The three principal drivers of fraud are represented in the fraud triangle. The largest cause of fraud, 59%, is opportunity or weak internal controls, followed by incentive/pressure to perform, 21%, and rationalization, 11%. Each of these must be addressed individually. The 2018 survey showed that senior management was responsible for the most destructive crime in 24% of the cases, and 28% of the organizations suffered business misconduct fraud (called incentive abuse). Preventing rationalization should focus on organizational culture—the environment that governs employee behavior.

 

The report concludes with the challenge: “Be prepared, face the fraud, and emerge stronger.”

 

IMA ETHICS HELPLINE

 

For clarification of how the IMA Statement of Ethical Professional Practice applies to your ethical dilemma, contact the IMA Ethics Helpline.

 

In the U.S. or Canada, dial (800) 245-1383. In other countries, dial the AT&T USA Direct Access Number from www.usa.att.com/traveler/index.jsp, then the above number.

 

The IMA Helpline is designed to provide clarification of provisions in the IMA Statement of Ethical Professional Practice, which contains suggestions on how to resolve ethical conflicts. The helpline cannot be considered a hotline to report specific suspected ethical violations.

 

Curtis C. Verschoor, CMA, CPA, is the Emeritus Ledger & Quill Research Professor, School of Accountancy and MIS, and an honorary Senior Wicklander Research Fellow in the Institute for Business and Professional Ethics, both at DePaul University, Chicago. He is also a Research Scholar in the Center for Business Ethics at Bentley University, Waltham, Mass., and Chair-Emeritus of IMA’s Committee on Ethics. Trust Across America—Trust Around the World awarded him a Lifetime Achievement Award in 2016. In 2017, IMA published his book, Curt Verschoor on Ethics. His e-mail address is curtisverschoor@sbcglobal.net.
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