Recession drives more managers to commit fraud: PwC survey

42 percent of New Zealand organisations reported fraud
Sharp rise in economic crime by middle management
Reduction in staff morale a notable impact of fraud

Business fraud committed by middle and senior management across New Zealand has increased by almost 20 percent over the past year, according to the latest PricewaterhouseCoopers Global Economic Crime Survey.

The survey of 3000 respondents in 54 countries revealed that, in the last 12 months, a total of 42 percent of New Zealand organisations were the victims of fraud. The global average was 30 percent.

Asset misappropriation (theft) was the most common form of fraud, cited by 86 percent of New Zealand respondents. This was followed by financial statement fraud, cited by 36 percent, and intellectual property theft at 17 percent. In 72 percent of all cases the fraud was committed by someone inside the organisation.

PricewaterhouseCoopers Forensic Services Partner Eric Lucas says that fraud is a widespread and serious problem for New Zealand businesses. “On average New Zealand organisations lost almost $500,000 in the last 12 months as a result of fraud. One organisation alone reported that their losses were in excess of $7 million over the last 12 months,” he says.

“The high level of fraud committed by internal staff was a figure we expected, and reflects our own experiences in fraud investigations. What was alarming was the shift in the profile of the internal fraudster. In our 2007 fraud survey, 75 percent of fraud was carried out by junior staff. In 2009, that figure had dropped by almost 20 percent - but the fraud is now increasingly being committed by middle and senior management. This shift is a cause for concern, as senior staff have the ability to override internal controls and can potentially cause greater financial loss to organisations.”

New Zealand was ranked eighth highest for rate of fraud out of the 54 countries surveyed, behind the Ukraine (45 percent reported fraud) and the UK (43 percent). Russia was the country with the highest incidence of reported fraud with a 71 percent. Australia was ranked ninth, on 40 percent, and the country with least reported fraud was Japan, with 10 percent.

Mr Lucas: “This figure was above our expectations – the global average for reported rates of fraud was 30 percent. While New Zealand has reported a fairly high incidence of fraud, one possible explanation is that we have good detection systems. We believe that in New Zealand there is a high level of honesty in answering these surveys, so this is likely to represent a true rate of fraud for this country,” he says.

The financial crisis had created an environment with greater incentive or pressure for fraud. Most common reasons for committing fraud were that it was increasingly difficult for staff to achieve their performance targets, and people were afraid of losing their jobs.

A third of all economic crimes were detected by formal (such as whistle-blower hotlines) and informal tip-offs, and a further third by accidental means. “Our experience is that many organisations in New Zealand are reluctant to use a whistle-blower hotline, or have a poorly functioning hotline tip-off system. These results show the importance of having these sorts of mechanisms in place to alert management to fraud and other issues,” Mr Lucas says.

For those affected by fraud, the biggest impact was in employee morale. “Often these cases involve a breach of trust or similar feeling of betrayal. Organisation management tends to focus on external impacts such as brand reputation – but managers risk losing sight of the very real impact that fraud has on their staff internally, which can in turn impact on production and staff turnover which also have significant business costs.”

Mr Lucas: “These results highlight the need for organisations to ramp up their fraud detection and risk management systems. With increased incentives for fraud through financial hardship in the wake of the financial crisis, combined with reduced numbers of staff focusing on fraud detection, and increasing numbers of middle management fraudsters, the conditions exist for companies to lose a lot of money over the coming year.”
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