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Creaming from the top

Creaming from the top

Recession drives more managers to commit economic crime, reports PwC.

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. 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,” says Eric Lucas, PwC Forensic Services partner, in a press statement.

The survey of 3000 respondents in 54 countries revealed that, in the past 12 months, a total of 42 percent of New Zealand organisations were the victims of fraud. The global average was 30 percent, says PwC, which conducted the survey with INSEAD business school. The previous survey on this topic was conducted in 2007.

As with the results of the 2007 survey, asset misappropriation is the most prevalent economic crime risk to New Zealand organisations; with 86 percent of respondents who had suffered fraud saying they had been the victim of asset misappropriation, reports PwC.

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 internal staff.

PwC says it is interesting to note that intellectual property infringement, which includes data theft, was the third most prevalent form of economic crime within New Zealand organisations (17 percent).

PwC says this is part of a worrying trend, with an increasing number of employees stealing company secrets to take with them when they move to another company or to set up competing businesses.

Lucas says fraud is a widespread and serious problem for local businesses. “On average New Zealand organisations lost almost $500,000 in the past 12 months as a result of fraud.” The report cites one organisation reporting losses of over $7 million during the past year.

Internal fraudsters were the main perpetrators in 72 percent of fraud reported by New Zealand respondents. This figure is significantly higher than Australia (33 percent), Asia Pacific (57 percent) and globally (53 percent). Per sector, the government and public sector in New Zealand had the highest rate of internal perpetrators

with 89 percent of frauds within this sector committed internally.

“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,” says Lucas.

New Zealand was number eight for the 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.

“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,” Lucas says in the press statement.

PwC 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.

He says the 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 fewer 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, he says.

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Tags risk managementCIO rolecybercrimePricewaterhouseCooperseconomic crisisPwC

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