@Risk

The economic downturn has provided a perfect storm of factors for business fraud, according to new research from PricewaterhouseCoopers.

In its 5th annual Global Economic Crime Survey, PwC identifies three factors that make fraud “inevitable”:

• Perpetrators of fraud need an incentive or pressure to engage in misconduct.

• There will be an opportunity to commit fraud.

• Perpetrators are often able to rationalize or justify their actions.

Unfortunately, all three were commonplace over the past year.  Businesses that set unrealistic financial targets often created situations where employees felt pressure to inflate results or omit expenses . Staff reductions watered-down internal controls. And, employees were more likely to rationalize their actions if they thought their job and/or financial future was at stake. There’s no doubt about it –that’s a “perfect storm.”

PwC’s report, titled “Economic crime in a downturn,” compiles results from a survey of more than 3,000 companies in 54 countries. Here are a few key findings that I found particularly intriguing:

• 40% of respondents reported that their companies now face a greater risk of economic crime, and 30% reported being victims of fraud in the last 12 months.

• Asset misappropriation topped the list of economic crimes (67%), followed by accounting fraud (38%), and bribery and corruption (27%).

• Interestingly, economic crimes committed by middle managers now account for 42% of all internal frauds, up dramatically from 26% in 2007.

• Of those in the survey who were victim to external perpetrators, 45% suffered customer frauds. Frauds from agents/intermediaries accounted for 20%.  ‘Other third parties’ (which included government employees, mobsters and other unknown individuals) accounted for another 25%.

• And here’s a statistic that is really remarkable: More than half (51%) of the survey respondents in companies where fraud risk assessments were conducted on a monthly basis reported incidences of economic crime. PwC concludes that those organizations who have conducted frequent fraud risk assessments were able to detect more fraud, and so they reported it more. Makes you wonder about the fraud that is undetected and underreported, doesn’t it?

You can download the full report here.