Business fraud on the rise during recession

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Companies are dealing with more than just bad financial news – they also are dealing with a steep increase in business fraud.

One in three companies around the world reported they were the victims of business fraud during the past 12 months. Of those, 43 percent said the cases had increased during the period.

A PricewaterhouseCoopers survey showed 42 percent of companies said that the cost of fraud had increased since this time last year, with theft being the most pervasive crime.

Financial statement fraud, cited by 38 percent, was the second most common, while bribery and corruption ranked third. Other reported crimes included intellectual property infringement, money laundering, tax fraud, insider trading and espionage.

“Most fraud is asset misappropriation – stealing,” said Rand Gambrell, fraud examiner with BKD, a national accounting firm with offices in Colorado Springs. “But financial statement fraud makes sense, with money scarce from banks, there’s greater incentive to misrepresent your bottom line in an attempt to get additional funding.”

Gambrell

Gambrell

Companies are hit with a “double whammy,” he said.

“They are facing a decrease in business at the same time credit is tighter,” he said. “They can’t get that money they need to tide them over during the recession.”

Financial statement fraud is the fastest growing form of economic crime and has more than tripled since 2003, the study said.

The survey covered more than 3,000 companies in 54 countries and is the most comprehensive study of white collar crime.

“The global economic downturn has heightened the pressures and incentives to commit fraud,” said Tony Parton, leader of PricewaterhouseCoopers forensics practice. “Economic crime is pervasive, persistent and pernicious. No organization and no industry are immune from the threat of fraud.”

Economic crime is most common at large companies, with 46 percent of organizations with more than 1,000 employees reporting incidents. Among the companies who reported fraud, nearly a third said they had more than 10 incidents in the last 12 months.

Industries most affected by fraud were communications, financial services, insurance and hospitality and leisure.

Most fraud takes place internally, with 53 percent of the companies reporting fraud from employees, however 44 percent reported external fraud.

Internal fraud was highest in the aerospace, chemicals, manufacturing and pharmaceutical industries. External fraud was most common in insurance, technology, communication and the financial services sector.

“And the way to stop most crime: install a tip-line,” Gambrell said. “Most business fraud crimes are found by other employees or by accident. The tip line keeps it from happening, because people will know they’re being watched.”

For economic crime to occur, three things have to happen: a person has to feel an economic crisis, they have to have opportunity and they have to feel like they can get away with it.

“The only one of these a company can affect is the middle one,” he said. “But with the recession internal audits are frequently the area that gets cut. So at a time when there is a strong economic pressure to commit crime, there are fewer people watching for it.”