Managing the Risks of Fraud in a Downturn
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Octombrie 2009 |
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PRICEWATERHOUSECOOPERS in ROMANIA |
Adresa
Strada Barbu Văcărescu, Nr. 301-311
Cladirea Clădirea Lakeview
020276 Bucureşti, Sector 2
Telefon
+40-21-225 3000
Fax
+40-21-225 3600
Website
www.pwc.com/ro
A review of how fraud and other integrity risks will affect business in Romania, the Balkans and CEE in 2009
Introduction
The impact of the credit crunch and the global economic downturn is challenging even our most robust institutions. Many businesses have to deal more and more with „fighting fires" now rather than doing anything meaningful to secure the long-term future, since they are facing the greatest financial challenges in recent memory on a daily basis. Focusing on short term measures to address the risk of corporate failure has become the preferred method of management in private sector companies, while public sector institutions must deliver more value with fewer resources available.
The dilemma public and private organizations face is how best to manage recovery in the short term, while not losing sight of the need to maximise shareholder and stakeholder value and to maintain and develop services over the medium and long term. While trying to stand up to this huge challenge, the global economic downturn presents another monumental task - that of protecting valuable and scarce economic resources. As the economy declines new threats emerge. The recent collapse of certain investment schemes illustrates how allegations of fraud, previously undetected, emerge from the shadows.
Directors and employees alike face a very real prospect of losing their jobs, lifestyles, homes, families, assets and retirement funds. Organizations have been laying-off employees with little regard for position, loyalty and years of experience. Expenses are being cut in almost every sector, as a result salaries and benefits are hit. Values of all major investments are dropping, from stocks to bonds to real estate. Interest rates are coming down, posing a real risk of spiraling deflation.
Most importantly, thanks to the current technology age we live in, it's all being unraveled before your very eyes, live on your TV, on the web, on the twitter and on your mobile, in the newpapers and magazines. You cannot possibly go through the day without hearing about the negative effects of the downturn somewhere, wondering if, or maybe when, it will hit you. Morale is down. Fear is up. This is a fatal combination which is sure to create an environment ripe for fraudulent activity.
When economic survival is threatened the line separating acceptable and unacceptable behaviour can, for some, become blurred. In addition, criminal organizations that profit from fraud view the current economic conditions as an opportunity, not a threat.
The Association of Certified Fraud Examiners ("ACFE"), the leading world-wide body of anti-fraud professionals, states in its 2009 report entitled "Occupational Fraud: A Study of the Impact of an Economic Recession" ("The 2009 Report on Occupational Fraud") that 18.1% of US respondents (out of a total of 507) claim that they have experienced a significant increase in the number of frauds in their workplaces, while 37.3% have experienced a slight increase during the period between February-March 2008 and February-March 2009. Additionally, 49% claim that they have experienced an increase in the dollar amount lost to fraud during the same period. Moreover, 80.5% of respondents claim that fraud will thrive in times of economic turmoil.
It is very logical that the risk of fraud should be heightened given thecurrent economic conditions; however, it is nearly impossible to measurethe true amount of fraud occurring at any given time. This is due to thefact that fraudsters tend to conceal their actions. Some fraud schemesmay never be caught. Other schemes may be operational for years before they are discovered. And, even if they are detected, a large number of cases may never actually end up being reported, so we will never know about them. Although no exact measure of the level of fraud during the current recession can exist, examining the correlation between fraud and the impact of the downturn is important and necessary.
In this article we will look at how fraud risks change during the downturn, and consider the issues that shareholders, boards of directors and audit committees need to be aware of in 2009 and 2010: the frauds that may emerge and the likely regulatory response. Finally, we describe the strategies enlightened organizations are implementing to manage short term risks and to enhance stakeholder value in the longer term.
It’s all in the mind
