According to a survey by PricewaterhouseCoopers, a consultancy and accounting firm, just over half of British firms said that they had uncovered high levels of fraud over the last year. Only Kenyan and South African ones found more (see chart), although it is likely that British companies are just better at spotting it.
Most fraud is carried out by outsiders, such as customers or vendors. But a firm’s employees still represent a big risk. A third of the companies questioned said that the biggest swindles over the last year were perpetrated by their own staff. Middle managers were by far the biggest culprits—and they are becoming more sticky-fingered. In 2007 32% of reported internal frauds at British companies were carried out by middle managers. By 2011 this had risen to 65%.
This is happening even as the overall level of internal fraud is falling. Middle managers are particularly keen on “asset misappropriation” (common theft to you or I), while the types of crimes more associated with the big cheeses, such as accounting fraud, have fallen—probably because firms, and regulators, have become more stringent after the credit crunch. But it might also be that internal fraud is now less likely to be detected. During a downturn, c
ompanies are tempted to do away with frontline defences, such as internal audits. This may have led to the under-reporting of some crimes.
When PwC asked firms to describe their typical fraudster, they identified him as a man in his 30s, who has been with the organisation for between three and five years. It sounds like a wild generalisation. But Tony Parton, an investigation partner at PwC, thinks it is not so far-fetched. In all likelihood, he says, it is describing a particular type of disgruntled manager, who has been passed over for promotion during straitened times. He might be driven to fraud by a sense of bitter entitlement, or it may be that he is feeling the economic pinch of sending his kids to private school or maintaining a second home.
Not every employee caught defrauding his company is sacked. Seventeen percent get to keep their jobs, while a quarter are not reported to the police. Many bosses decide that, even after being caught in the act, some managers are too valuable to lose. Better, they think, to shift them quietly to another department, with little more than a ticking off.
It is nigh on impossible for firms to quantify the cost of crimes such as theft. Many have concluded that the cost of a proper audit would outstrip the actual losses. The trouble with that approach, says Mr Parton, is that one also needs to consider the "collateral damage". Olympus, a Japanese maker of cameras and medical-imaging devices, may be an extreme example, but it lost 80% of its value after it sacked its new CEO, Michael Woodford, who had uncovered $1.3 billion in dodgy payments. And, of course, accounting frauds have brought down entire companies.
What is more, most firms are home to a vibrant grapevine. Knowing that your peers are stealing with impunity might lead you to think that you are the sucker for staying honest. Particularly if you promise yourself you will go straight once you get the promotion you deserve.
If you're interested in reading PwC’s latest fraud survey please click HERE
from The Economist
