Economic crime in Canada rises to highest level in six years

56% of Canadian companies report being victims of crime in the past 12 months

TORONTO, Nov. 19 /CNW/ - In the midst of the global economic downturn of the past year, several significant economic crimes have come to light, with large-scale Ponzi schemes in Quebec, Ontario and Alberta under investigation, and alleged financial fraud in the government sector. From an economic crime perspective, victim organizations said both internal and external fraudsters were the perpetrators, and theft of tangible assets was the most common type of fraud committed (83%), according to the PricewaterhouseCoopers (PwC) Investigations & Forensic Services' Global Economic Crime Survey 2009.

Other statistics include:

    
    -   Fifty-six percent of Canadian companies surveyed reported being
        victims of economic crime during the previous 12 months; this is an
        increase of 10% from the 2003 survey results.

    -   Approximately one quarter (24%) of Canadian companies (27% globally)
        that were victims of fraud within the past year estimated their
        direct fraud-related losses to be greater than US$500,000.

    -   Although Canadian companies have historically reported higher
        instances of economic crime than their global counterparts, the 2009
        results show a widening disparity: this year, 30% of global
        respondents experienced economic crime, a decrease of 13% from the
        43% reported in 2007.
    

"Companies need to be aware that an economic downturn can lead good people to do bad things-need comes to the forefront and becomes intermingled with greed and opportunity, creating the perfect storm for fraudulent activity," says Steven P. Henderson, partner and national leader of the Investigations & Forensic Services practice at PwC. "When corporate survival is the focus, the incentive to commit fraud increases while the focus on fraud detection, prevention and investigation diminishes."

Henderson continues, "Since companies are more vulnerable with weakened or non-existent controls due to cost-cutting and downsizing, fraudsters see increased opportunity to commit fraud. As a result, financial fraud occurs both from within and outside organizations."

The cost of fraud

According to the 2009 survey results, 41% of Canadian companies that were victims of economic crime in the past year (42% globally) believe the cost of fraud is higher now than it was 12 months ago with respect to the direct financial losses resulting from the fraud. The cost of fraud, however, can affect an organization in more ways than the immediate financial loss. Economic crime can harm the organization's brand name or reputation and it can negatively affect its relationships with suppliers, customers, regulatory bodies and other key stakeholders.

In this year's survey, results show that 24% of Canadian companies (27% globally) that were victims of fraud within the past year estimated their direct fraud-related losses to be greater than US$500,000. However, when asked to rate the impact of cases of fraud, other than direct financial losses, fewer than 24% of Canadian companies perceived a "significant" or "very significant" impact on the organization in terms of the following elements: employee morale (24%), business relations (21%), brand or reputation (7%), share price (3%) and relations with regulatory bodies (3%). Although it may be relatively simple to assess the loss caused directly from fraud, many of these additional indirect factors can prove more difficult to quantify.

Henderson comments, "Experience has shown that negative employee morale can result in additional losses for a company because it can lead to reduced performance and future detrimental behaviour such as committing crime."

Types of economic crime reported

The most common types of fraud encountered by companies surveyed globally were the following:

    
    -   Asset misappropriation or the theft of tangible assets that have a
        defined value. Asset misappropriation was reported by 83% of Canadian
        companies surveyed that were victims of economic crime in the past 12
        months. This is notably higher than the global survey result of 67%.

    -   Accounting fraud was reported by 31% of Canadian companies over the
        past 12 months, as compared to 38% globally.

    -   Money laundering was a type of fraud experienced by 28% of Canadian
        companies surveyed. This number is significantly higher than the
        global results, where only 12% of companies identified money
        laundering as an economic crime encountered during the past year.

    -   The survey results show that bribery and corruption are more common
        globally, as 27% of global respondents reported being a victim of
        this type of economic crime compared to only 7% of Canadian
        respondents.
    

The typical perpetrator

According to our 2009 survey results, 59% of Canadian companies that were victims of economic crime in the last 12 months said external fraudsters perpetrated the fraud and 38% identified the main perpetrator as an employee. In contrast, 44% of global respondents that experienced economic crime identified the main perpetrator as an external individual versus 53% internally.

The 2009 figures for Canadian companies may be swayed heavily by the results noted previously, where 28% of the Canadian companies that were victims of economic crime were victims of money laundering activities, a crime often perpetrated externally. Another possibility may be that external perpetrators are being reported as having committed the crime but have been aided through collusion with employees of the companies. Regardless of the true cause, the high percentage of fraud perpetrated by external persons illustrates the importance of having a strong enterprise-wide anti-fraud regime for protection from all perpetrators of fraud, both internal and external.

Means of detecting fraud

In 2009, 38% of Canadian companies that were victims of economic crime over the past 12 months detected the fraud by chance or internal or external tip-off. This is consistent with the 39% reported in 2007. An additional 14% of frauds were detected by internal audit, while preventative fraud risk management activities contributed to 17% of frauds detected. Canadian organizations were almost twice as likely as their global counterparts to detect fraud through electronic means, such as automated suspicious transaction reporting systems, which accounted for more than 10% of frauds detected. Interestingly, reports made through organizations' formal whistle-blowing mechanisms, often viewed by management as a principle fraud detection mechanism, played a role in only 3% of frauds detected in Canada and only 7% globally.

Henderson notes, "More work is needed by companies to ensure employees understand economic crime, their obligation to report it and the implications to them of not doing so. Companies should also work to gain employees' confidence that economic crime reporting through both internal and external whistle-blowing mechanisms can be trusted."

Indeed, despite increasing levels of fraudulent activity and the perception of increased fraud risk amidst turbulent market conditions, 69% of Canadian companies surveyed have not changed their frequency of conducting fraud risk assessments. Moreover, 29% (40% globally) of respondents stated that their respective organizations had not performed a fraud risk assessment, nor had any knowledge if one had been performed in the last 12 months.

Economic crime reported by industry sectors

Globally, the industries that reported having suffered the most economic crime were communication, insurance, financial services, hospitality and leisure. These industries tend to be targeted by fraudsters because of their product or service. Additionally, organizations in these industry sectors tend to have more robust and proactive anti-fraud measures. In effect, they both suffer and detect more fraud than other sectors.

Henderson concludes, "Over the coming months, we will likely see a significant growth in the mining, oil and gas and government sectors as Canadian companies grow into emerging markets and governments continue to support the economic recovery. Because of the new risks this presents, such as foreign corruption and spending abuse, organizations and governments will need to increase their vigil over economic crime. Indeed, every organization, regardless of industry, should be developing robust anti-fraud regimes and task fraud as a top priority for the next year. If not, the worst may be on the horizon."

For more information, please visit http://www.pwc.com/ca/crimesurvey.

About PricewaterhouseCoopers LLP

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. In Canada, PricewaterhouseCoopers LLP (www.pwc.com/ca) and its related entities have more than 5,300 partners and staff in offices across the country.

"PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.

SOURCE PwC

For further information: For further information: Carolyn Forest, (416) 814-5730, carolyn.forest@ca.pwc.com; Kiran Chauhan, (416) 947-8983, kiran.chauhan@ca.pwc.com

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