Corporate Crime Increases

So much for Sarbanes-Oxley and all of the other corporate-governance changes instituted by regulators and the stock exchanges. Nearly half of all organizations worldwide, including U.S. companies, admit they have been the victim of corporate crime in the past two years, according to PricewaterhouseCoopers's Global Economic Crime Survey 2005.

The number of companies reporting fraud increased from 37 percent to 45 percent since 2003, a 22 percent increase, according to the study. The average cost to companies was $1.7 million from what PwC calls "tangible frauds," those that result in an immediate and direct financial loss. These include asset misappropriation, false pretenses, and counterfeiting.

"The rise in economic crime is cause for concern," says Steven Skalak, global investigations leader. "Companies may have a false sense of security when it comes to fraud. More companies are reporting financial crimes; they're reporting a higher number of incidents."

Perhaps the most disturbing finding from the report is that most cases of crime are detected by accidental means.

More than one-third (34 percent) of these frauds were discovered by accident, making "chance" the most common fraud-detection tool. In other words, companies are learning about the frauds from calls to hotlines or from whistle-blowers, for example. Internal audit detected just over 30 percent of the reported cases in North America, and 26 percent of the reported cases globally.

There is more at stake besides financial loss. According to the survey, 40 percent of companies reported suffering significant so-called collateral damage to their businesses. Of those, 43 percent suffered damage to their brand, 42 percent to their relations with other businesses (including suppliers and contractors), and 54 percent to staff morale.

On average, companies recorded suffering eight serious incidents. Since 2003 there has been a 71 percent increase in the number of companies reporting cases of corruption and bribery, a 133 percent increase in the number reporting money laundering, and a 140 percent increase in the number reporting financial misrepresentation.

Who commits these crimes? The survey found that in the United States and North America, 79 percent of the transgressors are male, between the ages of 31 and 40, with a college education or higher degree. Also, 60 percent were employed by the defrauded company, 47 percent in a managerial capacity.

The biennial survey polled 3,634 companies from 34 countries, including the United States, and was conducted in association with Germany's Martin-Luther University, Halle-Wittenberg.

One more note of interest: nearly 80 percent of the companies did not consider it likely that they would suffer fraud in the next five years.