E-BRIEF - Jan-Feb 2004 - The Advocates' Society

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The Expert Column Global Economic Crime Survey 2003 - Canadian Results By Steven Henderson Economic crime continues to be a menace to businesses throughout the world despite widespread coverage in the press and government and regulators' efforts to reduce Steven Henderson fraud. Over onethird of companies were victims of fraud in the last two years, suffering an average loss of over US $2 million, according to the PricewaterhouseCoopers Investigations & Forensic Services' Global Economic Crime Survey 2003. In Canada, almost one half of the companies surveyed reported being a victim of an economic crime in the past two years. The Global Economic Crime Survey 2003 represents the minimum benchmark for economic crime. There are frauds that organizations never uncover, while others are treated as commercial losses. Additionally, there is bound to be a reluctance to divulge certain frauds that occur. Despite this, there remain some valuable lessons to be learned from this survey. Most notably, it reveals that in Canada approximately one-fifth of fraud cases were uncovered by accident or chance. Inasmuch as this statistic lends credence to the view that controls can never eliminate fraud completely, about one-half of respondents both globally and in Canada reported the fraud was uncovered as a result of the work of internal and external audit. The survey reveals the impact on a company's reputation, brand image and staff morale can be more important than the direct financial loss. Respondents assign primary responsibility for managing economic crime issues to the board of directors, followed closely by senior members of management. Overall the survey results reinforce the need for companies in Canada to develop a proactive anti-fraud regime founded on vulnerability assessment, communication, training, testing 10 QuickFIND is an award-winning desktop productivity tool for retrieving caselaw. QuickFIND lets you find or note up cases from citations in memos, email messages, factums, web pages, and other documents — immediately. Now you can access caselaw faster and more efficiently than ever. For pricing information, call 1-800-387-0899 or email sales@quicklaw.com. and fraud response planning. Types of Economic Crime Asset misappropriation, generally the easiest to detect as it often involves the theft of tangible assets with a defined value, is the single most commonly reported economic crime. Further insights can be gained by comparing the perceived prevalence with the actual number of incidents. Globally, corruption and bribery are perceived to be the most prevalent, however asset misappropriation has the highest number of incidents reported. In Canada approximately 40% of companies consider asset misappropriation to be the most prevalent with almost the same percentage of incidents reported. Financial misrepresentation is perceived to be prevalent both in Canada and on a global basis even though the number of incidents reported is less than 5%. With financial misrepresentation, this gap appears to reflect two factors: higher awareness following the corporate scandals in North America and Europe and an understanding that it is likely to have a dramatic impact on a business. Looking to the future, a majority of companies expect fraud to increase in the next five years. Over half of Canadian companies or one-third of global companies expect their greatest fraud risk to www.quicklaw.com LexisNexis and the Knowledge Burst logo are trademarks of Reed Elsevier Properties Inc., used under licence. Quicklaw and QuickFIND are trademarks of LexisNexis Canada Inc. Copyright 2003 LexisNexis Canada Inc. All rights reserved. continue to be asset misappropriation, followed closely by cybercrime, which primarily involves computer hacking, virus attacks, denial of service and theft of electronic data. The Collateral Damage Fraud can affect organizations in many ways, not solely in terms of direct financial losses. The indirect costs associated with staff morale, damage to the reputation of the organization and the erosion of shareholder value must be taken into account. Approximately half of companies, both globally and in Canada, reported that economic crime had the greatest impact on staff morale and motivation. Less than 5% of Canadian companies reported that economic crime impacted the share price despite the fact that approximately one-fifth indicated it affected their reputation and business relationships. The markets' lack of knowledge about fraud or the avoidance of adverse publicity may explain this, but many well-publicized cases clearly demonstrate the sensitivity of markets to management fraud. Detecting Economic Crime The perpetrators of fraud invariably take great pains to conceal or remove evidence of their crimes. It is not possible to accurately gauge how much fraud goes (Continued on page 11) VOLUME 15, NO. 5, JANUARY/FEBRUARY 2004
(Continued from page 10) unnoticed, but we can analyse the means by which fraud is brought to light. Accident or chance continues to play a significant role in the detection of fraud. In Canada, approximately one-fifth of cases were uncovered this way lending credence to the view that controls can never eliminate fraud completely; however, about one-half of respondents both globally and in Canada reported that fraud was uncovered as a result of the work of internal and external audit. Clearly, reliance on luck is not a basis for an anti-fraud regime. Even where companies have controls in place to detect economic crime, these often can be rendered ineffective by management override or collusion. A company's preventative anti-fraud regime should consist of an ongoing assessment of the real risks and vulnerabilities to fraud within an organization; senior management actively communicating a company's fraud policy; the development of policies to encourage and protect whistleblowers; and the development of a robust fraud response plan that is based on worstcase scenarios. Recovering Stolen Assets Even if economic crime is detected and prosecuted, it still can prove difficult to recover the assets. Of respondents who had experienced fraud, only 10% of Canadian and global companies succeeded in recovering more than 80% of their losses. There are many reasons for this relative failure to recover lost assets, one of which is that companies are reluctant to embark on long recovery processes with no certainty of success; however, a policy of always attempting recovery, and communicating such an initiative, helps to create the right culture of deterrence. Preventing Economic Crime A majority of businesses are inadequately prepared to manage and prevent economic crime. For example, less than 30% of businesses surveyed both globally and in Canada have fraud-related training for those handling economic crime issues. These companies rely on more tangible prevention tools such as codes of conduct and ethical policies that, although a foundation for good practice, on their own can be poorly The Society’s award-winning “Written Advocacy” program featured an illustrious faculty including, left to right: Joyce Harris of Teplitsky Colson LLP; The Honourable Justice Thomas A. Cromwell of the Nova Scotia Court of Appeal; Stephen V. Armstrong of Wilmer, Cutler & Pickering, and Jane Greisdorf of The Writing Consultants. understood and difficult to enforce. In contrast, companies that have actually suffered an economic crime loss are more likely to take practical and effective measures to combat it and to mitigate its impact. In Canada, 86% of respondent companies reported having insurance to cover an economic crime loss. This is significantly higher than the global results, which indicate only half of the companies surveyed were insured. Similarly, 40% of Canadian companies surveyed have implemented whistleblowing systems compared to 28% globally. As well, two- thirds of Canadian respondents have implemented preemployment screening and considered the impact of fraud in their risk management systems compared to approximately half of the global respondents. Although almost one-half of Canadian companies surveyed reported falling victim to an economic crime in the last two years, approximately 60% of them reported they are quite confident that their existing control systems are effective enough to minimize financial loss. This is consistent with the global results. Privacy Legislation and International Bribery and Corruption Laws In Canada, approximately 80% of companies surveyed indicated that they were familiar with the current privacy legislation, although approximately one-fifth indicated they had not yet assessed their compliance with this legislation. Almost two-thirds reported they conducted business abroad, however, only about onehalf reported they were aware of the bribery and corruption legislation in both Canada and the countries in which they did business. Approximately one-fifth reported that they had not assessed their compliance with this legislation. Further Information The survey demographics and definitions of economic crimes can be found in the Economic Crime Survey 2003 report at www.pwc.com/crimesurvey or call Steven Henderson at 416-941-8328. We welcome your suggestions for future columns. Please forward them by e-mail to john.seigel@ca.pwc.com. Steven Henderson is a Partner in the PricewaterhouseCoopers Dispute Analysis & Investigations Group in Toronto, focusing his practice on forensic accounting. Congratulations to Kathleen J. Kelly, Barrister, Arbitrator, Mediator, winner of the LexisNexis book contest (E-Brief, Nov/Dec 2003) VOLUME 15, NO. 5, JANUARY/FEBRUARY 2004 11
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E-BRIEF - Jan-Feb 2004 - The Advocates' Society

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