Corporate Fraud Still Widespread, Difficult to Detect

The number of companies around the world that reported incidents of fraud increased 22 percent in the last two years, according to a new Big Four survey.

While layers of new controls have been implemented to improve corporate governance, fraud is still widespread, difficult to prevent, and detected many times by chance, according to the biennial survey by PricewaterhouseCoopers (PWC), which interviewed more than 3,000 corporate officers in 34 countries.

Fraud was detected by 45 percent of the companies polled, which is up from 37 percent in 2003, Reuters reported. In North America, 60 percent of the fraudsters were company employees. Almost 25 percent were senior managers.

PwC found that “accidental” ways of detecting fraud, such as calls to hotlines or tips from whistleblowers, account for more than a third of the cases. Internal audit was responsible for detecting fraud about 26 percent of the time.

The increase in reported fraud raises the question: Are the companies victimized more often, or are they getting better at detecting fraud?

Steven Skalak, Global Investigations Leader at PwC, told Reuters: "I think the investment in control systems is paying off and detecting more crime, and I think it remains to be seen whether that pays off in the future."

Companies have been required to invest in internal controls by the Sarbanes-Oxley Act. The study also found that companies with a larger number of controls could better determine the full impact of the fraud, uncovering three times as many losses as companies with fewer controls, the Ottawa Business Journal reported.

"Internal controls can never completely eliminate fraud as there are always individuals or groups who have the incentive and the ability to circumvent or override controls,” said Steven Henderson, Canadian investigations and forensic services leader for PwC.

Despite the increase in frauds reported, almost 80 percent of companies did not consider it likely that they would suffer from financial fraud over the next five years.

“Many companies have a false sense of security when it comes to economic crime,” Andrew Clark, partner in the investigations and forensic services practice at PwC, said in a statement.