Advisory Forensic Services. Economic Crime in a Downturn Global Economic Crime Survey Hungarian Country Report 2009

Transcription

1 Advisory Forensic Services Economic Crime in a Downturn Global Economic Crime Survey Hungarian Country Report 200

2 Introduction We are pleased to present the 200 PricewaterhouseCoopers Global Economic Crime Survey results the largest study of its kind now available worldwide. In our fifth survey, we interviewed senior representatives of more than 3,000 companies in 54 countries, including 53 leading companies within Hungary, providing us with unparalleled depth of insight into perceptions, awareness and the impact of economic crime on business around the world. We believe that the results of our survey will help business leaders to understand and confront the issues around economic crime. Our aim was: to assess corporate attitudes to fraud in the current economic environment; to understand in particular if fraud has increased as a result of the economic downturn; and to find out: - which types of fraud are the most prevalent; - who are the perpetrators of fraud; - what are the costs to business; and - what steps companies are actually taking to detect and prevent fraud. Our survey indicates that the number of incidences of fraud uncovered has increased in Hungary at a much greater rate in the past 12 months than in the wider Central and Easter European ( CEE ) region with % of companies who suffered indicating an increase (compared to 48% in CEE). In addition, the cost of fraud to a company is also reported by the majority of companies who have suffered as increasing and the impact on employees and morale was judged to be more significant in Hungary than in other countries in the region. A large proportion of fraud is still detected by chance rather than internal controls or other systems. In our previous surveys, Asset Misappropriation has always been the most prevalent type of economic crime suffered, until this year, respondents endured more Bribery and Corruption than any other economic crime. Whether this is due to economic pressures is unclear. What is reported is that the global economic downturn has significantly affected most organisations, with 2% of respondents reporting a decline in financial performance over the past 12 months. Furthermore, the current economic climate has affected individuals views on fraud risks with 38% of respondents reporting that, they believe that their organisation faces a greater risk of economic crime at present. We also discovered that the nature of fraud has changed as a result of increased economic pressure, namely the need to achieve high targets or financial performance and/or the fear of losing jobs. Half of respondents who commented on this area state that staff reductions have resulted in fewer resources deployed on internal controls whilst two thirds suggested management is focussing on the survival of the business and less on fraud. Companies need to consider how to balance the need to meet profit targets and the consequences of excessive pressure on employees, as well as how to adjust control systems to ensure their effectiveness. The survey indicates there appears to be a serious mindset issue in Hungarian companies, 8% of respondents who commented report that people are prone to committing fraud when they believe others do it as well. This stresses the need for strong corporate communication and a very clear tone from the top that is also followed by decisive action when fraud is identified. Last but not least, over two thirds of frauds uncovered were committed by an organisation s own staff, this compares to 3% in the wider CEE and 53% globally. We are very grateful to all respondents and organisations who have participated in the survey, and without which we would not have been able to produce this report. We hope that this information will further assist the readers in their ongoing fight against economic crime. David Wake, Partner Miklós Fekete, Partner Lee Coles, Director Forensic Services PricewaterhouseCoopers Hungary

3 Key findings Economic crime continues to be a serious issue affecting organisations in Hungary and worldwide, 30% of companies in Hungary experienced one or more economic crimes in the past 12 months; compared to CEE (34%) and globally (30%). With 25% of the victims of fraud in Hungary having had more than 10 incidents. Fear of losing their jobs (43%) and a belief that competitors were paying bribes to win contracts (43%, compared to 30% in the CEE as a whole) increased the pressure on companies to commit fraud in Hungary in the current economic climate. A belief that others do it so it is OK is also a common way to rationalise fraud in Hungary (8%) and in CEE (58%) compared to the global level (35%). Asset misappropriation is no longer the most common type of economic crime reported in Hungary, replaced by Bribery and Corruption (81%), this exceeds both the CEE and global averages of 44% and 27% respectively and shows a huge increase on our 2007 survey where 17% reported they had suffered from this form of economic crime. In prior surveys we had commented on the fact that the belief of respondents was that Bribery and Corruption was the most prevalent economic crime, but it was not actually the crime most experienced. However, as the survey shows, that is no longer the case. An increase in the cost of fraud over the last 12 months was reported by 3% of companies who had suffered an economic crime in Hungary. 5% of respondents highlighted employee morale as the most significant indirect cost of economic crime in the last 12 months whilst 50% indicated that there had been a significant impact on business relations after suffering an economic crime. This compares to the CEE average of 23%. % of companies lost over USD 1 million as a result of fraud with 25% losing over USD 500,000. The main threat of economic crime in the last 12 months came internally from employees (%). Middle Management in Hungary is reported as perpetrating 4% of internal frauds, which is in line with CEE (47%) and globally (42%). In the case of internal perpetrators, dismissal was the most frequent action taken in Hungary, in 1% of cases. External parties to the company played a role in % of fraud cases in Hungary which involved agents/intermediaries (40%) and customers (0%) being the perpetrators. 38% of the incidents of economic crime detected were by accident, or by means that were beyond the influence of management, namely a combination of internal/external tip-offs other than the formal whistle-blowing mechanism. 85% of respondents surveyed mentioned that they had not changed the frequency of conducting fraud risk assessment compared to 12 months ago. In addition, 43% of companies in Hungary had not performed any fraud risk assessment in the last 12 months. Economic downturn and the risk of fraud The global economic downturn has significantly affected most organisations, with 2% of respondents reporting a decline in financial performance over the past 12 months. Furthermore, the current economic climate has affected the individual s views on fraud risks globally, with 38% of respondents reporting that they believe that their organisations face a greater risk of economic crime at present. What drives fraud in times of crisis? Fraud practitioners often point to three factors that are commonly found when fraud occurs (the Fraud Triangle - Figure 1). Figure 1 Incentive or Pressure 30% FRAUD RISK 35% 35% Opportunity Attitude / Rationalisation First, perpetrators of fraud need an incentive or pressure to engage in misconduct. Second, there needs to be an opportunity to commit fraud, and third, perpetrators are often able to rationalise or justify their actions. Our survey probed deeper into the impact of these three factors and found that amongst the respondents who believed that there is a greater risk of fraud in the current economic environment one of the three factors of the fraud triangle was the most likely reason for the greater risk of fraud. PricewaterhouseCoopers 1

4 Figure 2 People are afraid they might lose their jobs People want to make the numbers in order to earn performance bonuses There is a belief that competitors are paying bribes to win contracts Global CEE Hungary Reasons for increasing pressures and incentives to commit fraud Targets more difficult to achieve Bonuses not paid this year The responses were markedly different in Hungary compared to CEE and globally. Respondents perceive themselves as far less likely to commit due to incentives or pressures and much more likely to do so because they can rationalise committing the economic crime. And what contributes to this higher level of rationalisation? 8% reported that others do it and so it is OK. The maintenance of the existing standard of living was the next highest perceived pressure at 57%. When we asked companies to categorize what, if anything, has contributed to increasing pressures and incentives to commit fraud in the current economic environment, in Hungary, CEE and globally, trying to achieve difficult targets was the key reason provided (57% in Hungary), whilst 43% of respondents highlighted job security as a key consideration. (Figure 2) Interestingly in Hungary 43% believed that competitors were paying bribes to win contracts, compared to % globally and 30% in the wider CEE. Moreover, 83% of respondents surveyed highlighted at least one of three key issues that contributed to greater opportunities of the risk of fraud: staff reductions have resulted in fewer resources deployed in internal controls; management focusing on the survival of the business; and internal audit being asked to do too much. Economic downturn has increased the risk of fraud Economic crime takes on many different forms, some more common than others, but all can be equally damaging if they occur. Asset misappropriation has always been the most common form of economic crime reported in Hungary but no longer, with respondents in 200 identifying they suffered from Bribery and Corruption more than anything else. (Figure 3) Figure 3 IP infringement, including theft of data Bribery and corruption Asset misappropriation Financial statement fraud- Accounting manipulations Money laundering Tax fraud % of respondents Types of Economic Crimes In some ways this could be viewed as a positive trend that means that companies in Hungary are identifying more incidents in an area that is typically difficult to detect. However the sheer weight of numbers indicates this could be a wider business culture problem where such activities can be viewed as a necessary evil because as the survey suggests, others (including competitors) do it as well (or at least are perceived to). Of those that reported economic crime in the last year in Hungary, % suffered some form of financial statement or accounting fraud. This is a dramatic increase on prior years (% in 2007). Fraudulent borrowing/raising of finance and credit are the two reasons provided for financial statement fraud in Hungary. The significant increase in this type of fraud could be linked to the current economic climate and a combination of a weaker control environment due to staff reductions and the increasing pressure placed upon management to meet targets. Asset Misappropriation remains a significant problem with 3% of respondents identifying it as an area where they have been a victim. The prevalence of this type of fraud is not surprising, as it is among the easiest to detect; it involves the taking of items with % of respondents Global Economic Crime Survey November 200

5 Figure 4 Monthly Quarterly Every months Once Not at all Global CEE Hungary a defined value and provides a clear indication of where management should concentrate its immediate attention in order to avoid losses. Prevention, detection and response are key Of the total respondents for Hungary, 30% reported that they had suffered economic crime in the past 12 months. Whilst it cannot be proven, it is extremely likely that further fraud remains undetected. Fraud risk assessments are a critical tool in identifying potential fraud threats and in controlling weaknesses that can create opportunities to commit fraud. However, Hungary reported that 43% of respondents had not performed a fraud risk assessment in the past year and a further 3% had only performed it once. (Figure 4) 85% indicated the frequency of performing fraud risk assessments remained unchanged from the past. Global results have shown a clear correlation between the frequency of fraud risk assessments and the number of detected frauds. Are organisations detecting fraud effectively? Our survey statistics show that 1% of the frauds reported were detected by internal audits. Frequency of conducting fraud risk assessment As such, it can be extrapolated that if there were no reductions in internal control staff levels, more frauds could have been detected. % of reported frauds were detected through risk management measures, including preventive fraud risk assessments. 38% of all frauds detected were via means that were beyond the influence of management, namely a combination of internal/external tip-offs other than the formal whistle-blowing mechanism, or by accident. This compares to CEE (32%) and globally (32%), which suggests that companies in Hungary may rely too heavily on chance. (Figure 5) Interestingly globally, 7% of frauds were detected through formal whistle-blowing procedures. Hungarian responses indicate 0% was detected in this way. This may suggest either the ineffectiveness or the absence of such procedures, which could be Figure 5 43 Risk management, including preventive fraud risk management How was the fraud detected? By accident Corporate security External audit Internal audit Change of personnel/duties Activity/investigation by law enforcement agencies /regulatory authority External tip-off through means other than the formal whistle blowing mechanism Internal tip-off through means other than the formal whistle blowing mechanism due to a lack of support within organisations, insufficient publicity and/or leadership not being seen to take whistle-blowing seriously or perhaps cultural or historical issues with such mechanisms which a company needs to consider and address. Do organisations have the right tone at the top? Employee morale was reported to be the area of greatest impact on economic crime, with 5% of those experiencing economic crime reporting its effect to be significant on morale. This is much higher than the CEE figure of %. 50% also said that the economic crime committed against them had significantly damaged business relations with others whilst 25% indicated the company brand had been significantly impacted upon. Our survey indicates that in % of cases respondents took criminal or civil action against external perpetrators, which is lower than the CEE average (%). (Figure ) With respect to internal perpetrators (Figure 7), 1% of companies in Hungary claimed they dismissed the perpetrator whilst 27% brought civil actions and/or criminal charges against % of frauds PricewaterhouseCoopers 3

6 him/her. This compares to the CEE figure of 4% and a global average of 48%. It should be noted that this survey does not differentiate from those employees removed through dismissal and those which may be removed through other actions such as mutual agreement or an accepted resignation. In terms of deterrent, the latter two options make a much weaker statement when it comes to the perception of how fraudsters are dealt with by an organisation. We are pleased to note that all organisations reported that they took at least some action against internal perpetrators although % indicated external perpetrators suffered no follow up action. Only 7% of respondents consider measures adopted by the regulatory framework to prevent fraud to be effective. fraudsters, and 5% across CEE. No questions relating to age or sex of perpetrators were asked. The only perpetrators of external fraud reported in Hungary were customers (0%) and agents/ intermediaries (40%). Figure No action Notify relevant regulatory authorities Cessation of the business relationship Civil action/criminal charges were brought Global Central & Eastern Europe Hungary Which action was taken against external perpetrators? Moreover, % of fraud discussed in our survey was actually detected by an action from authorities. At the same time, 2% of victims of fraud admitted that the fraud had no significant impact at all on their relations with regulators. Figure 7 No action Notify relevant regulatory authorities Civil action/criminal charges were brought Which action was taken against internal perpetrators? Dismissal Profile of the internal fraudsters Transfer 4 4 In 4% of cases, the respondents identified that the perpetrator had been a member of middle management; and % were senior management, a combined total of 4%. In comparison to our 2007 Hungary survey this shows a worrying increase as previously respondents indicated 27% of Senior and 20% of Middle Management were involved (a combined total of 47%) (Figure 8). Warning/reprimand Global Central & Eastern Europe Hungary Figure 8 Senior management Middle management Profile of the internal fraudsters Globally our 200 results showed middle and Senior Management comprised 5% of the profile of Others Global Economic Crime Survey November 200

7 Fraud in the Future % of respondents who reported fraud believed that there had been an increase in the level of economic crime compared to 12 months ago. However, since fraud is not a static threat, organisations need continually to assess their fraud risks. Despite the figures in this survey, the overwhelming majority of companies in Hungary still think it unlikely that their organisation will be subject to economic crime in the next 12 months, particularly financial statements fraud only 11%, asset misappropriation 25% and/or corruption and bribery 33% think it likely or very likely they will fall victim to these economic crimes. It should be noted that the corruption and bribery perception is higher than that in CEE (28%) and significantly higher than the global perception (1%). (Figure ) Figure Figure 10 Detection Bribery and corruption Asset misappropriation Accounting manipulations Prevention n Effective fective fraud combat perception 200 perception 200 reality Perception vs. Reality 21 Response % of the companies 3 81 In our experience global procedures can themselves be effective in detecting and, over a period of time, deterring fraudsters, our research and experience also shows that it is the culture of a company one that supports a compliance programme working in conjunction with a clearlyunderstood, and lived, code of ethics that is the true foundation for an effective anti-fraud programme. PricewaterhouseCoopers 5

8 Contacts David Wake Partner, Advisory Tel.: david.wake@hu.pwc.com Miklós Fekete Partner, Advisory Tel.: miklos.fekete@hu.pwc.com Lee Coles Director, Forensic Services Tel.: lee.x.coles@hu.pwc.com Zoltán Pintér Manager, Forensic Services Tel.: zoltan.pinter@hu.pwc.com The 200 Global Economic Survey can downloaded from the following link: PricewaterhouseCoopers provides industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. More than,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. 200 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) 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.