Economic crime in the spotlight

THE DIFFICULT economic situation in Slovakia as well as elsewhere has been reflected in a greater awareness of economic crime. While it is difficult to say with certainty whether the actual incidence of economic crime has grown, detection of economic crime has increased, partially because as companies have searched for cost-savings and taken closer examinations of their financial statements, they have been able to uncover more economic crime. In addition, the possibility of layoffs, cost-cutting through salary reductions, and pressing on employees for greater effectiveness creates a more favourable environment for unethical or fraudulent behaviour by top managers or employees.

“It is possible to say that the number of uncovered frauds is increasing,” Jan Vylita, director of Investigation and Forensic Services at PricewaterhouseCoopers (PwC) in Slovakia told The Slovak Spectator.

The Global Economic Crime Survey conducted by PricewaterhouseCoopers for 2009 revealed that about one in every three respondents said their company had experienced some form of economic crime over the previous 12 months. Slovakia was no different in this incidence of economic crime as the difference between the global average and that of the Slovak respondents was less than 1 percent.

PwC conducted this survey in the fall of 2009 in which top managers of 3,037 companies from 55 countries across the world, including Slovakia, shared their experiences with actual economic crimes against their companies.

“Fraudulent practices by employees have not been receding over recent years,” Radoslava Staroňová, manager of Fraud Investigation & Dispute Services at Ernst & Young in Slovakia, told The Slovak Spectator. “The results of Ernst & Young’s European Fraud Survey confirmed this. The survey showed that European and also Slovak companies are afraid that fraud will grow when there is more tolerance towards unethical behaviour, especially with regards to efforts of a company to survive.”

Ernst & Young’s survey, reflecting the views of over 2,200 respondents in 22 countries, including Slovakia, was published in May 2009.

According to Staroňová, the economic crisis has strengthened preconditions for fraud. This is due to increasing pressure from employers on employees to work more effectively as well as from the side of employees who are under increasing pressure from potentially deteriorating economic and social situations. Layoffs of employees who had financial control responsibilities and therefore a reduction of routine control mechanisms have also increased the opportunity to commit fraud. Moreover, Staroňová said that during the economic crisis, additional pressure to maintain income and personal security leads some people to lean towards committing fraud when deciding whether or not to violate one’s ethics or the law.

Daniel Bican, the director of Forensic and Dispute Services at Deloitte Central Europe oversees forensic services in Slovakia and sees it as very difficult to compare the incidence or kinds of economic crime conducted in Slovakia before the crisis with the current time because the comparison can only be based on statistics of cases actually being detected and solved.

“But we have registered an upward trend in cases being detected because companies are concentrating more on uncovering fraud and undertaking accounting checks during the time of crisis due to their negative impact on the costs-side of business operations,” Bican told The Slovak Spectator. “Each euro which could help a company to survive this unfavourable period of time is being managed with greater care. This is also why services of forensic specialists are more in demand.”

According to Bican, there are two ways in which economic crime has been manifested during the crisis. First, it has grown absolutely as a result of some managers and employees attempting to protect against the social impact of a potential layoff or reduction in wages by engaging in fraudulent activity. And secondly, economic crime has also increased relatively because companies are much more focused on finding additional cost-cutting opportunities and thus, apart from other outcomes, they also have uncovered more frauds which might have otherwise escaped their attention.

“In other words: when everything is running properly, there is not an extra need to look at each euro; but when margins are decreasing, any financial leakages, also because of fraud, are being sought out,” Bican said.

Deloitte’s team of forensic accounting experts covers 18 countries of central Europe and its office has registered an increase in cases detected and solved across all of central Europe in 2009 compared with 2008 and this includes Slovakia as well. But these forensic specialists point out that the increase in cases does not necessarily mean that more frauds are now being committed compared with the past; they certainly are being detected more.

Bican said this may also be because top managers in Slovakia did not in the past pay as much attention to economic crime and unethical behaviour as managers in western countries did, adding in his opinion that this is connected to historical development, as the ethical standards of society developed relatively continuously in the Anglo-Saxon world.

According Vylita, the attention that top managers give to economic crime varies from company to company but the risk of fraud has not been yet fully comprehended and is underestimated in Slovakia. Staroňová holds a similar opinion, saying that in many companies the opinion still prevails that a fraud simply cannot occur in their company.

“In general it can be said that attention is growing especially among Slovak arms of international companies, those in which the parent companies require the implementation of various preventive measures, performance of preventive audits or a more thorough investigation of suspicions,” said Staroňová.

Viliam Kačeriak from Forensic Services at KPMG Slovakia believes that many companies are more often realising the increased risks as indicated in various statistics and surveys. He added that they are also considering turning to outside consultancy companies more often because this is simpler and cheaper than keeping their own team of forensic auditing experts.

“In spite of this, statistics indicate that there are still reserves in uncovering economic crime in this region compared with companies in more developed countries,” Kačeriak told The Slovak Spectator.

Most frequent economic crimes

While Slovakia, according to the PwC survey, does not show any significant difference in the incidence of economic crime compared to the global average, a more detailed look at the incidence rates of particular kinds of economic crime shows some interesting differences. Slovak firms reported a higher rate of credit fraud. Globally, this type of fraud was reported by about 28 percent of the surveyed firms while it was 50 percent in Slovakia.

Also very interesting was the low incidence of reported cases of corruption in Slovakia. The global average of companies that reported that they had experienced corruption was 27 percent while only 10 percent of the Slovak respondents reported this type of economic crime, the PwC survey found.

The economic downturn has changed the profiles and motives for committing fraud according to Vylita who noted a huge increase over the last year in credit frauds and manipulation of financial statements in Slovakia.

“The reasons for this fraud are many times related to efforts to salvage companies going bankrupt, sometimes at any price,” said Vylita. “These new kinds of fraud are most often committed by managers of the company and its owners.”

In general, less sophisticated types of economic crime relating mostly to theft of company property, corruption and conflicts of interest occur in Slovakia, according to Staroňová. She said another interesting field of economic crime involves vendor selection proceedings in which there is manipulation of conditions in tenders, cartel agreements or leaks of key information, all of which are linked with fraudulent behaviour by employees or third parties.

Deloitte most often identifies fraudulent activities which contravene domestic business habits, and according to Bican, assets misappropriation and other types of fraud are the most common incidents being investigated by the Deloitte experts. The Deloitte team solved in 2009 more cases than in the previous year.

“We expect further increase in interest in forensic accounting, reflecting the changing attitude of companies to fraudulent behaviour,” said Bican.

According to Vylita, the interest in forensic investigation is increasing proportionally to greater awareness about what forensic investigation is and what benefits it can bring a company.

The KPMG forensic team has been conducting about 20 such investigation projects annually with owners or managers of foreign-owned companies most often turning to them, said Kačeriak.

Staroňová also confirmed an increase in interest for forensic services, saying it is difficult to ascribe the growth only to the economic crisis. She also sees nation-wide initiatives for more transparency in doing business and in trade transactions as well as good manners pushing this trend.

“Statistics show that losses of companies due to fraud account for as much as 7 percent of total sales,” said Staroňová. “Thus, prevention of fraud and unethical behaviour can create a significant opportunity within a company to increase its savings.”

The PwC survey confirmed an increasing trend in losses reported from fraud – over 70 percent of the respondents reported losses exceeding $100,000. One-fourth of all fraudulent incidents reported in Slovakia exceeded a value of $500,000. This was also confirmed by the respondents, with more than half in Slovakia reporting an increase in their losses caused by economic crime.

Ethics as prevention

The forensic accounting professionals all said that they are realistic and do not expect that it is possible to prevent all frauds, but added that a good ethical climate can significantly help.

“The most basic rule is that only very few frauds would be committed if the culprit thought that he or she would be caught or if good control mechanisms were known to exist in a company that would detect the person when committing a fraudulent activity,” Andrea Hubíková, manager of the Forensic Services Department of PwC told The Slovak Spectator. “Unfortunately, many surveys have indicated that most fraud is uncovered more or less accidentally and not by the help of control mechanisms.”

Forensic specialists say the ethical climate within companies is the basic instrument to prevent economic crime.

“A good ethical climate in a company – starting at the management level – is the basic prerequisite for preventing economic crime,” said Kačeriak.

Such a clear signal from top management, the ‘tone at the top’ is of prime importance for any system of risk management for fraud.

“If management provides a bad example to employees and is willing to accept unethical activities, it is highly probable that employees will have a similar attitude,” said Staroňová.

Kačeriak divides control mechanisms into three categories: prevention, detection and response/reaction. An ethical code is an example of a preventive mechanism while a whistle-blowers line through which any employee can transmit suspicious, unfair or fraudulent behaviour by a supervisor or manager directly to the owners or shareholders of the company is a detection mechanism. The third mechanism is swift and thorough investigation.

But Bican of Deloitte points out that internal rules and directives to prevent fraud, even though in place and well designed, might end up being ineffective if they are not managed in a correct and thorough way.

While past surveys conducted by PwC showed that the expectations of respondents about the future incidence of economic crime were below the actual number of fraudulent incidents, the respondents in last year’s survey appear to be less positive about the future. The respondents mentioned three types of fraud that they expect to be very likely in the future: asset misappropriation, manipulation of financial results, and corruption.

“The expectation of economic crime has dramatically increased,” said Vylita. “However, this development has a positive message: to realise there is a risk is the first step towards successful protection against it.”