Whistle-blowers still best at finding fraud-survey

Tue Oct 16, 2007 10:25am EDT

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By Emily Chasan

NEW YORK Oct 16 (Reuters) - Whistle-blowers still uncover the most incidents of corporate fraud even as companies invest in financial controls, according to a study from auditing firm PriceWaterhouseCoopers [PWC.UL] released on Tuesday.

The study polled 5,400 executives in 40 countries, with respondents reporting total losses of about $4.2 billion from fraud.

PwC found that 29 percent of frauds were detected through whistle-blower hotlines and internal tip-offs, with an additional 14 percent discovered through external tip-offs.

"The less-tangible control measures are more difficult to measure so people think they are less important, but I think our survey shows that they aren't," said Steven Skalak, global investigations leader at PwC.

The internal audit department was the second-biggest fraud detector, detecting about 19 percent of all frauds, the survey showed.

"Controls by themselves just don't seem to be sufficient," Skalak said. "A company has to have an appropriate culture in combination with appropriate controls to do a good job at preventing and detecting the economic crimes."

The internal audit department had been responsible for finding about 26 percent of frauds in the 2005 survey.

COST OF FRAUD

More than 43 percent of the companies polled said they had experienced at least one significant economic crime during the previous two years, down slightly from 45 percent in the 2005 survey, but up from 37 percent in 2003.

Crimes mentioned in the latest survey included property theft, money laundering, accounting fraud, bribery and copyright infringement.

The cost of fraud has increased in the past two years, according to the survey. It found the average loss per company from fraud in the past two years was about $2.42 million, compared with $1.73 million during 2003 to 2005.

"A big reason for the cost increase is that more and more companies are doing business in the emerging markets, and economic crime is more expensive in those areas," Skalak said. "As more people do business on a transnational level, where they perceive the best growth opportunities, they are exposing themselves to greater and greater risk."

Skalak said the average cost of fraud in the emerging economies was more than double the levels in developed countries.

PwC noted that the actual cost of fraud was higher than reported since the crime hurts companies in terms of management time, their brands, share prices and relationships with customers and suppliers.

((Editing by Lisa Von Ahn; Reuters Messaging: rm://emily.chasan.reuters.com@reuters.net;Tel: +1 646 223 6114)) Keywords: FRAUD SURVEY/

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