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Economic crime: people,

culture & controls


The 4th biennial Global Economic Crime Survey
Engineering and Construction industry supplement
2 Economic crime: people,
culture & controls
The 4th biennial Global Economic Crime Survey
Engineering and Construction industry supplement

The overall picture around economic and contrast their views with those of crime by E&C respondents, with 27% of
crime in the Engineering and Construction executives across all industries, as well companies reporting instances of this
(E&C) sector this year is somewhat as with E&C respondents interviewed form of fraud, a slight increase over the
mixed. Whilst the overall percentage of in our 2005 survey. This report will help 24% seen in 2005. While this reverses
companies reporting incidents and the to highlight the importance of this issue 2005’s trend of improvement in this area,
mean number of incidents are down to E&C industry executives, stimulate the industry is actually performing slightly
in comparison to 2005 survey results, discussion, and aid in the development of better in comparison to the rate seen
detection via chance mechanisms has increasingly effective means of combating across all industries (30%; see figure
increased, while the efficacy of internal economic crime. 2). In 2005 we reported a trend towards
audit in detecting economic crime installing better tracking devices which
decreased. In essence, companies The prevalence and type help deter theft of construction plant.
may simply be detecting less economic of frauds Construction sites provide enterprising
crime, particularly in light of lower levels fraudsters with multitudes of options for
of respondents reporting strengthening Our 2007 survey results indicate that misappropriating assets, from diverting
control systems. the prevalence of economic crime in a truck-load of concrete, to substituting
the E&C sector has levelled off slightly. inferior materials or falsifying their quality,
Our results show that corruption and The number of companies suffering so a better result than the overall industry
bribery remains a significant problem, from economic crime is down slightly average is actually an encouraging sign
meriting continued attention in the future, – 40% of E&C companies reported that preventative measures such as
given that nearly a quarter of respondents economic crime, compared with 43% tracking devices are having an impact.
globally, and over two-fifth of respondents of respondents across all industries,
in Central and Eastern Europe, report and 43% in the E&C sector in 2005. The Corruption and bribery remains a
having been asked to pay a bribe. IP mean number of incidents of economic significant problem for the industry. The
infringement also stood out as cause for crime has decreased, reducing from incidence of this type of economic crime
concern, particularly in emerging markets, 7.4 incidents in 2005 to 5.8 incidents in has remained fairly stable, with 15% of
where incidence was high. 2007 (see figure 1). Central and Eastern companies reporting incidents this year
Europe stood out as the region reporting compared with 13% across all industries
These results are some of the highlights economic crime most frequently, with and 14% of E&C companies in 2005.
of our E&C industry supplement to 49% of E&C respondents reporting at
Economic crime: people, culture least one incident and with a much higher The nature of the construction industry,
& controls: The 4th biennial Global mean number of incidents (11.8). where the procurement of goods and
Economic Crime Survey1. In this industry services and the selection of contractors
summary we examine data from 321 E&C Asset misappropriation remains the and suppliers on large-scale projects may
companies in 40 countries. We compare most widely reported type of economic be decided or influenced by individuals

1 Average number of incidents of economic crime reported 2 Percentage of companies surveyed reporting different
in the Engineering and Construction industry compared types of economic crime
to all industries

5.8 27
Asset misappropriation 30
All frauds 8.4
7.4
8
Accounting fraud 12
7.7

0 2 4 6 8 10 14
IP infringement 15
E&C worldwide 2007 E&C worldwide 2005
15
Corruption & bribery 13
Across all industries Across all industries
2007 2005 Other crimes 6
7

Money laundering 2
4

0 5 10 15 20 25 30
% companies

E&C worldwide Across all industries

1 Economic crime: people, culture & controls: The 4th biennial Global Economic Crime Survey is available for download at pwc.com/crimesurvey. The survey is based on
interviews with executives responsible for detecting economic fraud in 5428 companies in 40 countries.
PricewaterhouseCoopers 3

within an organisation, provides a In recent years, a number of major E&C up to this survey, accounting issues
number of opportunities for corruption players have looked to increase their arising from construction contracts have
and bribery. This can be amplified by activities in other countries – and cross- been less prevalent when compared to
a lack of transparency or governance border activities bring with them added other industries. This does not reflect
of the processes established to judge risk of some types of economic crime. the current market, however, where
and report on the levels of performance While the corruption risk in Central & contracting frameworks for capital
and value for money actually achieved. Eastern Europe is great, the region is also projects are becoming more complex.
In many circumstances, capital project highly attractive for the sector. PwC’s
owners may have difficulty establishing 2008 report, Building New Europe’s Incidents costing more on
objective, defined criteria to determine the Infrastructure – Public Private Partnerships average; IP infringement cases
best contractor or supplier for a particular in Central and Eastern Europe, available
project. As a result, an environment still for download at pwc.com/e&c, highlighted are particularly expensive
exists where individuals can influence the the unprecedented levels of activity in The average financial losses per company
process and outcome. projects aimed at modernising public and in the E&C industry were slightly higher
social infrastructure, as the region works than the global average (US$2.92 million
Vigilance in combating the problem to meet its estimated €500 billion total vs. global all industries: US$2.42 million),
is necessary; around one-quarter of infrastructure investment need. and up sharply from 2005 (US$1.12
engineering and companies have been million). Companies in Western Europe
asked to pay a bribe (25% vs. 18% across Companies need to balance the suffered by far the highest average losses
all industries), so the potential exists opportunities of operating in markets at US$5.18 million, although companies
for incidence to increase. The situation outside of their home territories with the in this region were smaller and had been
was particularly pronounced in Central corresponding higher risk of corruption. In less often victimized by fraud. This rate
& Eastern Europe, where 41% of E&C Western Europe the problem is especially was more than double the level seen by
respondents have been asked to pay acute: one-third of the cases of corruption Western European E&C companies in
a bribe, and less prevalent in Western and bribery reported by respondents 2005 (US$2.25 million), and is driven by a
Europe (13%). Further, 39% of E&C involved a party located outside of the fairly large number of companies reporting
companies globally experienced business company’s home country. steep losses. Eight per cent of Western
setbacks due to corruption by competitors European E&C companies lost more than
(across all industries: 24%). Western The situation around accounting fraud US$10 million over the last two years. In
European companies also reported such remained fairly stable, with 8% of contrast, no more than 4% of companies
experiences more often than did their peer E&C companies reporting this type of in all industries reported losses of more
group across all industries (28%), but by economic crime, (2005: 9%), a rate than US$10 million and only 1% of E&C
far the highest rate was found in Central & which is slightly lower than that across companies (2% of Western European E&C
Eastern Europe (60%). all industries (12%). In the time leading companies) in 2005.

3 Methods of detection of most serious incidents of


economic crime

Internal tip off 23


21
Internal audit 15
19
Other ways 16
12
External tip-off 15
14
By accident 9
6
Whistle blowing system, eg 8
hotline 8
Investigations by law 4
enforcements agencies 3
Electr.Autom. Suspicious 4
transaction report systems 4
Change of personnel/duties eg 3
rotation of staff 3
1
Corporate security 4
Fraud risk management 1
4
0 5 10 15 20 25
% companies
E&C worldwide Across all industries

Note: Categories with response rates of less than 2% have been omitted
4 Economic crime: people,
culture & controls
The 4th biennial Global Economic Crime Survey
Engineering and Construction industry supplement

By far the highest financial losses in the Negative publicity from fraud can also Companies in the E&C industry
E&C industry were caused by cases of affect a company’s share price. In the experienced high rates of IP infringement
intellectual property (IP) infringement: E&C industry, the most common type of in China (28%), as witnessed across a
US$5.09 million vs. global all: US$1.90 collateral damage that an investigation number of industry sectors, as well as in
million. In Western Europe, companies can bring (whether it be for fraud, the other six emerging market countries
suffered extreme losses due to this type bribery, bid rigging / cartel or regulatory) (E6, 21%)
of economic crime (US$12.72 million). is being dropped from a tender list for
Almost one quarter (23%) of the Western future opportunities. Companies headquartered outside the
European E&C companies lost more than E7, but operating in these territories, face
US$10 million over the last two years. Around half of companies in the E&C particular challenges related to economic
IP infringement typically covers the industry worldwide who detailed serious crime. As is true across all industries,
copying of designs and specifications for incidents of economic crime reported a large proportion of economic crime
specialised equipment, plant and process having suffered collateral damage from involves external parties; 75% of E&C
technology. the same (52% vs. all industries: 54%), companies reported at least one such
and 10% described the intangible case, and just under a third (32%) of
In addition to these direct costs, damage as significant. IP infringement these external perpetrators came from
companies also need to consider the and corruption and bribery in particular abroad. This proportion was particularly
costs of managing incidents – and far stood out as areas where the rate of high in Western Europe (44%). When
more importantly, potentially wide- collateral damage reported was above foreign offenders were involved in this
reaching collateral damage. In terms of average. E&C companies were somewhat industry, they mostly came from China
the direct cost of managing economic less likely to report certain types of (42%) and Western Europe, excluding UK
crime, costs reported by E&C companies collateral damage including ‘significant and Germany (35%), but also from Asia &
were slightly less than those reported management distracted’, ‘significant Pacific (26%) and Russia (25%).
across all industries, but were somewhat financial/time expense involved in
higher in Central & Eastern Europe, and litigation’ and ‘more stringent Incidents of economic crime in the E7
notably lower in Asia & Pacific. regulatory oversight’. proved costly. The average loss per
E&C company in this region was nearly
Economic crime can have a more The emerging markets two-thirds higher than the level for the
far-reaching impact that is difficult to E&C industry globally (US$4.81 million
measure. Collateral damage can include This section takes a look at economic vs. US$2.92 million). In the E6 countries
damage to a company’s brand or to its crime risks in the developing markets, (E7 excluding China), losses were
position with regulators and government including Brazil, China, India, Indonesia, particularly high through incidents of
clients. Staff morale may be impacted, Mexico, Russia and Turkey (a group which asset misappropriation (US$ 8.95 million),
with a resultant drop in productivity. PwC terms the ‘E7’, or ‘Emerging Seven’). and due to corruption and bribery (US$

In the E&C industry, the most


common, and potentially very
costly, type of collateral damage
that an investigation can bring is
being dropped from a tender list
for future opportunities
PricewaterhouseCoopers 5

4.57 million). Managing costs in the E6 chance. The results of our 2007 survey material substitutions or programme
countries were also somewhat higher indicate that even more serious incidents manipulations. For example, a large pump
than the average across the E&C industry of fraud in the E&C industry are being may be a substantial single-line item in
globally and across all industries in discovered by chance (through tip-offs or the construction of a water treatment
the region. by accident), 46% (see figure 3), up from facility. One type of fraud might involve
38% in 2005. the substitution of a higher-value pump
Corruption and bribery were serious in a purchase order, while taking delivery
problems in the E7 countries. While the Internal audit proved less effective in of a lower-value version that nonetheless
fairly high rate of incidence of corruption detecting economic crime, with only 15% complies with contract standards, and
and bribery reported by E&C respondents of serious incidents in the E&C industry pocketing the difference in value. An
responsible for business in China (17%) coming to light as a result of internal audit internal auditor with field experience
was similar to the rate seen across all activities, compared to nearly a quarter would have a greater likelihood of
industries (16%), levels reached 30% (24%) of sector crimes in our 2005 survey. detecting substitutions of this nature than
in the E6 countries. Further, the risk of There are a number of opportunities an auditor without field experience.
future corruption in these countries is for the internal audit function to detect
substantial for E&C companies. 44% of the types of fraud most common in the Reporting, investigations,
the companies in the E&C industry were E&C industry. A proactive internal audit
asked to pay bribes in these countries,
recovery of lost assets
staff with field experience can perform
compared to a 25% global average, and a number of focused procedures to Discovering fraud is only the first step.
more than one half (E7: 53%) reported scan for fraud, including validating the Companies also need to decide how to
having suffered business setbacks in the existence and quality of suppliers and deal with the perpetrator, and attempt to
E7 because of other competitors having sub-contractors, researching anomalies in recover lost assets.
paid bribes, compared to 39% of E&C disbursements, looking for opportunities
companies worldwide reporting these for kickbacks, particularly in respect to Upon the discovery of a serious incident
types of negative consequences. change orders and sub-contractor liability of fraud, and consistent with the global
evaluation, and testing the integrity and results, the most common response
Detection of serious incidents security of IT applications. of E&C companies was to inform their
more often through chance executive management (72%), albeit
mechanisms; efficacy of Experience of working in the field is also somewhat less frequently than did
particularly important for internal audit their peers across all industries (82%).
internal audit declined Around 54% also reported fraud to law
staff in the E&C industry. Staff members
As is the case in many, if not all, other with a purely financial background enforcement, a figure slightly below
industries, E&C companies most often may not be able to detect types of the average across all industries. This
discover incidents of economic crime by fraud common in the industry, such as figure was slightly higher in Western

44% of E&C companies have


been asked to pay bribes in the E7
emerging markets, and more than
half report business setbacks due to
corruption by competitors
6 Economic crime: people,
culture & controls
The 4th biennial Global Economic Crime Survey
Engineering and Construction industry supplement

Europe (59%). Investigation was primarily Given that corporate memories may be possess control measures like fraud
undertaken internally (eg internal audit fairly short, E&C companies may derive risk management (35% vs. global all
55%, in-house counsel 45%). Around even more benefit from establishing a industries: 47%) and corporate security
half of companies also chose to call in consistent company culture that includes (43% vs. global all industries: 52%), but
law enforcement officers, a number in appropriate control systems. Project they also had fewer preventive measures
line with the rate across industries, and owners need to send out a strong such as compliance programmes (56%
a substantial number (38%) turned to message that fraudsters will vs. 61%). E&C companies were also
external lawyers as well. Although law be prosecuted. less likely to have instituted frequent
enforcement office played only a minor specific fraud training (22% vs. global all
role in the initial detection of serious When it comes to recovering lost assets, industries: 30%).
incidents in the E&C industry (4% of E&C companies compare similarly with
cases detected through law enforcement other industries, with 44% recovering Management awareness:
participation), they were very important for at least some of their losses. This rate
is down slightly from 2005, when 49%
undue optimism?
the successful criminal investigation
of cases. of companies recovered some of their In the E&C industry, although 40% of
losses. When E&C companies chose to respondents reported that their company
E&C companies do not always send out prosecute, they experienced a notably was subject to economic crime in the last
consistently strong messages in response low rate of success in garnering some two years, only 10% anticipate economic
to serious incidents of economic crime. restitution – only 39% of the companies crime over the next two years, much in
While criminal charges were pressed in this industry who took perpetrators to line with other industry sectors (see
in almost half of all cases (46% of E&C court reported having recovered some of figure 4).
cases vs. 50% across all industries), their losses through court proceedings
one-fifth of companies chose to do (global all industries: 62%). While a significant number (41%) of E&C
nothing in response to these incidents companies reported having strengthened
– a rate slightly higher than that for the Some key controls not yet their existing control measures to combat
E&C industry in 2005 (17%) or across in place economic crime, almost one-third (32%)
all industries in 2007 (17%). This result have planned no specific action in
is not surprising, given that the E&C Overall, E&C companies reported a the past two years. Although the E&C
industry has evolved from direct labour similar level of control measures as their sector seems to be suffering particularly
to an outsourced / sub-contractor model, peers across all industries. Compared from IP infringement and corruption
where teams may work in an alliance or to other industries, E&C companies risks, no more intensive measures for
joint venture environment. As a result, were somewhat less well provisioned strengthening the control and prevention
employees may be involved on various particularly in the field of prevention. Not environment had been projected (no
projects and may change substantially. only did they somewhat less frequently specific action planned: 34% vs. across

Although 40% of respondents


reported that their company was
subject to economic crime in the
last two years, only 10% anticipate
economic crime over the next two
years
PricewaterhouseCoopers 7

all industries 29%). Unfortunately, many A more encouraging sign is the drop in reported structural changes. This level
companies view better controls as adding the number of frauds perpetrated by of transformation may in part explain the
significantly to their cost base, without middle management – just 25% of frauds higher level of economic crime seen in
bringing a clear business benefit. in the E&C industry were attributed to the region. Significant changes can alter
middle management employees this company structures substantially, and
Given this attitude, many E&C companies year, compared to 40% in 2005. As we control systems may struggle to keep
enhance their controls only on a reactive noted in 2005, this category includes up, creating increased opportunities for
basis following a serious incident of project managers with very wide-reaching potential offenders.
crime, rather than proactively looking to discretion over capital projects. As
prevent crime before it happens. project managers often have ultimate Future outlook
responsibility for bringing a project in on-
Top managers more apt to time and on-budget, opportunities may E&C industry executives are looking to
commit fraud, but rates decline arise to by-pass controls. The drop expand their global footprint – in the
in fraud at this level may suggest E&C industry supplement to our 11th
amongst middle management Annual Global CEO Survey: Compete
improved controls in the supply chain
Just over half of those committing serious where the majority of a contractor’s and Collaborate, we found that 28% of
incidents of economic crime in the E&C expenditure occurs. CEOs cited geographic expansion as the
sector came from within the company, much main opportunity to grow their business
in line with the rate across all industries Overall individual causes of fraud were over the following 12 months, compared
(53% vs. 50% across all industries). ranked more highly than corporate to 19% of peers across all industries.
causes; the most frequently cited But entering new markets means
Internal perpetrators of serious incidents corporate causes included ‘insufficient encountering new risks. Some of the
were slightly more likely to have come internal controls’ and ‘low commitment to most promising markets – such as Central
from the ranks of senior/top management the company’. and Eastern Europe and China – pose
this year, with 23% coming from the top the greatest risks, particularly around
ranks (see figure 5), compared to 20% for Corporate changes can increase the corruption and bribery and intellectual
the E&C industry in 2005, and 20% across risk of future fraud. While overall the property infringement, two types of
all in industries in 2007. This upward trend level of signficant changes in company economic crime which pose particular
is worrying, as our global survey results structure for the E&C industry was challenges for the industry.
indicate that fraud by senior management almost identical to that seen across all
is much more likely to have a negative industries (at least one change: 54%
impact on staff morale, particularly when vs. 55% across all industries), the rate
top-ranking offenders are seen to have was significantly higher in Central and
been let off lightly. Eastern Europe, where 63% of companies

4 Engineering and construction executives’ perception vs. 5 Level of perpetrator of most serious incidents of
reality: Actual and anticipated levels of economic crime economic crime

Senior/Top management 23
Reported crime over eg owner, CEO, directors 20
40
the past two years Middle management 25
eg managers or other 20
executives
34
Other employees 38
Anticipated crime over
10
the next two years Other eg from subsidiary 18
or temporary worker 22

0 10 20 30 40 0 5 10 15 20 25 30 35 40
% companies % companies
Engineering and Across all
construction worldwide industries
pwc.com/e&c

Contacts Acknowledgements: Definitions of economic crimes


Jonathan Hook Data analysis for this industry summary Due to the diverse descriptions of
Global E&C Leader was provided by Prof. Dr. Kai Bussmann, individual types of economic crime in
Tel: +44 (20) 7804 4753 Chair of Criminology & Penal Law, Martin- countries’ legal statutes, we developed
Email: jonathan.hook@uk.pwc.com Luther-University (Halle-Wittenberg, the following categories for the purposes
Germany). Thanks go to Elizabeth of this survey. The descriptions were read
Anthony Morgan Montgomery for writing and editorial to each of the respondents at the start of
E&C Dispute Analysis and Investigations input. Anthony Morgan, Stephen Lechner, the survey to ensure consistency.
Partner Jonathan Hook, Michael Cracknell and
Tel: +44 (20) 7213 4178 Anthony White provided technical and Fraud/economic crime
Email: anthony.j.morgan@uk.pwc.com industry review and input. The intentional use of deceit to deprive
another of money, property or a
Stephen P. Lechner legal right.
E&C Dispute Analysis and Investigations
Asset misappropriation (inc.
Partner
embezzlement/deception by employees)
Tel: +1 415 498 6596
The theft of company assets (including
Email: stephen.p.lechner@us.pwc.com
monetary assets/cash or supplies and
equipment) by company directors, others
Claudia Nestler
in fiduciary positions or an employee for
Germany Forensics Leader and Survey
their own benefit.
Sponsor
Tel: +49 (69) 9585 5552 Accounting fraud
Email: claudia.nestler@de.pwc.com Company accounts are altered or
presented in such a way that they do not
Steven Skalak reflect the true value or financial activities
Global & US Investigations Leader of the company.
Tel: +1 (646) 471 5950
Email: steven.skalak@us.pwc.com Corruption and bribery (inc. racketeering
and extortion)
Michael Cracknell Typically, the unlawful use of an official
Global E&C Marketing Manager position to gain an advantage in
Tel: +44 20 7213 1737 contravention of duty. This can involve
Email: michael.cracknell@uk.pwc.com the promise of an economic benefit
or other favour, the use of intimidation
or blackmail. It can also refer to the
acceptance of such inducements.

Money laundering
Actions intended to legitimise the
proceeds of crime by disguising their
true origin.

IP infringement (inc. trademarks, patents,


counterfeit products and services,
industrial espionage)
This includes the illegal copying and/or
distribution of fake goods in breach of
patent or copyright and the creation of
false currency notes and coins with the
intention of passing them off as genuine.
It also includes the illegal acquisition of
trade secrets or company information.

© 2008 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms
of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

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