Thursday, December 1, 2005
International accounting firm PricewaterhouseCoopers issued its Global Economic Crime Survey 2005 (here) that surveys companies worldwide about how they are affected by fraud and other types of white collar crime, and how they go about detecting and combating such misconduct. The headline-grabber (see Reuters story here) is the assertion by PwC that "[o]ver one third of these frauds were discovered by accident, making 'chance' the most common fraud detection tool." Can if be that so many frauds are only discovered through luck, or some other random happenstance, so that much of the money spent on internal controls is a waste? It's interesting to note that an "accidental" discovery of fraud includes an internal tip to management or through a corporate hot-line, which does not strike me as necessarily "chance" but the product of a system that permits the reporting of fraud and effective investigation of tips. It is the rare fraud that involves self-revelation, and perpetrators are unlikely to create files labeled "Fraudulent Scheme" or "Accounts I've Embezzled." Those engaged in fraud know they have to avoid the internal audit department, and it is often the subordinate or co-worker who notices the misconduct first.
The report notes that internal controls are the second most likely way in which fraud it detected, so it is probably not the case that internal control mechanisms are a waste of money if they encourage employees to report misconduct and operate to uncover other types of fraud. With a nod to Prof. Pam Bucy, an organization's corporate ethos can go a long way toward preventing fraud and other types of economic misconduct in the first place. An environment that stresses ethical conduct and a measure of watchfulness can keep some (perhaps even most) fraud from ever happening, something that simply cannot be measured. As Brooklyn Dodger general manager Branch Rickey once said, "Luck is the residue of design." So too may be the "chance" discovery of fraud in corporations. (ph)