Report: Fraud levels fall for construction industry, but companies still losing $6.4 million on average
The global construction, engineering and infrastructure industry saw a significant decline in fraud activity with companies losing an average of $6.4 million over the last three years, according to the latest edition of the Kroll Annual Global Fraud Report, released today at the Association of Corporate Counsel’s 2009 Annual Meeting in Boston. This new figure represents less than half of last year’s amount of $14.2 million. Construction, engineering, and infrastructure companies registered a below average loss compared to other sectors, with the financial services industry being hit hardest by fraud over the past 12 months. The findings are the result of a survey Kroll commissioned from the Economist Intelligence Unit of more than 700 senior executives worldwide.
While the construction industry experienced a slowdown in fraud, this was not the case in every industry. In fact, despite the most challenging global economic conditions in recent history, the latest edition of the Kroll Annual Global Fraud Report revealed that across ten industries, fraud activity worldwide remained steady in 2009. On average, companies lost $8.8 million to fraud over the past three years, up just seven percent on last year’s figure of $8.2 million.
The report found fraud levels varied markedly by sector with five industries experiencing a rise in fraud losses (financial services; professional services; healthcare, pharmaceuticals, and biotechnology; retail, wholesale, and distribution; and travel, leisure, and transportation) and five sectors, including construction, reporting declines (construction, natural resources, consumer goods, manufacturing, and technology, media, and telecoms).
Although fraud losses are down in this year’s survey for construction companies, the prevalence of the problem is not declining at nearly the same rate. More than nine out of ten (91 percent) companies reported being hit by some form of fraud over the past three years, down slightly from last year’s figure (95 percent) but still well above the survey average (85 percent).
Interestingly, the types of fraud incidences are changing, with more than a third of companies suffering from corruption and bribery (38 percent), up from last year’s survey (28 percent). Other areas of frequent loss are: theft of physical assets or stock (36 percent); financial mismanagement (29 percent); vendor, supplier or procurement fraud (25 percent); information theft, loss or attack (23 percent); regulatory or compliance breach (23 percent); and management conflict of interest (21 percent).
Blake Coppotelli, senior managing director in Kroll’s Business Intelligence and Investigations unit said:
“Traditionally every downturn brings about a rise in fraud, but what we are seeing in 2009 is something far more complex. Companies are seeing greater vulnerability due to reduction in internal controls, pay cuts and reduced revenue across the board, but counteracting this increased risk are the realities of today’s constrained business environment, where factors such as high staff turnover, entry into new markets and inter-firm collaboration are far less common than in years past. In short, the current economic crisis has increased the motive for fraud, but decreased the opportunity.
Of course, this shift in business behavior is only as lasting as the economic crisis itself, which is why companies must work to bolster their existing anti-fraud strategies in preparation for the economic changes to come.”
Overall, 30 percent of companies surveyed across ten sectors in the Kroll Annual Fraud Report reported the current economic climate had directly increased their exposure to fraud over the past 12 months, with only five percent reporting a decline. Of all the regions surveyed, North America experienced the highest incidence of fraud due to the global financial crisis (32 percent).
Other key findings include:
• The Middle East and Africa experienced the worst fraud levels of all the regions with companies losing an average $11.5 million and seeing the highest incidence rate in seven out of the ten frauds surveyed.
• North America was no longer the low fraud leader with seven out of ten fraud incidences up from 2008 figures. Companies experiencing internal financial fraud and financial mismanagement rose substantially; theft of physical assets, corruption, and vendor fraud were lower than any other region.
• Larger companies with annual sales of more than $5 billion reported greater average losses – up to $25.8 million from $23.3 million in 2008 – while the situation improved for smaller businesses with yearly revenue under $5 billion – dropping to $4.6 million from $5.5 million last year.
The third Kroll Annual Global Fraud Report includes a full detailed industry analysis across a range of fraud categories and regions. To obtain a copy, please visit www.kroll.com/fraud.