Global construction industry faces growing threat of economic crime
Published at 10:29 AM on 13 April 2010
A quarter of construction companies suffered economic crimes in the past year such as asset misappropriation, accounting fraud and bribery, according to a new survey by PricewaterhouseCoopers (PwC). The survey of 226 construction companies in 43 countries found that sophisticated crimes such as accounting fraud, bribery and corruption are on the increase.
In spite of recent efforts by the industry to ‘chip’ and use tracking devices on plant, equipment and high value materials, ‘asset misappropriation’ (theft) remained the most common economic crime, according to the survey participants.
Nearly half (47%) of respondents whose organisations experienced economic crime in the past year reported bribery and corruption, which is nearly double the level reported in other sectors such as retail and insurance.
A significant percentage, 29% versus 13% for other industries as a whole, think that 'a belief that competitors are paying bribes in order to win contracts' was a reason for bribery occurring.
An overwhelming 72% of respondents think that increased pressure and incentives to commit fraud are the most likely factors behind the greater risk of fraud, with respondents citing concerns about meeting targets and the prospect of redundancy. Indeed, 65% of firms reported a decline in financial performance over the past 12 months.
Jonathan Hook, partner and global engineering and construction leader at PricewaterhouseCoopers, said:
“The construction sector has a number of characteristics which make it particularly vulnerable to economic crime, including projects with multiple contractual arrangements, often across geographic borders, the use of agents and a heavy involvement with governments and public sector organisations.”
Eleven companies said the direct financial impact of fraud in their organisation in the past 12 months was more than US$500,000 and two others reported an impact of over US$ 5 million. But PwC finds that the true cost of bribery and corruption in the construction sector goes beyond financial risk and loss. Over half of the respondents (55%) reported that economic crime hit employee morale - compared to a wider industry average of 32% - and a significantly higher proportion said that business relationships, reputation and brand were adversely affected.
Jonathan Hook, partner and global engineering and construction leader at PricewaterhouseCoopers, continued:
“Construction firms pay the price for the crimes and misdemeanours committed by their own employees and business associates. Collateral damage to employee morale across an organisation leads to disengagement, and an inevitable exodus of talent and skills.”
Of the 226 respondents, 36% came from listed companies, 62% from organisations trading in multiple countries and 62% from organisations with an employee base in excess of 200. Survey responses were received from a cross section of management levels, from board members to managers.
PwC also notes that there are a series of emerging regulatory risks that are causing consternation in the boardrooms of construction companies around the world as the approach to the prevention of bribery and corruption changes from the top down. Inter-governmental organisations such as the Organisation for Economic Co-operation and Development, United Nations, World Bank, as well as national legislators and law enforcement are all upping the ante in their efforts to stamp out bribery, resulting in more coordinated action and stiffer penalties. These range from hefty financial penalties to exclusion from the bidding for future government contracts.
In the UK, the Bribery Bill received Royal Assent on 8 April and is now the Bribery Act. It will bring with it a new crime of ‘failing to prevent bribery’ which makes companies accountable for the efficacy of the controls and procedures in place to mitigate against these risks.
Will Kenyon, partner at PricewaterhouseCoopers, said:
“The global recession has brought increased pressures and incentives to commit fraud of various types. The difficulty of reaching financial targets, fear of losing jobs and to compensate for bonuses not paid last year are the motivations.
“With regard to bribery, many companies are realising that what has been considered ‘standard practice’ now represents an untenable corporate risk and that thy need to seen to be cleaning up their acts.
“We expect to see a significant investment in anti-bribery programmes and controls in response to the new Bribery Act. These will include more training and awareness raising, due diligence on business partners, an intensification of compliance and control activities and more targeted monitoring and internal audit.”
Finally, in terms of detection of crimes, a quarter of frauds reported were detected by internal audit, up from 16% when PwC carried out the survey in 2007. This is a positive change, but over a third of construction companies had not performed a fraud risk assessment in the last twelve months and another third had not increased the frequency of those reviews.
Copies of the Global Economic Crime survey can be downloaded at www.pwc.com/construction
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