Gecs Engineering Construction 2007

7/21/2019 Gecs Engineering Construction 2007

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Economic crime: people,culture & controlsThe 4th biennial Global Economic Crime SurveyEngineering and Construction industry supplement


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2 Economic cr ime: people,culture & controlsThe 4th biennial Global Economic Crime SurveyEngineering and Construction industry supplement

1 Average number of incidents of economic crime reported

in the Engineering and Construction industry compared

to all industries

2 Percentage of companies surveyed reporting different

types of economic crime

All frauds

E&C worldwide 2007 E&C worldwide 2005

0 2 4 6 8 10

5.8

8.4

7.47.7

0 5 10 15 20 25 30

Asset misappropriation

Accounting fraud

IP infringement

Corruption & bribery

Other crimes

Money laundering

E&C worldwide Across all industries

2730

812

1415

67

24

1513

The overall picture around economiccrime in the Engineering and Construction(E&C) sector this year is somewhatmixed. Whilst the overall percentage of

companies reporting incidents and themean number of incidents are downin comparison to 2005 survey results,detection via chance mechanisms hasincreased, while the efcacy of internal

audit in detecting economic crimedecreased. In essence, companiesmay simply be detecting less economiccrime, particularly in light of lower levelsof respondents reporting strengtheningcontrol systems.

Our results show that corruption andbribery remains a signicant problem,

meriting continued attention in the future,given that nearly a quarter of respondentsglobally, and over two-fth of respondents

in Central and Eastern Europe, reporthaving been asked to pay a bribe. IPinfringement also stood out as cause forconcern, particularly in emerging markets,where incidence was high.

These results are some of the highlightsof our E&C industry supplement toEconomic crime: people, culture

& controls: The 4th biennial Global

Economic Crime Survey1. In this industry

summary we examine data from 321 E&Ccompanies in 40 countries. We compare

and contrast their views with those ofexecutives across all industries, as wellas with E&C respondents interviewedin our 2005 survey. This report will help

to highlight the importance of this issueto E&C industry executives, stimulatediscussion, and aid in the development ofincreasingly effective means of combatingeconomic crime.

The prevalence and typeof frauds

Our 2007 survey results indicate thatthe prevalence of economic crime inthe E&C sector has levelled off slightly.The number of companies sufferingfrom economic crime is down slightly

40% of E&C companies reportedeconomic crime, compared with 43%of respondents across all industries,and 43% in the E&C sector in 2005. Themean number of incidents of economiccrime has decreased, reducing from7.4 incidents in 2005 to 5.8 incidents in2007 (see gure 1). Central and Eastern

Europe stood out as the region reportingeconomic crime most frequently, with49% of E&C respondents reporting atleast one incident and with a much highermean number of incidents (11.8).

Asset misappropriation remains themost widely reported type of economic

crime by E&C respondents, with 27% ofcompanies reporting instances of thisform of fraud, a slight increase over the24% seen in 2005. While this reverses

2005s trend of improvement in this area,the industry is actually performing slightlybetter in comparison to the rate seenacross all industries (30%; see gure

2). In 2005 we reported a trend towardsinstalling better tracking devices whichhelp deter theft of construction plant.Construction sites provide enterprisingfraudsters with multitudes of options formisappropriating assets, from divertinga truck-load of concrete, to substitutinginferior materials or falsifying their quality,so a better result than the overall industryaverage is actually an encouraging sign

that preventative measures such astracking devices are having an impact.

Corruption and bribery remains asignicant problem for the industry. The

incidence of this type of economic crimehas remained fairly stable, with 15% ofcompanies reporting incidents this yearcompared with 13% across all industriesand 14% of E&C companies in 2005.

The nature of the construction industry,where the procurement of goods andservices and the selection of contractors

and suppliers on large-scale projects maybe decided or inuenced by individuals

% companies

1 Economic crime: people, culture & controls: The 4th biennial Global Economic Crime Surveyis 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.

Across all industries2005

Across all industries2007


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PricewaterhouseCoopers 3

3 Methods of detection of most serious incidents of

economic crime

2321

1519

16

1215

14

96

88

43

14

14

E&C worldwide

Other ways

Internal tip off

Internal audit

External tip-off

By accident

Whistle blowing system, eghotline

Investigations by lawenforcements agencies

Electr.Autom. Suspicioustransaction report systems

Change of personnel/duties egrotation of staff

Corporate security

Fraud risk management

0 5 10 15 20 25 % companies

within an organisation, provides anumber of opportunities for corruptionand bribery. This can be amplied by

a lack of transparency or governanceof the processes established to judgeand report on the levels of performanceand value for money actually achieved.In many circumstances, capital projectowners may have difculty establishing

objective, dened criteria to determine the

best contractor or supplier for a particularproject. As a result, an environment stillexists where individuals can inuence the

process and outcome.

Vigilance in combating the problem

is necessary; around one-quarter of

engineering and companies have been

asked to pay a bribe (25% vs. 18% acrossall industries), so the potential exists

for incidence to increase. The situation

was particularly pronounced in Central

& Eastern Europe, where 41% of E&C

respondents have been asked to pay

a bribe, and less prevalent in Western

Europe (13%). Further, 39% of E&C

companies globally experienced business

setbacks due to corruption by competitors

(across all industries: 24%). Western

European companies also reported such

experiences more often than did their peer

group across all industries (28%), but by

far the highest rate was found in Central &

Eastern Europe (60%).

In recent years, a number of major E&Cplayers have looked to increase theiractivities in other countries and cross-border activities bring with them addedrisk of some types of economic crime.While the corruption risk in Central &Eastern Europe is great, the region is alsohighly attractive for the sector. PwCs2008 report, Building New EuropesInfrastructure Public Private Partnershipsin Central and Eastern Europe, availablefor download at pwc.com/e&c, highlightedthe unprecedented levels of activity inprojects aimed at modernising public andsocial infrastructure, as the region worksto meet its estimated 500 billion totalinfrastructure investment need.

Companies need to balance theopportunities of operating in marketsoutside of their home territories with thecorresponding higher risk of corruption. InWestern Europe the problem is especiallyacute: one-third of the cases of corruptionand bribery reported by respondentsinvolved a party located outside of thecompanys home country.

The situation around accounting fraudremained fairly stable, with 8% ofE&C companies reporting this type ofeconomic crime, (2005: 9%), a ratewhich is slightly lower than that acrossall industries (12%). In the time leading

up to this survey, accounting issuesarising from construction contracts havebeen less prevalent when compared toother industries. This does not reect

the current market, however, wherecontracting frameworks for capitalprojects are becoming more complex.

Incidents costing more onaverage; IP infringement casesare particularly expensive

The average nancial losses per company

in the E&C industry were slightly higherthan the global average (US$2.92 millionvs. global all industries: US$2.42 million),and up sharply from 2005 (US$1.12million). Companies in Western Europe

suffered by far the highest average lossesat US$5.18 million, although companiesin this region were smaller and had beenless often victimized by fraud. This ratewas more than double the level seen byWestern European E&C companies in2005 (US$2.25 million), and is driven by afairly large number of companies reportingsteep losses. Eight per cent of WesternEuropean E&C companies lost more thanUS$10 million over the last two years. Incontrast, no more than 4% of companiesin all industries reported losses of morethan US$10 million and only 1% of E&Ccompanies (2% of Western European E&Ccompanies) in 2005.

Across all industries

Note: Categories with response rates of less than 2% have been omitted

44

33


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By far the highest nancial losses in the

E&C industry were caused by cases ofintellectual property (IP) infringement:US$5.09 million vs. global all: US$1.90

million. In Western Europe, companiessuffered extreme losses due to this typeof economic crime (US$12.72 million).Almost one quarter (23%) of the WesternEuropean E&C companies lost more thanUS$10 million over the last two years.IP infringement typically covers thecopying of designs and specications for

specialised equipment, plant and processtechnology.

In addition to these direct costs,companies also need to consider thecosts of managing incidents and far

more importantly, potentially wide-reaching collateral damage. In terms ofthe direct cost of managing economiccrime, costs reported by E&C companieswere slightly less than those reportedacross all industries, but were somewhathigher in Central & Eastern Europe, andnotably lower in Asia & Pacic.

Economic crime can have a morefar-reaching impact that is difcult to

measure. Collateral damage can includedamage to a companys brand or to itsposition with regulators and government

clients. Staff morale may be impacted,with a resultant drop in productivity.

Negative publicity from fraud can alsoaffect a companys share price. In theE&C industry, the most common type ofcollateral damage that an investigation

can bring (whether it be for fraud,bribery, bid rigging / cartel or regulatory)is being dropped from a tender list forfuture opportunities.

Around half of companies in the E&Cindustry worldwide who detailed seriousincidents of economic crime reportedhaving suffered collateral damage fromthe same (52% vs. all industries: 54%),and 10% described the intangibledamage as signicant. IP infringement

and corruption and bribery in particularstood out as areas where the rate of

collateral damage reported was aboveaverage. E&C companies were somewhatless likely to report certain types ofcollateral damage including signicant

management distracted, signicant

nancial/time expense involved in

litigation and more stringentregulatory oversight.

The emerging markets

This section takes a look at economiccrime risks in the developing markets,including Brazil, China, India, Indonesia,

Mexico, Russia and Turkey (a group whichPwC terms the E7, or Emerging Seven).

Companies in the E&C industryexperienced high rates of IP infringementin China (28%), as witnessed across anumber of industry sectors, as well as in

the other six emerging market countries(E6, 21%)

Companies headquartered outside theE7, but operating in these territories, faceparticular challenges related to economiccrime. As is true across all industries,a large proportion of economic crimeinvolves external parties; 75% of E&Ccompanies reported at least one suchcase, and just under a third (32%) ofthese external perpetrators came fromabroad. This proportion was particularlyhigh in Western Europe (44%). When

foreign offenders were involved in thisindustry, they mostly came from China(42%) and Western Europe, excluding UKand Germany (35%), but also from Asia &Pacic (26%) and Russia (25%).

Incidents of economic crime in the E7proved costly. The average loss perE&C company in this region was nearlytwo-thirds higher than the level for theE&C industry globally (US$4.81 millionvs. US$2.92 million). In the E6 countries(E7 excluding China), losses wereparticularly high through incidents of

asset misappropriation (US$ 8.95 million),and due to corruption and bribery (US$

In the E&C industry, the mostcommon, and potentially verycostly, type of collateral damagethat an investigation can bring isbeing dropped from a tender listfor future opportunities


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4.57 million). Managing costs in the E6countries were also somewhat higherthan the average across the E&C industryglobally and across all industries in

the region.Corruption and bribery were seriousproblems in the E7 countries. While thefairly high rate of incidence of corruptionand bribery reported by E&C respondentsresponsible for business in China (17%)was similar to the rate seen across allindustries (16%), levels reached 30%in the E6 countries. Further, the risk offuture corruption in these countries issubstantial for E&C companies. 44% ofthe companies in the E&C industry wereasked to pay bribes in these countries,

compared to a 25% global average, andmore than one half (E7: 53%) reportedhaving suffered business setbacks in theE7 because of other competitors havingpaid bribes, compared to 39% of E&Ccompanies worldwide reporting thesetypes of negative consequences.

Detection of serious incidentsmore often through chancemechanisms; efcacy ofinternal audit declined

As is the case in many, if not all, otherindustries, E&C companies most oftendiscover incidents of economic crime by

chance. The results of our 2007 surveyindicate that even more serious incidentsof fraud in the E&C industry are beingdiscovered by chance (through tip-offs or

by accident), 46% (see gure 3), up from38% in 2005.

Internal audit proved less effective indetecting economic crime, with only 15%of serious incidents in the E&C industrycoming to light as a result of internal auditactivities, compared to nearly a quarter(24%) of sector crimes in our 2005 survey.There are a number of opportunitiesfor the internal audit function to detectthe types of fraud most common in theE&C industry. A proactive internal auditstaff with eld experience can perform

a number of focused procedures toscan for fraud, including validating theexistence and quality of suppliers andsub-contractors, researching anomalies indisbursements, looking for opportunitiesfor kickbacks, particularly in respect tochange orders and sub-contractor liabilityevaluation, and testing the integrity andsecurity of IT applications.

Experience of working in the eld is also

particularly important for internal auditstaff in the E&C industry. Staff memberswith a purely nancial background

may not be able to detect types offraud common in the industry, such as

material substitutions or programmemanipulations. For example, a large pumpmay be a substantial single-line item inthe construction of a water treatment

facility. One type of fraud might involvethe substitution of a higher-value pumpin a purchase order, while taking deliveryof a lower-value version that nonethelesscomplies with contract standards, andpocketing the difference in value. Aninternal auditor with eld experience

would have a greater likelihood ofdetecting substitutions of this nature thanan auditor without eld experience.

Reporting, investigations,recovery of lost assets

Discovering fraud is only the rst step.Companies also need to decide how todeal with the perpetrator, and attempt torecover lost assets.

Upon the discovery of a serious incidentof fraud, and consistent with the globalresults, the most common responseof E&C companies was to inform theirexecutive management (72%), albeitsomewhat less frequently than didtheir peers across all industries (82%).Around 54% also reported fraud to lawenforcement, a gure slightly below

the average across all industries. Thisgure was slightly higher in Western

44% of E&C companies havebeen asked to pay bribes in the E7emerging markets, and more thanhalf report business setbacks due tocorruption by competitors


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Europe (59%). Investigation was primarilyundertaken internally (eg internal audit55%, in-house counsel 45%). Aroundhalf of companies also chose to call in

law enforcement ofcers, a number inline with the rate across industries, anda substantial number (38%) turned toexternal lawyers as well. Although lawenforcement ofce played only a minor

role in the initial detection of seriousincidents in the E&C industry (4% ofcases detected through law enforcementparticipation), they were very important forthe successful criminal investigationof cases.

E&C companies do not always send outconsistently strong messages in response

to serious incidents of economic crime.While criminal charges were pressedin almost half of all cases (46% of E&Ccases vs. 50% across all industries),one-fth of companies chose to do

nothing in response to these incidents a rate slightly higher than that for theE&C industry in 2005 (17%) or acrossall industries in 2007 (17%). This resultis not surprising, given that the E&Cindustry has evolved from direct labourto an outsourced / sub-contractor model,where teams may work in an alliance orjoint venture environment. As a result,

employees may be involved on variousprojects and may change substantially.

Given that corporate memories may befairly short, E&C companies may deriveeven more benet from establishing a

consistent company culture that includesappropriate control systems. Projectowners need to send out a strongmessage that fraudsters willbe prosecuted.

When it comes to recovering lost assets,E&C companies compare similarly withother industries, with 44% recoveringat least some of their losses. This rateis down slightly from 2005, when 49%of companies recovered some of theirlosses. When E&C companies chose toprosecute, they experienced a notablylow rate of success in garnering some

restitution only 39% of the companiesin this industry who took perpetrators tocourt reported having recovered some oftheir losses through court proceedings(global all industries: 62%).

Some key controls not yetin place

Overall, E&C companies reported asimilar level of control measures as theirpeers across all industries. Comparedto other industries, E&C companieswere somewhat less well provisionedparticularly in the eld of prevention. Not

only did they somewhat less frequently

possess control measures like fraudrisk management (35% vs. global allindustries: 47%) and corporate security(43% vs. global all industries: 52%), butthey also had fewer preventive measuressuch as compliance programmes (56%vs. 61%). E&C companies were alsoless likely to have instituted frequentspecic fraud training (22% vs. global all

industries: 30%).

Management awareness:undue optimism?

In the E&C industry, although 40% ofrespondents reported that their companywas subject to economic crime in the lasttwo years, only 10% anticipate economic

crime over the next two years, much inline with other industry sectors (seegure 4).

While a signicant number (41%) of E&C

companies reported having strengthenedtheir existing control measures to combateconomic crime, almost one-third (32%)have planned no specic action in

the past two years. Although the E&Csector seems to be suffering particularlyfrom IP infringement and corruptionrisks, no more intensive measures forstrengthening the control and preventionenvironment had been projected (nospecic action planned: 34% vs. across

Although 40% of respondentsreported that their company wassubject to economic crime in thelast two years, only 10% anticipateeconomic crime over the next twoyears


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all industries 29%). Unfortunately, manycompanies view better controls as addingsignicantly to their cost base, without

bringing a clear business benet.

Given this attitude, many E&C companiesenhance their controls only on a reactivebasis following a serious incident ofcrime, rather than proactively looking toprevent crime before it happens.

Top managers more apt tocommit fraud, but rates declineamongst middle management

Just over half of those committing serious

incidents of economic crime in the E&C

sector came from within the company, much

in line with the rate across all industries(53% vs. 50% across all industries).

Internal perpetrators of serious incidentswere slightly more likely to have comefrom the ranks of senior/top managementthis year, with 23% coming from the topranks (see gure 5), compared to 20% for

the E&C industry in 2005, and 20% acrossall in industries in 2007. This upward trendis worrying, as our global survey resultsindicate that fraud by senior managementis much more likely to have a negativeimpact on staff morale, particularly whentop-ranking offenders are seen to havebeen let off lightly.

A more encouraging sign is the drop inthe number of frauds perpetrated bymiddle management just 25% of fraudsin the E&C industry were attributed tomiddle management employees thisyear, compared to 40% in 2005. As wenoted in 2005, this category includesproject managers with very wide-reachingdiscretion over capital projects. Asproject managers often have ultimateresponsibility for bringing a project in on-time and on-budget, opportunities mayarise to by-pass controls. The dropin fraud at this level may suggestimproved controls in the supply chainwhere the majority of a contractorsexpenditure occurs.

Overall individual causes of fraud wereranked more highly than corporatecauses; the most frequently citedcorporate causes included insufcient

internal controls and low commitment tothe company.

Corporate changes can increase therisk of future fraud. While overall thelevel of signcant changes in company

structure for the E&C industry wasalmost identical to that seen across allindustries (at least one change: 54%

vs. 55% across all industries), the ratewas signicantly higher in Central andEastern Europe, where 63% of companies

reported structural changes. This levelof transformation may in part explain thehigher level of economic crime seen inthe region. Signicant changes can alter

company structures substantially, andcontrol systems may struggle to keepup, creating increased opportunities forpotential offenders.

Future outlook

E&C industry executives are looking toexpand their global footprint in theE&C industry supplement to our 11thAnnual Global CEO Survey: Compete

and Collaborate, we found that 28% ofCEOs cited geographic expansion as themain opportunity to grow their business

over the following 12 months, comparedto 19% of peers across all industries.But entering new markets meansencountering new risks. Some of themost promising markets such as Centraland Eastern Europe and China posethe greatest risks, particularly aroundcorruption and bribery and intellectualproperty infringement, two types ofeconomic crime which pose particularchallenges for the industry.

4 Engineering and construction executives perception vs.

reality: Actual and anticipated levels of economic crime

Reported crime overthe past two years

Anticipated crime overthe next two years

0 10 20 30 40 % companies

10

40

Senior/Top managementeg owner, CEO, directors

Middle managementeg managers or other

executivesOther employees

Other eg from subsidiaryor temporary worker

5 Level of perpetrator of most serious incidents of

economic crime

Engineering andconstruction worldwide

Across allindustries

0 5 10 15 20 25 30 35 40 % companies

2320

2520

3438

1822


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2008 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member rms

of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

design: 0800598_clr

pwc.com/e&c

ContactsJonathan HookGlobal E&C LeaderTel: +44 (20) 7804 4753Email: [email protected]

Anthony MorganE&C Dispute Analysis and InvestigationsPartnerTel: +44 (20) 7213 4178Email: [email protected]

Stephen P. Lechner

E&C Dispute Analysis and InvestigationsPartnerTel: +1 415 498 6596Email: [email protected]

Claudia NestlerGermany Forensics Leader and SurveySponsorTel: +49 (69) 9585 5552Email: [email protected]

Steven SkalakGlobal & US Investigations LeaderTel: +1 (646) 471 5950Email: [email protected]

Michael CracknellGlobal E&C Marketing ManagerTel: +44 20 7213 1737Email: [email protected]

Acknowledgements:Data analysis for this industry summarywas provided by Prof. Dr. Kai Bussmann,Chair of Criminology & Penal Law, Martin-Luther-University (Halle-Wittenberg,Germany). Thanks go to ElizabethMontgomery for writing and editorialinput. Anthony Morgan, Stephen Lechner,Jonathan Hook, Michael Cracknell andAnthony White provided technical andindustry review and input.

Denitions of economic crimesDue to the diverse descriptions ofindividual types of economic crime incountries legal statutes, we developedthe following categories for the purposesof this survey. The descriptions were readto each of the respondents at the start ofthe survey to ensure consistency.

Fraud/economic crimeThe intentional use of deceit to depriveanother of money, property or alegal right.

Asset misappropriation (inc.embezzlement/deception by employees)The theft of company assets (includingmonetary assets/cash or supplies andequipment) by company directors, othersin duciary positions or an employee for

their own benet.

Accounting fraudCompany accounts are altered orpresented in such a way that they do notreect the true value or nancial activities

of the company.

Corruption and bribery (inc. racketeeringand extortion)Typically, the unlawful use of an ofcial

position to gain an advantage incontravention of duty. This can involvethe promise of an economic benet

or other favour, the use of intimidationor blackmail. It can also refer to theacceptance of such inducements.

Money launderingActions intended to legitimise theproceeds of crime by disguising their

true origin.

IP infringement (inc. trademarks, patents,counterfeit products and services,industrial espionage)This includes the illegal copying and/ordistribution of fake goods in breach ofpatent or copyright and the creation offalse currency notes and coins with theintention of passing them off as genuine.It also includes the illegal acquisition oftrade secrets or company information.

Gecs Engineering Construction 2007

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