‘Economic Pressures, Spending Cuts Lead to Financial Fraud’

Lucas Gilmore, “Big 4″ observer
April 13, 2011 /

A new report released by global accounting and consulting firm PricewaterhouseCoopers has revealed the reasons for the rise in financial fraud cases in the public sector, which grew by 8 percent year-on-year.

Based on a survey among 110 senior representatives from state-owned businesses, financial fraud in the public sector has risen from 52 percent in 2009 to 60 percent in 2010, which is half the increase detected by KPMG for UK firms in the same period.

KPMG’s report was based on cases that had cost UK firms worth in excess of £100,000, not counting those that remained undetected. According to the consulting firm, tough economic condition was the main cause of increased financial fraud.

PwC’s latest report pointed to tighter regulations and public spending cuts as the drivers of the rise in fraud rates.

PwC Scotland forensics director Richard Neave said these two factors “impact on peoples’ ability to rationalize fraudulent actions.”

According to Neave, public sector employees are being tested in their loyalty when faced with redundancy and pay freeze to the extent that their ability to distinguish “acceptable and unacceptable behavior” is impaired.

The desire to maintain their living standards will eventually lead them to commit fraud, Neave added.

Additionally, the report indicated a sharp change in the profile of those that committed financial fraud in the period during which the survey was conducted. From 39 percent of internal fraudsters in 2009 that were responsible for financial fraud, the figure has risen to 53 percent last year.

Roughly 74 percent of respondents agreed that public spending review has largely spurred high rates in financial fraud. The most common financial fraud according to the report was committed in the accounting of financials that has taken over asset misappropriation.

This kind of fraud includes manipulation of the audit process, illegal credit applications and transactions with no permit.

Neave pointed out that more “opportunities” for financial fraud come in light of the slim distribution of the audit function and authorization.

 

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