South African companies have reported a significant increase in tax fraud and market fraud and to a lesser extent, insider trading as well, according to a new report issued by Professional Services Firm PwC today. Louis Strydom, head of PwC’s Forensic Services Practice, says that this increase is also reflected in a shift in the South African perpetrator profile towards senior management. In 2011, 36% of internal economic crimes were carried out by senior management, compared to only 17% in 2009. “These economic crimes require access to sensitive information and more sophisticated ‘know-how’ which senior management usually possess”.
“These crimes have previously not been as prevalent in South Africa and the increase could suggest that organisations need to revisit their fraud risk management frameworks to ensure that they are able to deal with the emerging threats.”
Latest crime survey results
The Global Economic Crime Survey, which is carried out every two years, was conducted among 3 877 senior representatives from more than 70 countries. In South Africa 123 organisations across 19 industries took part in the survey. The study shows that economic crime remains a challenge for business leaders worldwide, particularly in South Africa where 60 % indicated that they had experienced some form of economic crime in the 12 months preceding the survey, compared to the global average of 34%. On the positive side, the survey found that this overall prevalence of economic crime in South Africa has decreased from 83% in 2005.
The decrease in the overall incidence of economic crime is as a result of corresponding decreases in the misappropriation of assets, bribery and corruption and financial statement fraud. These three crimes have decreased steadily over the past six years. There can be a number of reasons for this. One of them may be that internal fraud risk management frameworks are making progress in South Africa and are getting better at detecting and preventing economic crime.
Further, given the focus of cybercrime in this year’s survey, some organisations may have classified other economic crimes involving the use of computers and the internet as cybercrimes instead.
Detection is key
Strydom says that detection is a key element in managing the risk of economic crime. The survey found that detection methods under management’s control were responsible for 69% of detections in South Africa, compared to 72% globally. This is encouraging as it vindicates the investment in anti –fraud controls. However, 14% of detections occurred by accident which means there is room for improvement locally.
The most effective detection methods were formal risk management procedures (including fraud risk assessments), automated suspicious transaction reporting (both contributed 16% of the detections) and internal audit (11%). The various tip-off methods (internal tip-off, external tip-off and formal whistle-blowing mechanisms), together contributed 20% of detections.
Given the effectiveness of formal fraud risk management structures, it is surprising that 28% of organisations had not performed a fraud risk assessment at all and 14% indicated that they were unsure whether any fraud risk assessment had been performed. The most common reason given by companies for not carrying out a fraud risk assessment was uncertainty about what such a risk assessment involves.
High levels of fraud
The countries that reported high levels of fraud (40% or more) include Kenya, South Africa, Australia and New Zealand, suggesting that fraud is not only endemic in developing countries. Jurisdictions that reported low levels of fraud (25% or less) include Japan, Indonesia, Italy and Greece. However, these results can be affected or distorted by ineffective fraud detection methods or the reluctance of organisations in those countries to report fraud.
For the first time since PwC carried out the survey, economic crime in South Africa is being committed equally by internal and external perpetrators. Globally, the majority of crimes are still being committed by internal parties.
Overall South African organisations resorted to criminal and civil action more often than their global counterparts. However, with regard to the most serious economic crime committed by insiders, South African companies took no action in 6% of cases, opted for employee transfers in 3% or warnings in 14% of cases. Strydom says this is worrying as it suggests that these perpetrators still remain within the organisation and may be able to commit further transgressions. It is important for organisations to demonstrate zero tolerance for economic crime and set the right tone.
Cybercrime has emerged as a significant contributor to economic crime losses in South Africa and is considered the fourth most common economic crime after the misappropriation of assets, bribery and corruption, and financial statement fraud. South African respondents indicated that reputational damage and direct financial loss were their two main concerns with regard to cybercrime.
Based on the PwC study, 60% of organisations felt that the risk of cybercrime had increased in the past 12 months, compared to only 39% globally. Strydom noted, “46% of South African respondents see the threat of cybercrime as exclusively external. Cybercrime usually requires access to protected information. Employees, agents, contractors, customers and other individuals that have access to an organisation’s premises and systems are likely to have access to such information.” It is therefore important that organisations recognise cybercrime as an internal threat as well.
Based on the survey’s findings, South African companies and their global counterparts still have some way to go in dealing with cybercrime.
For instance, the findings also show that few organisations have all the elements of a holistic cybercrime prevention and response mechanism in place. Strydom says that one would expect the overall responsibility of addressing the risk of cybercrime, to lie with senior management. However, the survey shows that in 10% of South African organisations the respondents were unsure who should be tasked with this responsibility. A further 37% thought the chief information officer should be responsible.
This is an interesting observation, as the King 3 Report on Corporate Governance recommends that the board deal with IT, which includes IT security.
Despite the declining overall prevalence of economic crime in South Africa, the risk remains pervasive and South African organisations will need to remain vigilant, especially in these depressed economic conditions. Advances in technology are fast-paced, as are fraudsters. Those organisations ready to understand and embrace the risks and opportunities of the cyber world, will be the ones to gain competitive advantage in today’s technology driven environment. Establishing the right ‘tone at the top’ is key in the fight against economic crime.
For more information on the Global Economic Crime Survey, please visit: www.pwc.co.za/crimesurvey
Top Sectors For SMEs In 2019
“As such, SMEs in the construction, communications and electrical fields are all likely to benefit from supply and sub-contracting agreements over the coming years.”
While the South African economy has been underperforming for a number of years, the first positive signs of turnaround started to become visible by the second quarter of 2018, and by the end of the third quarter, data supplied by Statistics South Africa showed that the economy had indeed grown by 2.2 percent, compared to the previous quarter. This uptick is expected to have a positive effect on business confidence in 2019.
This is according to Jeremy Lang, regional general manager at Business Partners Limited (BUSINESS/PARTNERS), who says that certain business sectors have already seen an increase in opportunities for small businesses and start-ups.
“While these sectors will not be without challenges, the following four industries are likely to offer the best opportunities for small and medium enterprise (SME) owners to grow their enterprises in the coming year.”
The World Travel and Tourism report 2018, revealed that the direct contribution of the travel and tourism sector to South Africa’s GDP has been projected to rise from R136bn in 2016 to R197.9bn by 2028 – set to make up a total of 3.3 percent of the country’s total GDP, says Lang.
“Although this sector experienced some setbacks in 2018, such as the drought in the Western Cape and stricter visa regulations for children entering the country, both the water restrictions and visa regulations have been relaxed and the sector is once again poised for growth,” he says.
Statistics South Africa has credited this industry with being the biggest driver of growth in the country’s GDP, having expanded by 7.5 percent in September 2018, says Lang. “To bolster this, Government has made a concerted effort to stimulate small business growth in this area with initiatives such as the Black Industrialist Programme and the SA Automotive Masterplan.”
He adds that businesses in the manufacturing sphere could therefore likely see significant opportunities in the form of outsourcing contracts and new partnerships with large corporates.
“The debate around land expropriation has occupied most of the discussions surrounding the agricultural sector in 2018, with some questioning growth prospects of this sector. However, this industry has a lot of growth ahead of it, as demonstrated by its 6.5 percent growth over the last three months of 2018,” explains Lang.
“Further to this, the industry is also already taking significant advantage of seven climatic regions in South Africa, with the export of a wide variety of high quality fruit and vegetables increasing substantially,” he points out. The recent outbreak of foot and mouth disease that has resulted in the suspension of the country’s FMD-free status will however significantly impact meat exporters.
In terms of opportunities for SMEs, he says that these may most likely be found in the rural and underdeveloped regions, where the need for resources like efficient transport, state-of-the-art cold storage, better irrigation and private power generation will be key to making agriculture projects more productive and competitive in the export market.
Data and information technology
Connectivity and information technology infrastructure are both crucial to business and employment growth in South Africa, says Lang.
“With many municipalities and the Western Cape government committing to providing all of its residents with free data as part of a plan to expand public Wi-Fi network access, it is clear that this is also becoming a high priority on a state level.”
It has also been reported that South Africa is awaiting the arrival of three international data centres, and large players in the communications sphere, including Vodacom, Telkom and Vumatel, are making huge strides in drastically growing the country’s fibre optic backbone, he adds. “As such, SMEs in the construction, communications and electrical fields are all likely to benefit from supply and sub-contracting agreements over the coming years.”
In conclusion, Lang says that as South Africa’s economic growth has started to turn around, business owners should keep their ears to the ground as 2019 is highly likely to be a year of opportunity.
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SME Insurance Checklist For New Year
Malesela Maupa, Head of Product and Insurer Relationships at FNB Insurance Brokers, advises SMEs to consider the following factors when reviewing their policies.
Business owners who are planning for the year ahead should not overlook the importance of reviewing their insurance policies to ensure they are adequately covered against insurable risks.
Malesela Maupa, Head of Product and Insurer Relationships at FNB Insurance Brokers says, every year businesses face unique challenges ranging from credit and market risks, technological disruptions, compliance, operational and regulatory risks, amongst others. As a matter of precaution, insurance policies should at least be reviewed or updated once a year.
He advises SMEs to consider the following factors when reviewing their policies:
- Employee movements – if there are any employees who have left or joined the company, ensure that your policy is updated accordingly.
This type of cover normally depends on the role and contribution of the employee to the business. For instance, directors may be covered for Key Person Insurance and Directors & Officers Liability insurance.
- Protest Actions – this year is the national election year and leading up to elections we can expect to see an increase in the frequency and severity of protest actions, riots and strikes. Thus, it is essential to ensure that adequate special risks cover is in place from the South African Special Risks Insurance Association (SASRIA).
SASRIA provides cover to both individuals and businesses against special risks like civil commotion, public disorder, strikes, riots and terrorism at affordable premiums.
- Cyber risks – it is essential to communicate with your insurer or broker and find out if there are any new risks that your business should be protected against. Cyber incidents continue to be a major risk for businesses especially in the SME sector. Over the last couple of years there has been a major increase in the number of reported cyber incidences.
More businesses are now facing increased cyber threats due to their increased dependency on technology, relating to their internal and customer data being compromised by fraudsters. It is therefore essential to have some form of cyber risk insurance cover and/or enhancement of data security protocols.
- Regulatory changes – every year there are a number of regulatory changes that impact businesses directly or indirectly, which may result in fines and penalties for non-compliance.
- Natural catastrophes – the increase in the frequency and severity of extreme weather conditions, coupled with intensifying natural catastrophes will continue to have a significant impact on businesses.
Businesses should ensure they are adequately protected against these risks to avoid incurring sever financial losses.
- Business changes – should a business consider moving to a new location, purchasing new premises or venture into new business activities, these types of changes could have a major impact on its risks profile. As a result, the policy needs to be updated accordingly.
- New and Enhanced products – An innovative culture has taken over the insurance industry and ever so often we see the introduction of new products or the enhancement of existing products. Get in touch with you broker to advise you on any new products that might add value to your existing insurance portfolio.
“Reviewing your policy regularly gives you peace of mind knowing that you can focus on running your business effectively, without worrying about unforeseen risks,” concludes Maupa.
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