NEW YORK, Sept. 13, 2006 (PRIMEZONE) -- The threat of corporate misconduct and its impact on reputation is now higher on the agendas of aerospace and defense company managers and directors, as well as financial regulators, according to a PricewaterhouseCoopers report launched today, titled: "Predicting the unpredictable - Protecting aerospace and defense companies against fraud, reputation and misconduct risk."
Since 1986 the U.S. government has recovered over $17 billion under the False Claims Act. Incidents of procurement fraud in Afghanistan, Iraq and the reconstruction following Hurricane Katrina, indicate that investigations, prosecutions and recoveries are showing no signs of diminishing. In fact, the 2005 PricewaterhouseCoopers Global Economic Crime Survey revealed that thirty percent of companies in the aerospace and defense sector have suffered some type of fraud.
Companies subject to the Sarbanes-Oxley Act must now implement "antifraud programs and controls." This requirement creates significant responsibilities relating to the roles of the audit committee and independent auditor. However, fraud risks are broader than financial statement misstatements. A fraud can devastate a company's most valuable assets of reputation and brand value, even where there is no financial statement impact.
"The aerospace and defense industry faces unique risks due to the nature of procurement regulations and the long-term and large-scale contracts inherent in the industry," said Scott Thompson, U.S. Aerospace and Defense Leader, for PricewaterhouseCoopers.
"Corporate reputation does not appear on the balance sheet but has both operational and financial value. This is why it is essential that aerospace and defense companies establish effective antifraud programs which prevent fraud, rather than relying exclusively on detection controls to identify fraud or misconduct once it has already happened," Thompson said.
The report identifies the six categories of fraud with common schemes impacting the aerospace and defense sector in each:
-- Unauthorized receipts and expenditures is a significant category
and includes actions like improper payment to government
officials and improper product component substitutions.
-- Financial statement manipulation, another pervasive fraud risk
category, includes intentional manipulation of cost estimates,
overstatement of trade and unbilled receivables.
-- Misappropriation of assets affects operational risk rather than
financial reporting risk and includes industrial espionage
activities like violation of Export Administration Regulations
and International Traffic in Arms Regulation.
-- Disclosure fraud includes omission or misstatement of company
size, use of domestic products and payments to influence federal
transactions. Failure to make proper disclosures may result in
bid protests or contract terminations.
-- Aiding and abetting refers to facilitating others to engage in
fraud or misconduct and includes a sister company or other
related party helping a prime contractor to overbill a customer
through multi-tiered profit arrangements or inflated lease
transactions.
-- Fraud of any magnitude by senior management or employees with a
significant role in financial reporting.
"While it may not be possible to eliminate the risk of fraud altogether, an effective antifraud program can contain and minimize the impact of fraud to acceptable levels," said Dave Oldham, Managing Director, Fraud Risks & Controls Practice, for PricewaterhouseCoopers.
The report also outlines five key steps that aerospace and defense companies can take to develop an effective antifraud campaign:
-- Establish a baseline to assess existing antifraud programs
and controls and develop a remediation plan.
-- Conduct a fraud risk assessment.
-- Evaluate design and validate operating effectiveness.
-- Address residual risks.
-- Standardize processes for incident investigation and
remediation.
Notes to Editors:
For more information on PricewaterhouseCoopers aerospace and defense practice and to download a copy of the white paper visit www.pwc.com/aerospaceanddefence.
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries work collaboratively using connected thinking to develop fresh perspectives and practical advice.
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