Financial manipulation and corruption are widespread within companies – and a high percentage of employers and managers know about it.
Findings from Ernst & Young’s 2013 Europe, Middle East, India and Africa (EMEIA) Fraud Survey, Navigating Today’s Complex Business Risks, show that one in five employees surveyed are aware of financial manipulation in their own company in the last 12 months. This awareness increases to over a quarter of respondents in rapid-growth markets.
At board and senior manager level the proportion is higher still; more than 40% of those asked said that sales or costs had been manipulated at their company.
Ernst & Young’s survey of over 3 000 employees in 36 countries across EMEIA highlights that 42% of board directors and senior managers are aware of irregular financial reporting in their company, while 57% believe bribery and corruption are widespread in their country.
The survey also found that 38% of all respondents believe companies within their jurisdiction overstate their financial performance. Almost half the respondents in rapid-growth markets agree that companies in their countries often misrepresent financial performance, compared with 29% of those with headquarters in Western Europe.
David Stulb, global leader of Ernst & Young’s Fraud Investigation & Dispute Services practice, says: “Given the current challenging market conditions, companies face sustained pressure to meet growth and profit expectations. In this environment, some inevitably succumb to unethical behaviour.
“Shareholders expect management to take responsibility for protecting the business by implementing anti-bribery and anti-fraud programmes at all levels of their organisation. Boards must challenge management to ensure they are focused on high risk areas.”
The survey shows the risks of misreporting are compounded by an unethical business environment. Fifty-seven percent of all respondents believe bribery and corruption are widespread in their country, which rises to 67% in rapid-growth markets. The proportion dropped however, to 26% who feel it is common to use bribery to win contracts in their own sector.
Stulb comments: “To effectively tackle the risks from fraud, bribery and corruption, management need to acknowledge it could happen in their own organisation and profession. The survey reveals a worrying trend that employees see bribery and corruption happening widely in their country but do not acknowledge it as a risk in their own business or sector.
“The results seem to say: ‘Everyone else is doing it, but not me or my business’.”
While the majority of respondents are aware that their company has an anti-bribery/anti-corruption (ABAC) policy, the survey shows many organisations have a significant perception gap between senior management and employees when it comes to the relevance and effectiveness of this policy.
Sixty percent of directors and senior managers believe that their company would support people who reported cases of suspected fraud, bribery or corruption, whereas only 34% of other employees agree.
Critical business functions continue to question the importance of such programs. For example, just under half of respondents in the sales function either do not consider their organisation’s ABAC programme relevant to their role, or are not even aware of its existence.
According to Stulb: “While companies are focused on cost, compliance can be an afterthought for some organisations. Many incorrectly assume that the mere existence an anti-bribery programme is sufficient to mitigate their risk.
“Companies must ensure the program is communicated effectively, employees are trained adequately and it is continuously monitored and updated. Our experience also shows that leaders of organisations that successfully manage the risk of fraud, bribery and corruption ask the difficult questions and demand answers, particularly about the financial reports they receive.”
Businesses continue to face a challenging economic environment.
Driven by market uncertainties and declining economic growth forecasts, many companies are struggling to maintain margins. With fewer remaining opportunities for cost-cutting, many businesses are now focused on opportunities in rapid-growth markets.
Even these markets, however, are feeling the effects of a weakened global economy. In this environment, the 12th Global Fraud Survey’s findings are, unfortunately, a further cause for concern.
They suggest that bribery, corruption and fraud remain widespread. At the same time, many countries are strengthening their enforcement regimes, for example the UK, with the introduction of the Bribery Act, and India, with a range of proposed anti-bribery/anti-corruption (ABAC) legislation.
As regulatory activity intensifies, the risk of external scrutiny of corporate activity also increases. Senior management must do more to ensure that they and their companies are not found wanting should their activities come under the spotlight.
Bribery and corruption remain pervasive. On a global basis, 39% of respondents reported that bribery or corrupt practices occur frequently in their countries. The challenge is even greater in rapid-growth markets, where a majority of respondents believe these practices are common.
For example in Brazil, 84% responded that corruption was widespread. Multinational businesses inevitably have to confront this challenge.
Regulators have recognised this. In 2011, enforcement actions under the US Foreign Corrupt Practices Act (FCPA) continued to focus on conduct in rapid-growth markets.
Thirty-one of the 36 reported FCPA cases related to activities in Asia, Eastern Europe and Latin America. Many of these prosecutions related to payments to employees or officials at state-run enterprises.
There is little question that the current economic situation has exerted negative pressure on employees. One of the most troubling findings of the survey is the widespread acceptance of unethical business practices.
It is particularly alarming that respondents are increasingly willing to make cash payments (15% versus 9% in our last survey) and misstate financial performance (5% versus 3% in our last survey) to survive an economic downturn.
The findings from Far East Asia, where 15% of respondents think that financial performance misstatement can be justified are particularly shocking:
* In Indonesia, 60% of respondents consider making cash payments to win new business acceptable; and
* In Vietnam, 36% of respondents consider it acceptable to misstate a company’s financial performance.
It is no coincidence that this is a region where conduct has been heavily scrutinised by US authorities.
Despite the risk, companies are still failing to do enough to prevent bribery and corruption. From the responses of interviewees, it would appear that mixed messages are being given by management, with the overall tone often diluted by a lack of widespread training and a failure to penalise breaches.
While 81% of respondents say ABAC policies and codes of conduct are in place and a similar proportion agree that senior management strongly communicates its commitment to these, nearly half say that they do not believe people have been penalised for breaching ABAC policies.
After years of cost cutting, relatively labour-intensive measures and activities were less frequently cited as examples of ABAC controls in the respondents’ businesses.
As many as 42% of respondents had not received training on ABAC policies.
Without adequately trained employees, the ability of companies to identify issues or robustly investigate and act on allegations is also likely to be diminished.
At board and senior manager level the proportion is higher still; more than 40% of those asked said that sales or costs had been manipulated at their company.
Ernst & Young’s survey of over 3 000 employees in 36 countries across EMEIA highlights that 42% of board directors and senior managers are aware of irregular financial reporting in their company, while 57% believe bribery and corruption are widespread in their country.
The survey also found that 38% of all respondents believe companies within their jurisdiction overstate their financial performance. Almost half the respondents in rapid-growth markets agree that companies in their countries often misrepresent financial performance, compared with 29% of those with headquarters in Western Europe.
David Stulb, global leader of Ernst & Young’s Fraud Investigation & Dispute Services practice, says: “Given the current challenging market conditions, companies face sustained pressure to meet growth and profit expectations. In this environment, some inevitably succumb to unethical behaviour.
“Shareholders expect management to take responsibility for protecting the business by implementing anti-bribery and anti-fraud programmes at all levels of their organisation. Boards must challenge management to ensure they are focused on high risk areas.”
The survey shows the risks of misreporting are compounded by an unethical business environment. Fifty-seven percent of all respondents believe bribery and corruption are widespread in their country, which rises to 67% in rapid-growth markets. The proportion dropped however, to 26% who feel it is common to use bribery to win contracts in their own sector.
Stulb comments: “To effectively tackle the risks from fraud, bribery and corruption, management need to acknowledge it could happen in their own organisation and profession. The survey reveals a worrying trend that employees see bribery and corruption happening widely in their country but do not acknowledge it as a risk in their own business or sector.
“The results seem to say: ‘Everyone else is doing it, but not me or my business’.”
While the majority of respondents are aware that their company has an anti-bribery/anti-corruption (ABAC) policy, the survey shows many organisations have a significant perception gap between senior management and employees when it comes to the relevance and effectiveness of this policy.
Sixty percent of directors and senior managers believe that their company would support people who reported cases of suspected fraud, bribery or corruption, whereas only 34% of other employees agree.
Critical business functions continue to question the importance of such programs. For example, just under half of respondents in the sales function either do not consider their organisation’s ABAC programme relevant to their role, or are not even aware of its existence.
According to Stulb: “While companies are focused on cost, compliance can be an afterthought for some organisations. Many incorrectly assume that the mere existence an anti-bribery programme is sufficient to mitigate their risk.
“Companies must ensure the program is communicated effectively, employees are trained adequately and it is continuously monitored and updated. Our experience also shows that leaders of organisations that successfully manage the risk of fraud, bribery and corruption ask the difficult questions and demand answers, particularly about the financial reports they receive.”
Businesses continue to face a challenging economic environment.
Driven by market uncertainties and declining economic growth forecasts, many companies are struggling to maintain margins. With fewer remaining opportunities for cost-cutting, many businesses are now focused on opportunities in rapid-growth markets.
Even these markets, however, are feeling the effects of a weakened global economy. In this environment, the 12th Global Fraud Survey’s findings are, unfortunately, a further cause for concern.
They suggest that bribery, corruption and fraud remain widespread. At the same time, many countries are strengthening their enforcement regimes, for example the UK, with the introduction of the Bribery Act, and India, with a range of proposed anti-bribery/anti-corruption (ABAC) legislation.
As regulatory activity intensifies, the risk of external scrutiny of corporate activity also increases. Senior management must do more to ensure that they and their companies are not found wanting should their activities come under the spotlight.
Bribery and corruption remain pervasive. On a global basis, 39% of respondents reported that bribery or corrupt practices occur frequently in their countries. The challenge is even greater in rapid-growth markets, where a majority of respondents believe these practices are common.
For example in Brazil, 84% responded that corruption was widespread. Multinational businesses inevitably have to confront this challenge.
Regulators have recognised this. In 2011, enforcement actions under the US Foreign Corrupt Practices Act (FCPA) continued to focus on conduct in rapid-growth markets.
Thirty-one of the 36 reported FCPA cases related to activities in Asia, Eastern Europe and Latin America. Many of these prosecutions related to payments to employees or officials at state-run enterprises.
There is little question that the current economic situation has exerted negative pressure on employees. One of the most troubling findings of the survey is the widespread acceptance of unethical business practices.
It is particularly alarming that respondents are increasingly willing to make cash payments (15% versus 9% in our last survey) and misstate financial performance (5% versus 3% in our last survey) to survive an economic downturn.
The findings from Far East Asia, where 15% of respondents think that financial performance misstatement can be justified are particularly shocking:
* In Indonesia, 60% of respondents consider making cash payments to win new business acceptable; and
* In Vietnam, 36% of respondents consider it acceptable to misstate a company’s financial performance.
It is no coincidence that this is a region where conduct has been heavily scrutinised by US authorities.
Despite the risk, companies are still failing to do enough to prevent bribery and corruption. From the responses of interviewees, it would appear that mixed messages are being given by management, with the overall tone often diluted by a lack of widespread training and a failure to penalise breaches.
While 81% of respondents say ABAC policies and codes of conduct are in place and a similar proportion agree that senior management strongly communicates its commitment to these, nearly half say that they do not believe people have been penalised for breaching ABAC policies.
After years of cost cutting, relatively labour-intensive measures and activities were less frequently cited as examples of ABAC controls in the respondents’ businesses.
As many as 42% of respondents had not received training on ABAC policies.
Without adequately trained employees, the ability of companies to identify issues or robustly investigate and act on allegations is also likely to be diminished.