The competitive landscape continues to be distorted by unethical conduct. More than one-third of the respondents believe corruption is widespread in their country and this is perceived to be significantly higher in rapid-growth markets (e.g., Brazil – 84 percent, Indonesia – 72 percent, Turkey – 52 percent). Financial statement fraud remains an important risk across many jurisdictions. Indeed, 15 percent of respondents in Far East Asia think that financial performance misstatement can be justified.
The results from the nearly 400 CFOs surveyed, however, suggest that a concerning minority could be part of the problem. Fifteen percent of the CFOs surveyed said they would be willing to make cash payments to win business and 4 percent said they would be willing to misstate financial performance. This group of executives is not large, but given their responsibility, they represent a huge risk to their businesses and their boards. “Tolerance of fraud, bribery and corruption flows from the top of an organization. CFOs must do more to set an example for the company by instilling an ethical business philosophy throughout the organization and showing strong support for anti-corruption initiatives,” said Brian Loughman, Americas Leader of Ernst & Young’s Fraud Investigation & Disputes Services.
Boards are held responsible by regulators and shareholders for addressing these challenges and are under intense pressure. But approximately half of the c-suite respondents in the US think that the board needs a more detailed understanding of the business if it is to function effectively as a safeguard. Mixed messages are being given by management, with the “tone at the top” diluted by the failure to penalize misconduct. Almost 50 percent of respondents believed that, while management strongly communicated its commitment to anti-bribery and anti-corruption policies, there were no penalties for non-compliance.
“Proactive board management and oversight is critical to help mitigate potentially significant business risks. Companies should strive for a governance structure that enables and encourages the board to become actively involved in overseeing anti-fraud efforts and taking action against those that do not comply with company policy and recommendations,” said Mr. Loughman.
Companies pursuing opportunities in rapid-growth markets face specific risks that are not always being managed effectively, according to the survey. For example, due diligence on third parties is expected by regulators but almost half the respondents (44 percent) reported that background checks were not being performed. Many businesses also are exposed to additional risk, having failed to conduct appropriate anti-corruption due diligence before and after acquisitions. For US-based companies, this type of due diligence is the norm – 84 percent either always or very frequently conduct it pre-acquisition. But there appears to be an inconsistent understanding in the US about who is liable for actions of third parties. In North America, 34 percent of respondents said the company and third party have joint liability, with 28 percent reporting that the company is liable and 10 percent believing that the third party is liable.
“As US-based companies continue to expand in foreign markets, executives must have a clear picture of the potential fraud, bribery and corruption risks. Third-party relationships present a significant risk. As the survey shows, US executives must gain a clearer understanding of the liability associated with companies and individuals acting on their behalf,” said Mr. Loughman. “Communication between management and the board to identify and mitigate these risks is critical to building strong compliance programs and ensuring the long-term stability of an organization.”
A copy of the survey results are available at www.ey.com/globalfraudsurvey2012