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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

In its latest report on the private equity industry, GF Data reports that deal volume in the first quarter of 2012 exceeded expectations. The active contributors to GF Data’s reports – 167 middle-market private equity firms – reported on 45 deals completed in the first quarter of 2012, down slightly from the 50 completed deals in the fourth quarter of 2011 but up significantly over the 37 deals completed in the first quarter of 2011. “Over the prior eight years covered in our data universe, completed deal volume dropped an average of about 25 percent from the fourth quarter of one year to the first quarter of the next. This year’s ten percent dip decline compares especially favorably with the 42 percent drop-off in the first quarter of 2011 following the 2010 end-of-year rush,” said Andrew Greenberg, GF Data’s CEO and co-founder.“Most private equity professionals are predicting a flood of deal activity in 2012. The volume of reported deals in the first quarter suggests it’s already starting to happen.

Deal-term data in the GF’s report indicate that the trend in 2011 toward “size premiums” is continuing. Firms valued in the $50 million to $250 million range are commanding record average multiples of 7.8 times Total Enterprise Value (TEV) / Trailing Twelve Months (TTM) Adjusted EBITDA, while lower-middle firms valued at $10 million to $50 million went for an average of 5.6 times TEV.

First-quarter data also suggest that the “quality premium” – which GF Data measures by highlighting above average financial performers based on their revenue growth and EBITDA margins – has been reestablished for larger firms after waning in 2011. In the first quarter of 2012, larger businesses reaped greater rewards for above-average financial performance. According to GF Data, companies with above-average TTM EBITDA margins and revenue growth rates were valued in the first quarter of 2012 at a seven percent premium over lesser performers. At $50 million to $100 million TEV, that premium was 22 percent. At $100-1250 million TEV, it was 43 percent.

“The data certainly reinforces the positive sentiments we have observed at all levels of the middle market as both sponsors and lenders are eager to deploy capital,” said Paul Colone, managing director at C.W. Downer & Co., a Boston-based investment bank. “We continue to see strong momentum both in terms of deal activity and valuation multiples and we expect sellers will seek to take advantage of these market conditions during the second half of 2012.”

Total debt multiples for the quarter remained in the mid-threes, up slightly from 2010-11. The average equity contribution for the quarter was 47.2 percent, in line with the 48 percent average for 2011. However, as valuations in much of the lower-middle market surge at a greater rate than increases in bank debt availability, subordinated debt is making up the difference. Subordinated debt accounted for 18.9 percent of average capital structure, up from the 12 to 15 percent range the prior two years.

“With unprecedented cash on hand, improving corporate performance and expectations of federal tax changes in 2012, financial buyers and other deal professionals are expecting a strong year,” said B. Graeme Frazier, IV, GF Data principal and co-founder. “We expect momentum to continue from here.”

GF Data’s first-quarter 2012 report includes valuation, volume, leverage and key deal-term data on 1,332 private equity backed transactions in the $10 million to $250 million value range completed since 2003. The data reflects deal activity by 185 private equity firms, including 167 active contributors.

GF Data Resources provides data on private equity sponsored M&A transactions with enterprise values of $10 million to $250 million, offering private equity firms and other users external information to use in valuing and assessing M&A transactions. GF Data collects transaction information from private equity groups on a blind and confidential basis. Data contributors and paid subscribers receive two products ‐‐ high‐level valuation and leverage data via electronically delivered quarterly reports, and continuous access through the firm’s web site to detailed valuation data organized by NAICS industry code. For information on subscribing or on contributing data as a private equity participant, contact GF Data at www.gfdataresources.com.