Drive for revenue growth ignores risk of prosecution for senior executives

Ernst & Young’s 2012 Global Fraud Survey, Growing Beyond: a place for integrity, shows fifteen percent of senior executives polled at leading companies around the world are willing to make cash payments to win or retain business, up from 9% in 2010. More than 1700 executives across 43 countries, including CFOs and heads of legal, compliance and internal audit, were surveyed for their views of fraud, bribery and corruption. Face-to-face interviews were also subsequently held with senior executives of blue chip companies to discuss these findings and their own efforts to mitigate these risks.

For a growing number of executives, the pressure to meet revenue growth targets is undermining their commitment to compliance with policies and the law. The competitive landscape continues to be distorted by unethical conduct. Over a 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%, Indonesia - 72%, Turkey - 52%). Financial statement fraud remains an important risk across many jurisdictions. Indeed, fifteen percent of respondents in Far East Asia think that financial performance misstatement can be justified.

Boards under pressure

Boards are held responsible by regulators and shareholders for addressing these challenges and are under intense pressure. But more than half of c-suite respondents think the board needs a more detailed understanding of the business if they are 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% of respondents believed that, while management strongly communicated its commitment to anti-bribery and anti-corruption policies, people were not penalized for breaches.

David Stulb, Global Leader of Ernst & Young’s Fraud Investigation & Disputes Services practice says, “Growth and ethical business conduct in today’s markets can appear to be competing priorities. Our findings show that, as businesses continue to pursue opportunities in new markets, many executives are underestimating the risks. Boards need to put pressure on management to conduct more frequent and more robust anti-bribery/anti-corruption risk assessments and they need more tailored reporting to drive improved compliance.”

CFOs under the spotlight

CFOs are among the most influential executives reporting to the board on fraud, bribery and corruption issues. 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% said they would be willing to misstate financial performance. This group of executives is not large in absolute numbers but, given their responsibility, they represent a huge risk to their businesses and their boards.

David Stulb says, “The CFOs that we work with are invariably committed to extremely high ethical standards. But the CFO’s increasing influence within companies means they have a key role in preventing fraud, bribery or corruption and they need to redouble their efforts to set the right tone. They need to ensure that they themselves are trained, that they increase their awareness of the risks while clearly demonstrating support for anti-corruption initiatives.”

Preparing for new challenges: managing third parties and risk from acquisitions

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 - it is required under both the US Foreign and Corrupt Practices Act and the UK Bribery Act -, but almost half the respondents (44%) reported that background checks were not being performed. Many businesses are also 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% either always or very frequently conduct it pre-acquisition. Elsewhere the frequency is much lower (32% in China, 9% in Nigeria).

David Stulb concludes, “The survey shows companies struggling to balance growth and ethical business conduct. Many companies are failing to do enough to manage the risks of fraud, bribery and corruption. Boards need effective channels of communication with contacts across the finance function and other executives within the business to ensure that they have a full and an accurate picture of compliance. For businesses to seize new opportunities, boards need to ensure that the right tone is set not just at the top, but at all levels and in all markets.”

The survey is the largest one Ernst & Young have produced in this series. Between November 2011 and February 2012, more than 1,700 interviews were conducted in 43 countries with individuals from a sample of the largest companies by turnover in each country. Face-to-face interviews were subsequently held with senior executives of blue chip companies about the survey findings. A copy of the survey is available at: www.ey.com/globalfraudsurvey2012