3 Depressing Conclusions in E&Y’s Global Fraud Report – More Anti-Bribery Training, Internal Controls Required

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I just finished reading Ernst & Young’s “Growing Beyond: A Place For Integrity”, the company’s 12th Global Fraud Survey. It’s pretty sobering, but I’m trying to find some glimmers of hope in it.

Don’t get me wrong; the report is well done and well-written, but man, it’s shocking how little headway our efforts are making in preventing global fraud. There are 3 conclusions that I found downright depressing.

1. Rising Economical Risks and Slipping Ethical Standards

The first sentence in the report after the foreword is “Risks are rising and standards are not.” That’s a very powerful statement. Many organizations are facing difficult economic environments and having already reduced costs as much as possible, they find themselves focused on rapid-growth markets. RISKY rapid growth markets. At the same time, the UK and U.S. are stepping up their enforcement of bribery laws, and BRIC nations, like India and Brazil have stepped up and passed legislation as well. So, despite the increased regulatory scrutiny and despite the risky nature of the economy and high growth markets… and despite the anti-bribery training and awareness best practices recommended by the DOJ and everyone else… The report shows that bribery, corruption and fraud are still very widespread. Egads.

How widespread? Well, the report shows that on a global basis, 39% of respondents reported that bribery or corrupt practices occur frequently in their countries. In rapid-growth markets, it’s even higher – in Brazil, 84% responded that corruption was widespread. In Mexico, 38% of respondents reported that it’s common practice to gain business through bribery and in Turkey, 56% said that bribery has increased as the economy has worsened. The chart below shows the rest of the sobering data around those survey questions.

I also mentioned increased regulatory scrutiny – the report puts that into some perspective. In 2011, thirty-one of the thirty-six reported FCPA cases related to activities in Asia, Eastern Europe and Latin America. I’m just saying… if I were designing the online compliance training program and my organization was doing business anywhere in BRIC, I’d be focused very heavily on anti-bribery training.

2. Increasing Justification of Unethical Business Practices

One of the most disturbing findings of the survey is the widespread acceptance of unethical business practices, which the authors tie to the economic climate. This blew my mind – respondents indicated they are more willing to make cash payments (15% versus 9% in the last survey) and misstate financial performance (5% versus 3% in the last survey) in order to survive an economic downturn. Whoa. In parts of 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’s mind-boggling. I understand some of this is due to culture and again, having minored in psychology, I remember the desperate times adage and get that when people feel desperation (business needs to survive) they go into “do what you have to do” mode. But there has been so much focus on preventing fraud and improving ethical cultures; it seems every day there is another company in the headlines, paying huge fines for poor ethical decision-making or weak internal controls. Don’t companies learn anything from that? Or at least get scared by it? I’d be less surprised if the numbers were remaining flat but they are going UP.

Glimmer of Hope: a call out on page 7 has this quote from a Chief Risk Officer in Germany: “Employees are the number one defense against fraud and need to be intensively trained.” Can I get a big AMEN on that one?

3. Weak Controls, Failure to Follow Through on Tone from the Top

I know, I know, we’re all sick of “Tone from the Top,” but it’s still important. And inauthentic leadership that talks the anti-bribery talk but then doesn’t back it up with a solid program for employees, is creating a very dangerous situation. The report shows that the preventative measures – like the ones I mentioned above, are not enough. The report notes “From the responses of our 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 penalize breaches.”

Dan Draz, Principal of Fraud Solutions, a firm that provides fraud risk management consulting and training to help companies improve their enterprise fraud risk management efforts and reduce major fraud losses, says “Controls absent repercussions are synonymous to laws minus enforcement. The resulting condition: a state of corporate lawlessness.”

A solid majority – 81% of respondents – said that their organizations have anti bribery policies and Codes of Conduct in place. However, about half of respondents (!) said that they do not believe people have been penalized for violating those policies. Where’s the tone from the top on that? The report also cites how cost-cutting has affected internal audit and compliance functions, which may explain why some of their areas of responsibility such as anti-bribery training, also appear to have suffered. I’m going to bold this next part: As many as 42% of respondents had not received training on anti-bribery policies. Operating in high-growth markets during economically difficult times without giving employees training on the anti-bribery policies? That’s just asking for trouble.

Draz agrees and notes that because fraud is so fluid, “training that isn’t enterprise wide, holistic and fluid in nature, is ineffective. The training must be regularly offered to ALL employees and reflect current trends, patterns and crimes in order for employees to derive solid value which they can apply to their daily jobs. This type of training not only reinforces an ethical corporate culture but sends a strong deterrence message that wrong doing will not only be detected but punished.”

I hope we can make some major strides forward before E&Y releases the 2015 report. Companies who want to do business in high-growth markets have to be smarter about assessing the risks and the controls they have in place, or they may find themselves part of more sobering statistics.

Topics:  Bribery, BRIC, Chief Compliance Officers, Compliance, DOJ, Ernst & Young, FCPA, Fraud, UK

Published In: General Business Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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