EY Global Fraud Survey: “Depressing,” yes, surprising, no.

EY Global Fraud Survey: “Depressing,” yes, surprising, no.

In an August 21, 2014 post concerning the Ernst and Young (EY) 12th Global Fraud Survey (link here for download), Cindy Knezevich, (Vice President of Marketing Operations at The Network), states, “it’s shocking how little headway our efforts are making in preventing global fraud.” The EY Survey, as Ms. Knezevich, states, is “well done and well-written,” and furthermore, EY does a great service to the international business community by calling attention to the dynamic that in lucrative markets with potential for rapid economic expansion “growth and ethical business conduct can sometimes appear to be competing priorities.” As the Survey well states, “with fewer remaining opportunities for cost-cutting, many businesses are now focused on opportunities in rapid growth markets.” From the front lines of business, that is exactly where the challenge and confrontation with risk exists.

As we all know, methodologies and findings from surveys can often be suspect, based on control groups, how questions are asked, etc. However, the EY Survey, based on more than 1.700 interviews of “chief financial officers, heads of legal, compliance, risk and audit,” and conducted in 43 countries, is one of the most comprehensive corruption studies that I can recall, and it makes a great companion to the recent Kroll and Compliance Week report on which I recently reviewed. Nonetheless,  I hope that by sharing my own experiences, with the Survey as a companion guide, that I can help to add value to EY’s goal of contributing to “the ongoing conversation on these important topics.”

The big shocker to some, but not to me, is presented in the Executive Summary, as 15% of CFO respondents are “willing to make cash payments to win business.” In addition, the survey found that a greater proportion of executives, including CFOs “expressed an increased willingness to misstate financial performance.” As to foreign corruption, more specifically, 20% of the respondents “do not recognize that new markets bring new risks,” and “44% of respondents report that background checks (on third parties) were not being performed.” Finally, as to training, only 46% of all CFOs attended anti-bribery and compliance training. Ouch.

As to the Board of Directors, which are tasked with governance over risk and audit “according to our respondents, they are sometimes seen as out of touch with conditions on the ground.” When that dynamic gets combined with the finding that “a significant global minority of one in five respondents do not recognize that new markets bring new risk,” one can see why many multinationals are running into troubles in growth markets. If the C-Suite does not recognize corruption risk in low integrity regions, and the Boards are “out of touch,” who is asking the “how are we making such aggressive targets in such high risk areas?” In such cases, as I have shared before, its all “high fives” when those quarterly numbers roll in to management.

With respect to Third Parties, the Survey sheds more light on the recent Kroll and Compliance Week “2014 ABC Report” that “third parties continue to vex compliance officers.” As the Survey states “the apparent lack of knowledge held by companies about the third parties they deal with is a real problem.” In fact, the Survey found that “only 59% of respondents report using an approved supplier database- a worrying low uptake for a simple mechanism.” In addition, “only 45% of respondents identified audit rights or regular audits of the third party as a process in place to monitor the relationship.”

The Section “CFOs in the spotlight,” is both troublesome and again, not surprising. As previously stated, “15% of CFO’s surveyed would be willing to make cash payments to win or retain business…and 16% of CFO respondents do not know that their company can be held labile for the actions of third-party agents.” Maybe those respondents should read and re-read the recent interview with Chuck Duross, former deputy chief of the Fraud Section in the Criminal Division of the U.S. Department of Justice, and whom I met while I was preparing for trial testimony, when he states that “if a company’s employees are aware that the distributor is paying (or just offering) bribes to government officials to help sell the product, the company and its employees could be criminally liable as conspirators and aiders and abettors.”

Help me here, but in public companies don’t CFOs (along with the CEO and the Board) sign 10Ks (SEC) that acknowledge responsibility for controls over fraud prevention and detection? And as to the boards and audit committees that are tasked with governance, “52% of c-suite interviewees think that the board needs a more detailed understanding of the business if it is to be an effective safeguard against fraud or corrupt practices.” All of this results, in the opinion of the Survey authors, with a “tick the box” approach to managing risk.”

I have spent a great deal of time sharing the view from the front lines of international business that all too often field personnel are left to ponder “what does management really want, compliance or sales?” What the Survey demonstrates, in a way that is compelling and hard to dispute, is that at the C-Suite level, corruption is all too often ignored, not understood, or, as the Survey identifies, tolerated and supported. Like the trajectory of a stray bullet (sorry, I come from the Defense Sector), which drifts further from target as it travels, the messages of anti-bribery compliance from a c-suite and board that doesn’t understand it, will not gain clarity as it travels down through an organization.

I have to agree with Ms. Knezevich, in her own view that there are “three conclusion that I found downright depressing,” but in my own experience, not at all surprising (here are my top two):

1. “Rising Economical Risks and Slipping Ethical Standards.” The rising search for new business opportunities in lucrative yet low integrity markets leads to “slipping ethical standards.” In those areas, where there are weak state institutions (hello again, Matt Ellis), infinite demands for “small bribes” (see Transparency International Report), yet plenty of short-term business up for grabs, a “win-big, lose-big” mentality takes hold at the front line. Where you have financial incentives indexed to those wins: Peril for all.

2. “Weak controls, Failure to Follow Through on Tone from the Top.” I am with Ms. Knezevich all the way on her conclusion, that “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.” I remember exchanging perspectives with a colleague on anti-bribery programs, and asked him what his leadership was providing (he worked in a public company). He shared with me that his CEO told him “win the business but keep us off the front page of the Wall Street Journal.” Mixed message?

I conclude again applauding the EY Survey, its findings and conclusions as elevating our understanding of how corruption and fraud exists among the corporate environment. While some might attribute all this to “institutional fatigue about anti-corruption initiatives,” my experience points to the Survey’s findings that in wanting to secure “revenues in rapid-growth markets,” corporations are willing to blast out both anti-bribery messages while ignoring or tolerating corrupt activities in order to “win above all else.” So, I will leave in agreement with Ernst and Young that “much remains to be done.”

Topics:  Chief Compliance Officers, Corporate Governance, Corruption, Ernst & Young, Fraud

Published In: General Business Updates, Criminal Law 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.

© Richard Bistrong FCPA Real-World Blogger and Speaker | Attorney Advertising

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