Increasing Risks of Fraud; Compliance Failures; A Willingness to be Unethical

by Dorsey & Whitney LLP
Contact

Cyber security, corruption and unethical behavior pose significant risks for business enterprises, according to a new survey by EY titled “Overcoming Compliance Fatigue’ (here). At the same time business organizations may be focusing their efforts in the wrong area while not effectively implementing the effective building blocks of a good compliance system.

Cyber security: Cyber security is a critical risk faced by many business organizations The point is emphasized regulators, yet business organizations do not seem to agree. Regulators ranging from Mary Jo White, Chair of the Securities and Exchange Commission, to a UK Government minister who recently reported that about 93% of large organizations in that country have faced a breach in the past year have expressed concern over cyber security. The point is underscored in part by survey results concluding that 74% of those who suffered a breach last year had not publically disclosed it, a point which may pose a serious issue for the SEC.

Despite these warnings and statistics, many business organizations do not view cyber security as a significant risk. Almost 50% of those responding to the EY survey viewed it as a fairly low risk to their business. Indeed, 17% viewed it as a very low risk while only 19% saw it as a high risk.

Fraud: In contrast, fraud is perceived as a serious threat to business enterprises. More than 1 in 10 executives in the survey reported that they have experienced a significant fraud in the last two years. The level overall of fraud reported in the survey has remained largely unchanged in the last six years. Ten countries, however, reported significant increases. Those include the U.S., up to 16% in 2014 from 8% in 2012, China, up to 8% from 4%, Japan, up t 10% from 6% and Russia, up to 16% from 10%.

Bending the rules: To achieve financial goals, a significant number of executive indicated a willingness to bend the rules. This suggests that in certain instances executives may be leading in the wrong direction. Overall 6% of those responding in the survey indicated a willingness to misstate financial performance under some circumstances. In the survey 11% of CEOs indicated a willingness under some circumstances to misstate financial performance while 7% of CFOs, or those in finance, responded in the affirmative.

The number of executives willing to bend the rules or break the law is surprising, particularly in view of the zeal of enforcement officials in areas such as financial reporting and overseas corruption Regarding financial performance the survey found that:

  • 33% may be willing to alter product return policies
  • 14% may be willing to change assumptions determining valuations/reserves
  • 11% may be willing to extend monthly reporting periods
  • 8% may be willing to backdate a contract
  • 47% may be willing to use at least one of the items listed above

Overall CFOs were more likely than others to justify changing assumptions regarding valuations and reserves; general counsels were most likely to justify backdating a contract to meet financial targets; and sales and marketing executives were most likely to introduce more flexible return policies to meet financial targets.

Anti-corruption: Consistent with these findings are those regarding bribery and corruption. This has been a focus of U.S. enforcement officials for years and, despite a dwindling number of cases recently, there should be no doubt that the focus continues. While the U.S. continues to be the leader in these enforcement efforts, other countries are stepping up theirs, according to the Report. Those include Germany, Italy, France, the Netherlands, China and Mexico.

Despite the increasing efforts of enforcement officials, there is no change in the perception of executives regarding the risks of bribery and corruption. The Report concludes that there has been no reduction in the perceived level of bribery and corruption over the last two years. There also continues to be a willingness on the part of a significant number of executives to participate in unethical actions to win or retain business. The Report found that in the C-suite:

  • 35% would use entertainment to win/retain business
  • 18% would use personal gifts to win/retain business
  • 13% would use cash payments to win/retain business
  • 41% overall would use one of the methods listed above to win/retain business

Compliance: Despite an emphasis on compliance there may be what the Report calls “compliance fatigue.” Overall the Report found that:

  • One in five business still do not have an anti-corruption policy

  • Less than 50% of executives have attended anti-corruption training

  • There has been a reduction in the level of reporting on compliance issues to boards

Finally, even for those who have anti-corruption compliance programs, there are suggestions that critical issues are not being addressed. For example, less than one third of business organizations are always, or very frequently, conducting anti-corruption due diligence as part of their mergers and acquisitions process. About 45% of companies have not implemented a whistleblower hotline. And, sales and marketing executives are the least likely to be included in risk assessment despite being exposed to significant risks. Overall, the Report findings present surprising and disturbing trends regarding potential threats of fraud and corruption, the willingness of executives to engage in unethical or wrongful conduct and compliance efforts.

 

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.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!