Rise in global fraud triggers serious liability concerns amongst global boards
Ernst & Young: «11th Global Fraud Survey» Serious fraud has doubled during the recession in some regions
ZURICH/NEW YORK, 19 MAY 2010 – The Ernst & Young 11th Global Fraud Survey reveals that in the aftermath of the financial crisis of the last two years, companies are slowly returning to growth. Often, a growth strategy involves expansion into new markets and new countries which can entail potential fraud, bribery and corruption risks.
The survey shows that the Swiss respondents are, amidst this drive for growth, concerned with regards to personal liability that could arise from potential fraudulent behavior. 64 per cent of the Swiss respondents (Global 76 per cent) feel that their boards are increasingly concerned with regards to their personal liability from fraud, bribery and corruption for the actions carried out by the company. Furthermore, executives interviewed believe that their boards are not sufficiently prepared to deal with the new risks from fraud and corruption as companies return to growth. Boards are perceived as being especially worried in Latin America (95 per cent), Middle East and Africa (87 per cent), Central and Eastern Europe (84 per cent) and Australia (81 per cent).
Having coped through the downturn, many companies are now looking for new growth opportunities, which may come through entering new markets or making acquisitions. 32 per cent of Swiss companies are focusing on aggressive growth over the coming year versus only 23 per cent of the global respondents and only 19 per cent of the Western European respondents. These efforts can expose companies to numerous new risks, potentially including corruption issues. To minimize such risks, businesses have to undertake thorough, focused pre-acquisition due diligence.
However, 46 per cent of Swiss respondents stated that they rarely or never undertook such procedures, (Global 30 per cent, Western Europe, 34 per cent). The figures for post-acquisition due diligence raises even greater alarm, with 55 per cent of Swiss respondents admitting that they rarely or never undertook such procedures. The figure is one of the highest, followed closely by 54 per cent in Australia and 53 per cent in Japan.
The responses of over 1,400 CFOs and heads of internal audit, legal and compliance in major companies in 36 countries across the world also show that fraud appears to be increasing significantly in some regions and that a substantial number of respondents reported suffering a significant fraud in the past two years. For example, in Western Europe, the rate has doubled from 10 per cent to 21 per cent, which is slightly higher than the 16 per cent Swiss rate. Fraud levels also remain high in Latin America (21 per cent) and the Middle East and Africa (18 per cent).
Michael Faske, Ernst & Young’s Fraud Investigation & Dispute Services Leader in Switzerland says: “Increased enforcement against fraud, bribery and corruption is a priority in many major markets. Individual executives and directors will not be immune from prosecution. Indeed, the passage of Article 102 of the Swiss Penal Code is an example of a more robust approach to punishing the unethical conduct of individuals and corporate.”
However, despite the boards’ concern, they do not appear to be behaving in a way that would increase their own protection. Worryingly, in Western Europe, only 4.5 out of 10 CFOs interviewed had been asked to perform a review of anti-fraud and corruption controls in the previous 12 months, and only 28 per cent had been asked to produce a fraud risk assessment. Results were generally better in North America than elsewhere, but results from Central and Eastern Europe were particularly concerning, with only 18 per cent of respondents having been asked to conduct a fraud risk assessment.
Michael Faske adds: “Given the pressure on corporate resources, prioritizing anti-fraud and anti-corruption efforts is essential. Regularly scheduled assessments of risks in particular businesses and markets are prudent and help those in risk management functions to triage the most pressing situations.”
For effective fraud prevention, 84 per cent of the Swiss respondents (Global 74 per cent) put the most confidence in strong internal controls. However, Swiss companies (72 per cent) are slightly below the global average of 79 per cent in their confidence in the effectiveness of internal audit to detect fraud bribery. Additionally, when fraud does occur, the survey reveals that 60 per cent of Swiss companies first response includes having a clear process for reporting incidents to the board.
A renewed merger and acquisition strategy also raised more specific concerns among our respondents. In Western Europe, 54 per cent percent of chief legal officers interviewed are worried by competition risks arising from a push for growth, while 52 per cent of the western European chief compliance officers reported that data security will be a significant issue in the next 18 months.
Michael Faske concludes: “When growth returns, we expect more challenges, more potential for fraud, more exposure to corruption and more interest from regulators. In the coming months, if they haven’t done so already, companies will need to review or improve their procedures to achieve long term sustainable and ethical growth.”
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