Audit Committee Bulletin: October 2013

Struggling to combat fraud and bribery

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Companies around the world continue to face significant fraud, bribery and corruption risks, according to our report Navigating today’s complex business risks. Many companies are struggling to deploy effective compliance programs, further underlining the need for audit committee oversight.

Triggers for unethical conduct

Executives and their employees are under increased personal pressure — from inside the company and from investors — to produce growth in extremely challenging conditions. To reach their targets, many companies are looking to cut costs or move into new, rapid-growth markets.

Companies must address the increased fraud, bribery and corruption risks that can arise from these strategies.

In rapid-growth markets, 67% of respondents believe that bribery and corrupt practices are widespread — nearly twice as many as in mature markets. When someone’s personal remuneration or career progression is at stake, the incentives for unethical conduct can be strong. A focus on growth and cost cutting can weaken the systems and teams in place to prevent and detect unethical behavior.

Financial manipulation is widespread


EY chart – unethical conduct by organizations

An alarming number of survey respondents were aware of unethical conduct. One in five said they had seen financial manipulation of some kind occurring in their company.

Its two most common forms were overstated sales and understated costs.

Focusing compliance efforts

The survey suggests the need for companies to strengthen their compliance efforts. It identified four problems to address:

  • Senior management thinks that programs are more effective than they actually are.
  • Compliance programs are too narrow or not seen as relevant.
  • Programs are perceived as constraining competitiveness in the market.
  • The increased risk due to current market conditions has not been matched by increased compliance efforts.

How audit committees can help

While being far from grounds for complacency, there are signs that compliance messages are gradually getting through to employees. But, for a minority, attitudes seem hard to change.

Businesses face significant risks in this area. Audit committees can help by making management aware of potential threats and appropriate responses. Complacency — “it couldn’t happen in our company” — must be challenged.

Ultimately, the reputational damage caused by unethical behavior could be far more punishing than regulatory fines and shareholder litigation.



Questions for the audit committee

 

 

Unethical conduct by organizations including by directors and senior managers


EY chart – unethical conduct by organizations ×