Audit Committee Bulletin: October 2013
Struggling to combat fraud and bribery
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
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:
- Has the business entered markets where unethicalconduct, including bribery and corruption, is perceivedas widespread?
- Companies that deal with fraud, bribery and corruptionrisks effectively take ownership of the problem. Do theboard, senior management and teams across functionsand geographies acknowledge that the risk is real forthem and their business?
- How are the company's anti-fraud and anti-briberyefforts communicated to its employees? Are the costsof fraud, bribery and corruption — both to the employeeand the company — understood at an individual level?
- How does management identify specific risks andhow often are those assessments refreshed? Is thecontrol environment designed to mitigate the risks andregularly assess them?
- Does management ask tough questions and demandanswers? Employees should be comfortable in raisingissues and confident that unethical behavior will notbe condoned.
- Is management cutting costs and putting pressureon teams in ways that could increase the risk ofunethical practices?
Unethical conduct by organizations including by directors and senior managers