59% of Irish businesses believe fraud risk is on the increase as recession bites
- however fraud is still widely seen as being someone else’s problem, with 81% Irish respondents believing their own companies are free from significant fraud
- 83% Irish respondents believe redundancies present significant risk problems
- Survey reveals alarmingly high tolerance of unethical business behaviour across Europe
Dublin 25 May 2009: Almost 60% of Irish businesses surveyed expect corporate fraud will rise as a result of the current economic downturn according to a report issued today by Ernst & Young. Respondents identified factors such as pressures resulting from corporate restructuring and cost cutting measures as being largely to blame. Julie Fenton, Ernst & Young’s Fraud Investigation & Disputes Partner at its Irish firm says that “the survey findings reflect the widely acknowledged view that fraud risk increases in a downturn. However, it is concerning that against this backdrop, 81% of Irish respondents consider that the company they work for is free from significant fraud, suggesting that fraud is still often viewed as being someone else’s problem.”
Consistent pessimism across Europe
The expectation that corporate fraud is going to increase over the next few years is mirrored across Europe, with 54% of respondents from Western Europe and 55% from Central and Eastern Europe sharing the same negative outlook. Only 8% of respondents through that corporate fraud would decline.
Fenton comments: “Geographic location or relative economic wealth makes little difference to expectations of increased fraud across Europe. This is a global recession and fraud is a global problem.”
The hidden costs of redundancy
Not only does any downturn expose more fraud as the masking effect of economic growth is withdrawn, but as the pressure intensifies on management to maintain income and earnings, the incentive to commit fraud increases.
Fenton comments: “In the current climate, management are under incredible pressure to stabilise their businesses and meet financial targets – both at a personal and organisational level.” Across Europe a quarter of respondents identified that it was an acceptable action to make payments or provide gifts to win and/or retain business.
A frequently shifting organisational structure and blurred reporting responsibilities provide opportunities for fraudulent behaviour in good economic times. This is intensified in a recessionary environment where such issues become more widespread. On this point, Ireland faired worse in comparison to European averages.
As Fenton explains, “When companies are making redundancies or they are undergoing changes in ownership gaps can appear in financial controls.” 43% of Irish respondents believed that normal policies and procedures are likely to be overlooked as staff redundancies are made, compared to 36% across Europe.
While in Ireland 45% said that damage to moral was a key factor which increased fraud risk following two companies merging in stark contrast to just 24% across Europe.
Fenton believes Irish results, in particular, highlight difficult challenges for non-executive directors and management. “With 69% of Irish respondents agreeing that management is likely to cut corners in the downturn, and the concern over damage to morale from redundancies among the highest in Europe, the scene is set for a potentially significant rise in both financial statement fraud and employee misconduct."
Measures to combat fraud
Positively, 57% of Irish respondents showed that their company’s are increasing their efforts in combating fraud relative the European average of 44%. However the survey indicates that these efforts rely heavily on reactive measures such internal and external audit and passive measures such as a code of conduct. Fenton says “proactive fraud risk management actions such fraud awareness training, whitleblowing and data mining should also be utilized as they are key elements to an effective anti fraud programme”
New data, new risks
Lack of common processes and procedures was recognised by 60% of Irish respondents as being a significant problem expected from the ongoing industry consolidation. Fenton explains, “Post-merger, organisations are often challenged with the need to be able to gather, analyse, and report on data flowing from multiple, incompatible, disparate and complex systems. Many organisations struggle to meet these challenges, with incompatible systems across many different divisions or entities, lack of common reporting tools and lack of resource availability to focus on pre-emptively detecting and preventing fraud and abuse as a result of the merger, all these factors lead to increased post-merger fraud risk.”
A wake up call?
Fenton believes that there is a silver lining now that fraud is so high on the corporate agenda. “The good news is that the current period of adversity can present opportunities to drive change more rapidly and effectively than in more prosperous times. Now is the moment for management to act urgently and emphatically to reinforce the importance of ethical business conduct,” she concludes.
Ends
About the Ernst & Young European Fraud Survey
In February 2009 our researchers conducted a total of 2,246 interviews with employees in 22 European countries either by telephone or online. Participants were employed by listed and/or multinational companies with over 1,000 employees. 48% worked for companies with over 5,000 employees, 92% over 500 employees.
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