Executive fraud and bribery risks increase during downturn

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London, 23 May 2012: More than half of UK executives would not rule out unethical activities to survive a downturn despite stricter bribery laws, EY’s 2012 Global Fraud Survey has shown.

EY’s 2012 Global Fraud Survey, Growing Beyond: a place for integrity shows that 54% of UK executives would not rule out unscrupulous behaviour, such as misstating financial statements, or providing personal gifts or cash to secure business. This is despite the UK Bribery Act coming into force, under which firms face criminal fines or imprisonment of executives. The survey of CFOs, heads of legal, compliance and internal audit, found that those who would provide personal gifts to secure business almost doubled in two years. A few even said they would give cash payments to win or retain business during the downturn.

Whistleblowing or hot air?

The findings show high risks of fraud and bribery despite 90% of UK companies having set up whistle blowing hotlines, compared to less than half of companies globally. Despite this, UK companies have shown weakness in punishing bribery and corruption. Only 24% have taken any action compared to 40% globally.

Equally, only just over a quarter of executives (26%) consider that UK enforcers are willing to prosecute cases of bribery and corruption and are effective in securing convictions. The survey found that 42% support regulators using financial incentives to encourage whistleblowers, following similar provisions in the US Dodd-Frank Act.

John Smart, Partner, EY’s Fraud Investigation & Disputes Services practice, says, “Growth and ethical business conduct in today’s markets can appear to be competing priorities, and many executives underestimate the serious risks. Boards need to put pressure on management to conduct more frequent and more robust anti-bribery and anti-corruption risk assessments and they need more tailored reporting to drive improved compliance.”

“There needs to be a more credible alternative for employees to report concerns. Companies should ensure effective mechanisms for internal whistleblowing – for example, 24 hour hotlines in local languages – but also that the corporate culture encourages internal reporting of issues.

“Businesses must also be aware of heightened scrutiny and ensure clear processes are in place for prompt investigation and communication with enforcement agencies.”

CFOs under the spotlight

CFOs are among the most influential executives reporting to the board on fraud, bribery and corruption issues. The results from the nearly 400 global CFOs surveyed, however, suggest that a minority could be part of the problem. The survey found 15% of CFOs would be willing to make cash payments to win business and 4% said they would be willing to misstate financial performance. Less than half had personally attended anti-corruption or bribery training. This group of executives is not large in absolute numbers but, given their responsibility, they represent a huge risk to their businesses and their boards.

John Smart says, “The CFOs we work with are committed to extremely high ethical standards. But the CFO’s influence within companies means they have a key role in preventing fraud, bribery or corruption and they need to redouble their efforts to set the right tone. They need to ensure that they have performed a thorough risk assessment around fraud, bribery and corruption, particularly in high risk markets.”

Preparing for export: managing third parties and risk from acquisitions

The survey also found fraud and bribery concerns influencing export strategy to create UK growth. The survey found 72% of UK executives said planned investment in new markets opened them up to new risks.

The results showed that only around a third understood their company is liable for the action of business third parties, often operating in foreign countries.

It also found one in five UK companies do not perform pre-acquisition due diligence very frequently, while only 60% regularly carry out post acquisition due diligence.

Smart concludes, “The survey shows companies struggling to balance growth and ethical business conduct during the current downturn. Many are failing to do enough to manage the risks. Boards need effective channels of communication with contacts across the finance function and other executives within the business to ensure that they have a full and an accurate picture of compliance. For businesses to seize new opportunities, boards need to ensure that the right tone is set not just at the top, but at all levels and in all markets.”