Only 52% of Canadian companies protect themselves against corruption risks when buying into business globally

(As originally published in FEI Canada F.A.R. member e-newsletter, August 2012)

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By Mike Savage, Global Leader, Anti-fraud, and Practice Leader, Fraud Investigation and Dispute Services, Ernst & Young LLP

Companies worldwide are battling to survive and grow in what have continued to be highly uncertain economic conditions. In this environment, growth and ethical business conduct can sometimes appear to be competing priorities. Many mature economies are struggling, while some growth markets in Asia and South America are decelerating. As a result, management and boards are increasingly focusing their growth strategies on “the next BRICs.”

Whether it’s Indonesia, Nigeria, Mexico or Turkey, among others, the opportunities to secure new revenues in rapid-growth markets are significant.

However, it’s imperative that in these rapid-growth markets, evaluation of opportunities includes understanding of the internal controls required to mitigate the associated risks. Many of these markets have historically been perceived as having high incidences of fraud, bribery and corruption. And those responsible for prosecuting corporations and their executives are now focusing on corrupt practices in rapid-growth markets.

In this changing regulatory and enforcement environment, Ernst & Young undertook the 12th Global Fraud Survey – Growing Beyond: a place for integrity. For this survey, we interviewed chief financial officers and heads of legal, compliance and internal audit, to get their views of fraud, bribery and corruption risk and how their organizations are mitigating them.

New global markets can pose risks

Though many companies have intensified their efforts to combat bribery and corruption, especially given the aggressive enforcement environment, our research shows that much remains to be done.

While 82% of Canadian executives feel investments into new global markets pose risks for their companies, only 52% say their company always conducts due diligence into fraud-related risks before acquiring a new business. And a mere 29% of Canadian respondents say their organizations perform post-acquisition due diligence into corruption-related risks.

Canadian companies seem to be very aware of the risks posed by fraud, bribery and corruption at home — but they expose themselves by not taking some critical steps when looking abroad. For example, when moving into new markets, Canadian companies can better manage the risks if they understand the local commercial practices and those of the target before they move ahead.

While the survey results aren’t necessarily surprising, they are troubling. Some 42% of Canadian respondents say company management might be likely to cut corners to meet targets when economic times are tough. That’s lower than the global response, but still worrisome.

Interestingly, while 95% of Canadian respondents state that their company has anti-bribery/anti-corruption policies, only 43% of respondents note that people have been penalized for breaching these policies. Without consistently applied internal discipline, employees may believe breaches of those policies are tolerated.

Internal controls to mitigate risks

In volatile economic environments, growth and responsible business conduct can sometimes appear to be competing priorities. But generally the opportunities can be pursued by using internal controls to mitigate the risks. Organizations have been more successful in growing internationally where they make concerted, risk-focused efforts that target areas of potential exposure, and where management leads by example. Successful companies are those able to balance the priorities of growth and ethical business conduct.

In order to successfully enter into new global markets, getting things right is not just about the internal procedural details — it’s also important to understand the broader operating environment a business will be working in. For example, only 28% of Canadian respondents believe they have joint liability for the actions of the third party, compared to 39% of global respondents. International regulatory settlements show that third-party due diligence and monitoring are important compliance requirements. Examples of third parties include distributors, agents and business consultants.

For effective fraud prevention, Canadian respondents put the most confidence in regular internal audits (90%) followed by audits by an external auditor (82%) and whistle blowing hotlines (81% compared to 53% globally).

Changes to an acquired company’s culture to mitigate the risks of fraud, bribery and corruption cannot be made overnight. Organizations need to make concerted, risk-focused efforts that target areas of potential exposure, and management needs to lead by example. Only then will companies be able to properly balance the priorities of growth and ethical business conduct while seizing opportunities available in these economic conditions.

About the survey: 12th Global Fraud Survey was conducted between November 2011 and February 2012. Researchers conducted a total of 1,758 phone interviews with employees in 43 countries covering North America, Latin America, Europe, Africa, Middle East, Far East and Oceania. Principle respondents were CFOs, heads of internal audit, heads of legal and chief compliance officers. Fifty interviews were conducted in Canada.