2012 Global Fraud Survey

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23 May 2012

Drive for revenue growth ignores risk of prosecution for senior executives

A concerning escalation in the number of executives willing to make cash payments to win business globally
• Support for bounty schemes to encourage whistle-blowing is high in South Africa
• Global appetite for increased supervision by regulators is mirrored in South Africa

Johannesburg, 23 May 2012 – Ernst & Young’s 2012 Global Fraud Survey, Growing Beyond: a place for integrity, shows that 15% of senior executives polled at leading companies around the world are willing to make cash payments to win or retain business, up from 9% in 2010.

More than 1,700 executives across 43 countries, including CFOs and heads of legal, compliance and internal audit, were surveyed for their views of fraud, bribery and corruption. Companies in South Africa, Kenya, Namibia and Nigeria formed part of the respondent base. Face-to-face interviews were also subsequently held with senior executives of blue-chip companies to discuss these findings and their own efforts to mitigate these risks.

The increase in the number of senior executives willing to make cash payments unethically underscores one of the survey’s key conclusions: the pressure to meet revenue targets is undermining executives’ commitment to compliance with policies and the law. The competitive landscape continues to be distorted by unethical conduct. Over a third of the global respondents believe corruption is widespread in their country, and the situation is significantly worse in rapid-growth markets like Brazil (84%), Nigeria (72%), Turkey (52%) and South Africa (64%).

In South Africa, while only 2% of executives would be willing to pay cash to win or retain business during an economic downturn, down from 16% in 2010, a higher percentage would be prepared to use entertainment to win/retain business (42%, up from 18% in 2010) and personal gifts (14%, up from 6% in 2010).
“These figures show that South African executives appear to have changed their minds about the kind of unethical behaviour they would countenance in order to ensure their companies’ survival,” observes Sharon van Rooyen, director, Fraud Investigation & Dispute Services at Ernst & Young. “More worrying, only 36% of South African respondents feel that unethical practices cannot be justified to help a business survive an economic downturn: a significant drop from the 64% in 2010 that took the same principled stand.”

On the positive side, the survey clearly shows that African respondents are committed to combating corruption, with the processes in place to monitor anti-bribery compliance broadly on a par with (or even higher than) those in the rest of the world. Africans also show a keen appetite for increased supervision by regulators (72% in South Africa as compared with 69% globally) and strong support for “bounties” for whistle-blowers along the lines proposed by the Dodd-Frank Act. Seventy-eight percent of South African respondents (79% in Africa overall) would support such a scheme, as compared with 52% globally.

Boards under pressure 

Boards are held responsible by regulators and shareholders for addressing the challenges of corruption and anti-bribery, and are under intense pressure to do so. But more than half of C-suite respondents think the board needs a more detailed understanding of the business if it is to function effectively as a safeguard. Globally, mixed messages are being given by management, with the “tone at the top” being diluted by the failure to penalise misconduct. A substantial minority of respondents believe that, while management strongly communicated its commitment to anti-bribery and anti-corruption policies, breaches were not penalised.

“This is an area in which South Africa performs significantly better than the global average,” Van Rooyen notes. “In South Africa, 62% of respondents said that breaches of anti-bribery and anti-corruption policies were penalised, as against 45% globally. Africa as a whole was even higher at 68%.”

CFOs under the spotlight

A particularly worrying development for boards is the emergence of a small but significant number of CFOs that are willing to countenance corrupt acts. Nearly 400 CFOs formed part of the global respondent base, and they are among the most influential executives reporting to the board on fraud, bribery and corruption issues. But the results suggest that a concerning minority could be part of the problem. Fifteen percent of the CFOs surveyed said they would be willing to make cash payments to win business, and 4% said they would be willing to misstate financial performance. 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.

“While the majority of CFOs are committed to extremely high ethical standards, their increasing influence within companies means they have a key role in preventing corrupt practices. They need to ensure that they themselves are trained adequately, and that they spend the time to build awareness of the risks. They also need to demonstrate their support for good governance” says Van Rooyen.

Preparing for new challenges: managing third parties and risk from acquisitions

Companies pursuing opportunities in rapid-growth markets face specific risks that are not always being managed effectively, according to the survey. For example, due diligence on third parties is expected by regulators—it is required under both the US Foreign and Corrupt Practices Act and the UK Bribery Act—but almost half the respondents (44%) reported that background checks were not being performed. South Africa bucks the international trend with 87% of local respondents using an approved supplier database to manage and monitor third-party relationships. Both background checks (77%) and ownership checks (72%) are also popular among South African companies—and both are significantly more used than in Western Europe and globally.

Many businesses are also exposed to additional risk, having failed to conduct appropriate anti-corruption due diligence before and after acquisitions. For US-based companies, this type of due diligence is the norm: 84% either always or very frequently conduct it pre-acquisition. Elsewhere the frequency is much lower (32% in China, 9% in Nigeria).

Here again, South Africa compares favourably, with 73% of South African companies frequently or always conducting due diligence prior to an acquisition.

“In the fight against fraud and corruption, South Africa faces a specific challenge: while 60% of respondents believed that authorities were relatively willing to prosecute bribery and corruption cases, only 16% saw these prosecution efforts as effective. These perceptions are mirrored across the African region as a whole, but are significantly at variance with the rest of the world,” Van Rooyen concludes. “Our belief is that businesses with major operations in Africa would be likely to benefit from participation in initiatives for collective action that are beginning show potential for combating fraud, bribery and corruption.”

Notes to editors
 About the survey
The survey is the largest one Ernst & Young have produced in this series. Between November 2011 and February 2012, more than 1,700 interviews were conducted in 43 countries with individuals from a sample of the largest companies by turnover in each country. Face-to-face interviews were subsequently held with senior executives of blue chip companies about the survey findings. A copy of the survey is available at: www.ey.com/globalfraudsurvey2012

About Ernst & Young’s Fraud Investigation & Dispute Services
Dealing with complex issues of fraud, regulatory compliance and business disputes can detract from efforts to achieve your company’s potential. Better management of fraud risk and compliance exposure is a critical business priority – no matter the industry sector. With more than 1,600 fraud investigation and dispute professionals around the world, we assemble the right multidisciplinary and culturally aligned team to work with you and your legal advisors. And we work to give you the benefit of our broad sector experience, our deep subject matter knowledge and the latest insights from our work worldwide. It’s how Ernst & Young makes a difference. 

About Ernst & Young
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