Unethical conduct condoned in the workplace, lack of consequences and prosecution for bribery and corruption, and inadequate government commitment to secure convictions – these factors cropped up repeatedly in the findings of the 2016 global fraud survey, published by EY.
Conducted between October 2015 and January 2016, the consulting firm’s biennial survey provides powerful insights from 2 825 senior executives drawn from both the private and public sectors in 62 countries and territories.
EY chooses different topical issues for each survey – this year’s edition, the 14th, focuses on individual consequences for corporate misconduct.
The survey shows that, while many businesses have made significant progress in tackling fraud and corruption, there remains a persistent level of individual unethical conduct which is not being addressed.
Governments must work harder to secure convictions
There is a perception in emerging markets that individuals responsible for corruption are not being held to account, EY says. In South Africa, 42% of respondents believe that, while governments are willing to prosecute, they are not effective in securing convictions. In Nigeria this figure is 62% and in Kenya it is 64%.
Only 10% of South African and Kenyan respondents describe their governments as effective in prosecuting cases of bribery and corruption, while a third of Nigerian respondents hold this view.
The majority of South African respondents – 86% – agree that the effective prosecution of individuals would help deter fraud. However, 40% of those same South African respondents go on to say they would justify unethical behaviour to meet financial targets or safeguard a company’s survival in an economic downturn. Such behaviour includes offering entertainment, making cash payments, providing personal gifts or services, and misstating financial performance.
With many African economies experiencing increasingly challenging business conditions, and South Africa one of those under particular scrutiny because of corruption and poor economic growth, it is worrying – although perhaps unsurprising – that one in 10 respondents in South Africa and one in five in Kenya are willing to misstate their company’s financial performance. This includes extension of the monthly reporting period, backdating of contracts, and booking revenues earlier than they should be booked.
With these illegal actions condoned by some, executives responsible for ethics and compliance face a significant challenge if they are to keep their organisations clear of the scrutiny of prosecutors and avoid enforcement action, says EY.
Major risks because of the corrupt minority
Although increased international co-operation makes it easier for enforcers to nab bribers and fraudsters, 39% of respondents globally say that bribery and corruption happens widely in business in their country nonetheless. In South Africa this figure is 74%, almost double the global average and putting the country ninth in the world for this indicator.
In addition, 60% of respondents in South Africa say that they have had concerns about ethical conduct at their place of work.
However, only 11% of respondents worldwide believe corruption happens in their particular sector, and only 20% of South African respondents hold this view.
When expanding into new markets, the survey reveals, companies often take inadequate steps to reduce their risk exposure, and 20% of respondents globally do not focus at all on third parties as part of their anti-corruption due diligence. Further, one in three companies do not assess country or country-specific corruption risks before making investments, while only half the respondents make use of forensic data analytics (FDA) to identify and mitigate risks.
“Companies continue to be exposed to major risks driven by the illegal actions of a small minority of employees,” says David Stulb, EY’s global leader of fraud investigation and dispute services. Stulb adds that better use of technology is part of the answer. Another is increased transparency.
Demand for beneficial ownership transparency
The survey shows overwhelming corporate support for enhanced beneficial ownership transparency, with 97% of executives in Africa, and 91% globally, recognising the importance of establishing the ultimate beneficial ownership of the companies with which they do business.
The need for such transparency was exposed with the recent leak of the Panama Papers, a collection of 11.5-million documents revealing information of shareholders, directors, owners and finances for more than 214 000 shell companies associated with Mossack Fonseca, a Panamanian law firm.
The leaked documents show how wealthy individuals, including public officials and company directors, can use secretive offshore tax systems to keep personal financial information private.
“With the continuing anti-corruption enforcement focus on third-party conduct and the recent revelations on the possible misuse of offshore financial structures, business leaders are right to be focused on securing a deeper understanding of their clients, partners and suppliers,” says Stulb. “Enhanced transparency is clearly a focus of broad public interest.”
What to do
These are the steps EY recommends businesses take to minimise their risk of exposure to corruption:
- Adequately resource compliance and investigations functions, so that they can pro actively engage before regulatory action
- Establish clear whistle blowing channels and policies that not only raise awareness of reporting mechanisms, but encourage employees to report misconduct
- Undertake regular fraud risk assessments, including an assessment of potential data-driven indicators of fraud and/or FDA indicators of fraud
- Develop a cyber-breach response plan that brings all parts of the business together in a centralised response structure
- Undertake robust anti-corruption due diligence on third parties, before entering into a business relationship
- Execute a comprehensive anti-corruption compliance program that incorporates FDA and tailored bribery and corruption training.