London, United States
"Senior managers express real anxiety about bribery and corruption in their emerging market operations," says David L. Stulb of leading professional services provider, Ernst & Young, "but many are still not taking the threat seriously enough. Robust business ethics, backed up by proper control processes, have to be ingrained into local operations, not just be part of the head office culture."
Speaking at the launch of the 9TH Global Fraud Survey, Fraud Risk in Emerging Markets, David L. Stulb, joint leader of Ernst & Young's global Fraud Investigations & Dispute Services practice, said, "Major fraud and corruption scandals attract headlines around the world, dramatically affecting corporate and market values. With the fear of fraud greatest in emerging markets, and with 20% of all companies having been victims of fraud, the consequences for those companies that continue to underestimate the risk could be severe."
For those developed markets organizations where fraud has occurred, three-quarters of it took place in their home or other developed country operations. However, senior management expresses more anxiety about fraud risk exposure in emerging market operations, with nearly half (48%) citing bribery and corruption as the greatest risk.
But many are not taking appropriate steps to minimize the real fraud risks in those markets. For example, in those markets where it is common practice, a third of staff (32%) receives no training on the differences between facilitation fees and corrupt payments. Even where there is communication on anti-fraud policies, a quarter of staff (25%) receives no education on how to implement them.
More than half (60%) of survey respondents in developed countries say they believe fraud is more likely to occur in their emerging market operations than their developed market ones, even though 75% of fraud happens in their developed markets. Anxiety among executives on the ground in emerging markets is even greater, with nearly nine out of ten (86%) of companies based there believing fraud is more likely to occur.
This 'gap' between experience and perception suggests that anti-fraud policies implemented in developed countries may not yet have been properly introduced to overseas operations.
The survey also suggests that companies are not doing enough to reduce the risk of fraud. Robust internal controls remain the first line of defense against fraud for companies in all markets, but anti-fraud controls are not always integrated under an anti-fraud program and monitored for compliance. Two in five (40%) of companies still have no formal or documented anti-fraud policy, a situation that has hardly changed since the 8th Global Fraud survey in 2003.
Assessing fraud risks
This year's survey found one in five organizations has made a decision not to invest in an emerging market as a result of a fraud risk assessment. Overwhelmingly, it is the respondents who have a formal worldwide anti-fraud policy that have walked away from a potential investment following a thorough assessment of the fraud risks.
For those companies that enter new markets without the benefit of such a fraud risk assessment, there is an even greater need to apply anti-fraud policies to prevent and detect fraud. However, it is those organizations that do not have a formal anti-fraud policy who are most likely to enter a new market without considering fraud risk. Companies with anti-fraud policies are three times more likely than those without to include fraud as part of their market-entry decisions.
"Companies that have anti-fraud programs could benefit from making these programs more comprehensive and extending them to all foreign operations," explains Stulb. "However, poor communication or insufficient training limits the effectiveness of anti-fraud programs for up to a quarter (25%) of companies.
"We recognize that ambitious businesses must pursue opportunities in these exciting emerging markets, but this also carries greater risk. Proper anti-fraud measures will greatly reduce the risk and allow senior management to focus on growing the business."
Other key findings of the survey include:
-- Corporate governance issues remain top of mind for our respondents and with more aggressive enforcement efforts by regulators worldwide, the attention of corporate leaders is increasingly being focused on management of fraud risk.
-- Surveyed companies are changing why they investigate fraud. While it used to be to apportion blame and recover losses, today nearly half of our respondents express a desire to identify and improve control weaknesses.
-- While corporations certainly need to be aware of the risks associated with bribery and corruption in emerging markets, our survey suggests corporations may be underestimating the threat of financial statement fraud in these markets. While implementation of International Financial Reporting Standards (IFRS) is a very positive step for investors and other capital markets participants worldwide, the transition to new accounting standards, where the change from local GAAP to IFRS might negatively impact a subsidiary's historical results, could increase pressure on managers to commit financial statement fraud.
-- For many companies, working with third parties and intermediaries is key to achieving growth in emerging markets. Yet still almost one third (28%) of these organizations do not have anti-fraud measures in place to manage the associated risks.
About Fraud Risk in Emerging Markets
Fraud Risk in Emerging Markets is Ernst & Young's ninth global fraud survey. From February through April 2006, 586 telephone interviews with senior executives in large organizations were conducted across 19 countries (eight of which were classed as 'emerging markets') by our research agency Taylor Nelson Sofres.
About Ernst & Young
Ernst & Young, a global leader in professional services, is committed to restoring the public's trust in professional services firms and in the quality of financial reporting. Its 107,000 people in 140 countries pursue the highest levels of integrity, quality, and professionalism in providing a range of sophisticated services centered on our core competencies of auditing, accounting, tax, and transactions. Further information about Ernst & Young and its approach to a variety of business issues can be found at www.ey.com/perspectives.
Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited does not provide services to clients.
This press release has been issued by EYGM Limited, a member of the global Ernst & Young organization
CONTACT: Ernst & Young Global PR Daniel Lawrence +44 (0)20 7980 0504 daniel.lawrence@uk.ey.com
Source: Business Wire (Business Wire India)