While senior managers express real anxiety about bribery and corruption in their emerging-market operations, 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, and not just comprise an extension of head-office culture. This is according to “Fraud Risk in Emerging Markets”, Ernst and Young’s ninth global fraud survey.
From February to April 2006, 586 telephone interviews with senior executives in large organisations were conducted across 19 countries (eight of which were classed as “emerging markets”) by Ernst and Young’s research agency Taylor Nelson Sofres.
Speaking at the launch of the Ninth Global Fraud Survey, Fraud Risk in Emerging Markets, David Stulb, joint leader of Ernst and Young’s global fraud investigations and 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 developed-markets organisations that have experienced fraud, three-quarters of the incidents took place in their home or other developed country operations. However, senior management expressed more anxiety about fraud risk exposure in emerging-market operations, with nearly half (48%) citing bribery and corruption as the greatest risk.
But many were not taking appropriate steps to minimise the real fraud risks in those markets. For example, in those markets where it is common practice, a third of staff (32%) received no training on the differences between facilitation fees and corrupt payments. Even where there was communication on anti-fraud policies, a quarter of staff (25%) received no education on how to implement them, the survey found.
More than half (60%) of survey respondents in developed countries said they believed fraud was more likely to occur in their emerging-market operations than their developed market ones, even though 75% of fraud happened in their developed markets.
“Anxiety among executives on the ground in emerging markets is even greater, with nearly nine out of ten [86%] companies based there believing fraud is more likely to occur,” the survey noted.
Stuart Waymark, fraud investigations and dispute-services partner at Ernst and Young South Africa commented: “Despite the high level of anxiety — and 24% of South African respondents indicating that their organisation has experienced fraud in the last year — corporate will and actions to address the problem appear to be lacking.”
The “gap” between experience and perception suggested that anti-fraud policies implemented in developed countries may not yet have been properly introduced to overseas operations, the survey noted.
The survey also suggests that companies are not doing enough to reduce the risk of fraud.
“Robust internal controls remain the first line of defence against fraud for companies in all markets, but anti-fraud controls are not always integrated under an anti-fraud programme and monitored for compliance. Two in five (40%) companies still have no formal or documented anti-fraud policy, a situation that has hardly changed since the Eighth Global Fraud survey in 2003,” Ernst and Young said.
Waymark noted that the situation was comparatively worse in South Africa, where just 32% of organisations had formal or documented fraud procedures and only 21% of employees were provided with formal training to help them understand and implement anti-fraud policies.
“This finding demonstrates the shortfall of corporate South Africa in combating the problem of loss through fraud and corruption,” he said.
This year’s survey found one in five organisations 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 organisations that do not have a formal anti-fraud policy who are most likely to enter a new market without considering fraud risk, Ernst and Young commented.
Companies with anti-fraud policies are three times more likely than those without to include fraud as part of their market-entry decisions.
“We recognise 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,” said Stulb. — I-Net Bridge