Fraud and corruption risks impact corporate international expansion; pressure for revenue and earnings growth driving illegal conduct

EY LLC, Kyiv, Ukraine, 
Wed, May 20, 2015

u 61% ofrespondents in key rapid-growth markets say corruption is widespread

u 20% ofbusinesses believe that their anti-bribery/anti-corruption policies make themless competitive

u 37% of respondentsagree that companies often overstate their financial performance

LONDON, KYIV, 20 May 2015 – EY’s Europe, Middle East,India and Africa (EMEIA) FraudSurvey, Fraud and corruption – the easy option for growth?, has found thatgreater pressure on businesses to grow revenues together with market volatilityis creating increased risk in expansion opportunities. Challenges, includinggeopolitical instability, commodity and currency price volatility, as well aseconomic sanctions, are pushing companies and their executives toward high-riskbehavior.

The survey, which polled3,800 employees of large businesses¹ in 38 countries, found thatnearly 33% of survey respondents report that management is under increasedpressure to expand into higher risk markets. In these markets, 61% ofrespondents see corruption in companies as widespread, and 37% of respondentsreport that companies often overstate their financial performance.

The risk of fraud, however,is not limited to rapid-growth markets². 23% of senior managementrespondents said they have heard of early recognition of revenue occurring intheir organization in the past year – the type of behavior that has been at thecenter of numerous high-profile frauds. In addition, 21% of respondents reportthat bad news about financial performance is not being shared openly.

David Stulb, Global Leader of EY’s Fraud Investigation & DisputeServices (FIDS) practice, says:

“The risks of fraud, briberyand corruption are real. Businesses are facing complex restrictions in the waythey conduct business with evolving sanctions regimes and new risks, such ascybercrime, having the potential to significantly disrupt operations.Businesses need to have their eyes wide open in their pursuit of high-riskgrowth strategies.”

Are fraud and corruption the easy options for growth?

While senior management maybe tempted to take risks to accelerate short-term growth, the survey shows aclear correlation in companies that are growing and are taking complianceseriously. Respondents whose business has experienced revenue growth in thelast two years are:

·        More likely to rate their company’s ethical standards as“very good”

·        More likely to have or know about their company’santi-bribery/anti-corruption policy

·        More likely to see operations across markets meeting the sameethical standards

Stulb continues, “Our surveyshows that 20% of employees believe anti-corruption policies will hold themback from growing their business. Our view is this shouldn’t be the case. Togrow in a high-risk market you need the right controls and processes. You needyour teams to be trained to make the right choice when asked to pay a bribe or‘cook the books’, and you need the right tools to monitor activity so theserisks can be addressed in a timely manner.”

Businesses are still not protecting themselves enough

Our survey shows that manybusinesses still do not have even the basic building blocks in place foreffective compliance.

·        42% of respondents say that their company does not have ananti-bribery/anti-corruption policy, or are unaware of them

·        37% of respondents have not had anti-bribery/anti-corruptiontraining

·        24% say their company does not have a whistleblowing hotline

The results also confirmthat financial services organizations have responded to the intense pressurethat they have been under from regulators, customers and others. Compared withother sectors, they are doing more to focus on compliance and the behaviors oftheir staff. But there are still gaps: there are respondents in the financialservices sector who report that their business does not have ananti-bribery/anti-corruption policy or a whistleblowing hotline. Also, thereare senior managers who are perceived as showing little attention to anti-moneylaundering rules, unauthorized trading or misselling issues.

Leadership’s commitment is critical

Not all senior management iscommunicating its commitment to high ethical standards. Furthermore, there is adisconnect between their view and that of more junior staff: 44% of seniormanagement said they frequently communicate the importance of high ethicalstandards but only 30% of employees agree.

Stulb concludes, “Businessesremain under intense pressure to grow and, in this market, operating in thegray area between legal and illegal may appear to some as a viable option. Butour survey results show that this is a false choice, and that growth can beachieved while appropriately managing the risks of fraud and corruption.Effective compliance is not a barrier to growth; it is a requirement forsustained success.”

Analysis of the research inUkraine

Alexei Kredisov, Managing Partner, EY Ukraine, Co-Chair of the GlobalEmerging Market Center, EY Global: “Compared with the previous year, currentsurvey indicators show an increase from 60% to 80% in the number of respondentsin Ukraine who agree that bribery/corrupt practices occur widely in theircountry. Such a response can be regarded as a "yellow penalty card"to efficiency and the speed of anti-corruption reform in Ukraine. It’s clearthat perceptions of the business environment have worsened in general. Perhapsthis was triggered by the economic downturn on the macro and micro levels, aswell as the disparity between the rate at which anti-corruption practices aredeveloping on the corporate and government levels."

Alexei Tyakin, Senior Manager, Head of Fraud Investigation and DisputeResolution practice, EY Ukraine: “Among positive trends, we can point out thatthe number of respondents in Ukraine who said that their company has ananti-bribery/anti-corruption policy and a Code of Corporate Ethics more thandoubled to 54%, which is close to the world average. The number of respondentswho said that their company does not have a whistleblowing hotline, where youcan report incidents of corruption or violations of corporate ethics, decreasedfrom 32% to 23%. Moreover, the number of those who hadanti-bribery/anti-corruption training significantly increased.

Despite this, the economicdownturn, political instability, and intensification of competition in thecountry could lead to violations of ethical standards and corporate policies.Some 24% of respondents claim that if they followed anti-bribery andanti-corruption policy very closely, it would harm their competitiveness in themarket. In addition, 20% of respondents believe that deliberately misstatingfinancial performance is justified if it helps their business survive. In othercountries, only 4% of respondents agreed. This fact should spark the concern ofcreditors and other users of financial statements."

To view the full version of thesurvey:

http://www.ey.com/Publication/vwLUAssets/ey-emeia-fraud-survey/$FILE/ey-emeia-fraud-survey.pdf

1 Large companies are defined as those with more than 150,250, 500, 1,000 or 1,500 employees globally, depending on the country, or asquoted on a stock exchange or are multinationals.

2 For the purposes of this report, “developed” countriesinclude Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland,Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the UK.The “rapid-growth” countries, taken from our Rapid-Growth Markets Forecast:July 2014, include Czech Republic, Egypt, India, Nigeria, Poland, Russia, SaudiArabia, South Africa, Turkey, UAE and Ukraine (100 respondents in Ukraine).

View the report online at: www.ey.com/FIDS

Notes to Editors

About EY’s Europe, Middle East, India and Africa Fraud Survey2015, Fraud and corruption – the easy option for growth?

Between December 2014 andJanuary 2015, our researcher — the global market research agency Ipsos —conducted 3,800 interviews with employees of large companies in 38 countriesonline or in person. Interviews were conducted on an anonymous basis using locallanguage in all countries.