Fraud risk on the increase across Europe as recession bites

Ernst & Young Fraud survey reveals alarmingly high tolerance of unethical business behaviour

The Ernst & Young European Fraud Survey released today reveals that as the recession in Europe deepens there are worrying trends in what company employees believe is acceptable business behaviour.

The responses of over 2,200 individuals in major companies in 22 countries across Europe vary by jurisdiction but there are some consistent themes. Half of those surveyed thought that one or more types of unethical business behaviour was acceptable including 25% who thought it fine to give a cash bribe to win work. By country this latter figure rose as high as 38% in Spain, 43% in the Czech Republic and 53% in Turkey.

There was even a significant minority – 13% of senior managers - who felt that distorting their company’s financial performance was justifiable to survive today’s turbulent economic climate.

David Stulb, Ernst & Young’s Global Fraud Investigation & Dispute Services Global Leader says: “The findings of this survey show there is a disappointing tolerance of unethical behaviour amongst employees in companies across Europe. Making cash payments to win business, and even deliberately misstating financial performance to mask disappointing results were supported by alarmingly large numbers of respondents.”

A bad problem that is getting worse

Not only does any downturn expose more fraud as the masking effect of economic growth is withdrawn, but as the pressure intensifies on management to maintain income and earnings, the incentive to commit fraud increases.

Sharon van Rooyen Director for Fraud Investigations and Dispute Services at Ernst & Young in South Africa adds that in the current climate, management are under incredible pressure to stabilise their businesses and meet financial targets – both at a personal and organizational level.

A frequently shifting organisational structure and blurred reporting responsibilities provide opportunities for fraudulent behaviour in good economic times. This is intensified in a recessionary environment where such issues become more widespread.

As van Rooyen explains: “When companies are making redundancies or they are undergoing changes in ownership gaps can appear in financial controls.”

36% of the respondents to the European Fraud survey believe that normal policies and procedures are likely to be overlooked as staff redundancies are made and almost half believe that the differing standards of behaviour that are typically held by two merging companies poses a major challenge to anti-fraud efforts.

Consistent pessimism across Europe

Over half of those individuals surveyed expected corporate fraud to increase over the next few years, with 54% of respondents from Western Europe and 55% from Central and Eastern Europe sharing the same negative outlook. Only 8% of respondents thought that corporate fraud would decline.

Stulb comments: “Geographic location or relative economic wealth makes little difference to expectations of increased fraud across Europe. This is a global recession and fraud is a global problem.”

“South Africa is not exempt from this trend,” says van Rooyen. “Just as the risk of fraud is increasing as the economic climate in Europe deteriorates so we can expect to see a similar increase in South Africa as the effects of the economic slowdown start to bite.”

Management are seen as part of the problem

The respondents to the survey believe that far from setting a leading example, the senior management of companies are in fact part of the problem. Some 69% of respondents had cause to doubt the integrity of their company’s management. Only 12% of individuals surveyed in France and Italy believed their management always operated with a high level of personal integrity.

As a result of this mistrust of management the research suggests that employees expect regulators and other authorities to do more to protect them and to ensure their bosses are compelled to intensify their efforts to defend companies from fraud.

As Stulb explains they were right to be concerned as, “worryingly, the senior management of the population that we surveyed are more likely to condone bribery and financial statement fraud than those of junior rank. Indeed our interaction with regulators suggests that they are very conscious of the shortcomings in corporate governance and are positioning themselves for much more aggressive enforcement action.”

Van Rooyen adds that the permissive attitude towards fraudulent activity by upper management is likely to have a knock-on effect as employees further down the organisation are able to justify their illegal activities with less remorse.

A wake up call?

As Stulb concludes, there is a silver lining with fraud now so high on the corporate agenda. “The good news is that the current period of adversity can present opportunities to drive change more rapidly and effectively than in more prosperous times. Now is the moment for management to act urgently and emphatically to reinforce the importance of ethical business conduct.”