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

• 61% of respondents in key rapid-growth markets say corruption is widespread • 20% of businesses believe that their anti-bribery/anti-corruption policies make them less competitive • 37% of respondents agree that companies often overstate their financial performance

EY’s Europe, Middle East, India and Africa (EMEIA) Fraud Survey, Fraud and corruption – the easy option for growth?, has found that greater pressure on businesses to grow revenues together with market volatility is creating increased risk in expansion opportunities. Challenges, including geopolitical instability, commodity and currency price volatility, as well as economic sanctions, are pushing companies and their executives toward high-risk behaviour.

The survey, which polled 3,800 employees of large businesses[2] in 38 countries, found that nearly 33% of survey EMEIA respondents report that management is under increased pressure to expand into higher risk markets. Of those respondents, 32% of South Africans surveyed hold this view. In these rapid-growth markets, 61% of respondents regard corruption in companies as widespread, while 37% of EMEIA respondents report that companies often overstate their financial performance.

The risk of fraud and corruption is not limited to rapid-growth markets[3]. Twenty-six percent of senior management EMEIA respondents say they have heard of early recognition of revenue occurring in their organisation in the past year – the type of behaviour that has been at the centre of numerous high-profile frauds.

David Stulb, Global Leader of EY’s Fraud Investigation & Dispute Services (FIDS) practice, says: “The risks of fraud, bribery and corruption are real. Businesses are facing complex restrictions in the way they conduct business with evolving sanctions regimes and new risks, such as cybercrime, having the potential to significantly disrupt operations. Businesses need to have their eyes wide open in their pursuit of high-risk growth strategies.”

This is particularly crucial in South Africa, where the pressure is on to succeed. According to the survey, 77% of South African respondents regard slower economic growth than expected as a challenge, highlighting that managers are under pressure to create new revenue opportunities and to expand into higher risk markets.

Are fraud and corruption the easy options for growth?

While senior management may be tempted to take risks to accelerate short-term growth, the survey shows a clear correlation in companies that are growing and are taking compliance seriously. Respondents throughout EMEIA whose business has experienced revenue growth in the last two years are:

• More likely to rate their company’s ethical standards as “very good”
• More likely to have or know about their company’s anti-bribery/anti-corruption policy
• More likely to see operations across markets meeting the same ethical standards

Stulb continues, “Our survey shows that 20% of employees believe anti-corruption policies will hold them back from growing their business. Our view is this shouldn’t be the case. To grow in a high-risk market you need the right controls and processes. You need your 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 these risks can be addressed in a timely manner.”

Sharon Van Rooyen, Director, Fraud, Investigation & Dispute Services (FIDS) at EY Africa, agrees, saying: “In rapid-growth markets like South Africa, the right controls and processes are needed. However, ticking the boxes when it comes to fraud, bribery and corruption compliance is not enough. The reputational and financial damage that fraud and corruption incidents inflict on any organisation’s brand and its sustainability is far-reaching.

“Organisations need leaders that are held accountable for embedding ethics and compliance into the behavioural DNA of their day-to-day activities and also educating all stakeholders of the organisation about what it means if they are not ethical or do not comply with legislation,” she adds.

Businesses are still not protecting themselves enough

Our survey shows that many businesses operating in the EMEIA still do not have even the basic building blocks in place for effective compliance.

• 42% of respondents say that their company does not have an anti-bribery/anti-corruption policy, or are unaware of them
• 36% of respondents have not had anti-bribery/anti-corruption training
• 24% say their company does not have a whistleblowing hotline

South Africa bucks this trend – 85% of South Africans respondents there have an anti-bribery/anti-corruption policy and code of conduct in place. Twenty-seven percent of them have not had anti-bribery/anti-corruption training, and only 13% say their company does not have a whistleblowing hotline.

The results also confirm that overall, financial services organisations have responded to the intense pressure that they have been under from regulators, customers and others. Compared with other sectors, they are doing more to focus on compliance and the behaviours of their staff. But there are still gaps: there are respondents in the financial services sector who report that their business does not have an anti-bribery/anti-corruption policy or a whistleblowing hotline. Also, there are senior managers who are perceived as showing little attention to anti-money laundering rules, unauthorised trading or misselling issues.

Leadership’s commitment is critical

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

Stulb says: “Businesses remain under intense pressure to grow and, in this market, operating in the grey area between legal and illegal may appear to some as a viable option. But our survey results show that this is a false choice, and that growth can be achieved while appropriately managing the risks of fraud and corruption. Effective compliance is not a barrier to growth; it is a requirement for sustained success.”

Van Rooyen adds that effective compliance should not only involve internal controls. “Transparency and openness in dealings with all suppliers, agents, third parties and other intermediaries also needs to be at the forefront of demonstrating that organisations are taking their corporate citizenship seriously,” she says.

“Investment into proactive measures like regular awareness and communication activities, ongoing training and running data analytics in high risk areas (like finance, procurement and payroll) are also some of the prevention building blocks that need to be embedded into organisations that are committed to ensuring ethical business behaviour,” she concludes.