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Bribery and corruption has become more acceptable in the economic downturn

Only a third of companies are turning to law firms to ensure regulatory compliance

24 May 2012

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By Manju Manglani, Editor (@ManjuManglani)

Only one in three companies worldwide use regular law firm reviews for anti-bribery and corruption compliance, a recent global survey has found.

However, corruption is on the rise, particularly in rapid-growth markets, in which there is greater acceptance of unethical business practices.

Anti-corruption due diligence is also a problem, with nearly half of respondents reporting that background checks are not being performed on company acquisitions or third-party relationships.

Ernst & Young’s 12th global fraud survey covered 1,758 executives across 43 countries (including CFOs and heads of legal, compliance and internal audit) on how they tackle fraud, bribery and corruption.

Companies depending on internal audits

Regular reviews by law firms and other consultants rank behind external and internal audits, whistleblowing hotlines and specialist IT systems as preferred compliance monitoring processes.

Regular internal audits are used by 86 per cent of respondents. In addition, 75 per cent said they use regular audits by an external auditor to monitor compliance.

The least popular method of ensuring compliance is regular reviews by law firms and other consultants, which are used by a third of respondents worldwide. This level is even lower in the UK, at 28 per cent, despite the landmark Bribery Act coming into force in July 2011.

Due diligence not being performed consistently

The survey also uncovered grey areas in due diligence on acquisitions and third-party relationships.

The monitoring of anti-corruption controls in third parties is still underdeveloped in many businesses that use third parties to enter new markets. Forty-four per cent of respondents reported that background checks are not being performed.

However, regulators have indicated that they expect companies to adopt third-party due diligence to ensure compliance with anti-bribery legislation like the US Foreign Corrupt Practices Act (FCPA) and UK Bribery Act.

Pre-acquisition due diligence is also being given insufficient attention. US companies are leading the way, with 77 per cent of respondents saying they always do so, compared to a global average of just 43 per cent.

There is evidence that companies in some regions are cutting back on due diligence. Fifty per cent of China respondents said that pre-acquisition anti-bribery/anti-corruption due diligence is rarely or never performed, double the amount in 2010. The proportion of India respondents giving the same answer jumped from under 30 per cent to over 50 per cent.

CFOs would not rule out unethical conduct to survive

Globally, nearly half of the 400 CFOs surveyed said they would not rule out unscrupulous behaviour, such as misstating financial statements or providing personal gifts or cash to secure business.

Indeed, 15 per cent of CFOs said they were prepared to make cash payments to win or retain business, while four per cent said they might misstate financial performance to help their business to survive.

Only 46 per cent of CFOs said they have attended anti-bribery or anti-corruption training, even though the survey found they are most likely to have responsibility for anti-bribery and anti-corruption compliance. Fifty-eight per cent of all respondents said they have received anti-corruption or anti-bribery training.

Interestingly, the survey found that 16 per cent of CFOs do not know that their company can be held liable for the actions of third-party agents.

The report notes that boards and audit committees need to remain appropriately sceptical and to develop channels of communication across the finance function and other parts of the business to ensure they have a full and an accurate picture.

Greater acceptance of corrupt practices in rapid-growth markets

The survey also found a more widespread acceptance of unethical business practices among all respondents in the continuing global economic crisis.

Twenty-four per cent of all respondents cited the economic downturn as the reason for increased bribery or corrupt practices. About half said this particularly applies to Turkey, Indonesia and Mexico.

The majority of respondents believe that bribery or corrupt practices are common in rapid-growth markets and 39 per cent said that these practices occur frequently in their own countries. In Brazil, for example, 84 per cent of respondents said that corruption is widespread.

Similar to the CFO results, 15 per cent of all respondents said they are willing to make cash payments (up from nine per cent in 2010), while five per cent (up from three per cent) are willing to misstate financial performance to survive the economic downturn.

In southeast Asia, three times as many respondents as the global average think that financial performance misstatement can be justified. Over a third of respondents in Vietnam (in which conduct has been heavily scrutinised by US authorities) believe financial misstatements are acceptable.

The full results of the survey are published in Growing Beyond: A Place for Integrity.

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