EY Survey Shows Companies Fear Fraud, But Many Not Prepared

Saturday, July 1, 2006 - 01:00

Fully 60 percent of multinational companies say they believe fraud is more likely to occur in their emerging market operations than their developed market ones, according to a recent survey of the world's largest companies by global professional services firm Ernst & Young.

However, a majority of these companies admit that their controls and policies may not be enough to prevent corruption such as bribery, kickbacks, or collusion, theft of intellectual property, and other types of fraud.

This is a key finding of Ernst & Young's 9th Global Fraud Survey: Fraud Risk in Emerging Markets, released in the U.S. today. The survey polled almost 600 of the world's leading companies to track the incidence of fraud and companies' preferred methods for its prevention.

'Companies who do business overseas are increasingly concerned about risks in emerging markets,' said Dale Kitchens, a partner in Ernst & Young's Fraud Investigation & Dispute Services practice and Americas Leader of its Fraud and Investigations team. 'But to defeat or mitigate such fraud, they need a more programmatic, comprehensive approach.'

That means not only assessing fraud risk but instituting policies that anticipate, preempt, or manage it, Kitchens said. 'Combating fraud depends on clear, unambiguous policies about what is allowable in conducting business overseas. It involves formal measures to audit internal activity, protect intellectual property, prevent corruption, and investigate irregularities as they are detected,' he said.

Ernst & Young's survey shows that companies with anti-fraud policies are three times more likely than those without to include fraud risk assessments as part of their market-entry decisions. Overwhelmingly, respondents with formal worldwide anti-fraud policies were those most likely to decline a potential investment following a thorough assessment of the fraud risks. Of companies that do assess fraud risk before entering a new market, one in five decides not to move forward.

'Often in our work, companies explain that fraud risks are simply a cost of doing business internationally,' Kitchens noted. 'But leading companies increasingly look to extend internal controls and risk management expertise from their domestic to their international operations.'

Another key finding shows that one-fifth of organizations surveyed have experienced significant fraud in the past two years. Three-quarters of it took place in their developed country operations.

'Companies without a fraud assessment policy run much higher risk in entering a new market than those that do,' Kitchens said. 'If you're assessing fraud risk up front, you better appreciate what the new investment could mean. If you don't have anti-fraud policies, your chance of losses is predictably higher. And fraud risk is particularly acute in emerging markets.'

Other key findings of the survey show that robust internal controls remain the first line of defense against fraud for companies in all markets. However, anti-fraud controls are not always integrated into an anti-fraud program and monitored for compliance. 40 percent of companies still have no formal or documented anti-fraud policy, a percentage hardly changed since the 8th Global Fraud Survey in 2003.

What has changed since the 8th Global Fraud Survey is companies' principal motive for investigating allegations of fraud. In the past, companies investigated fraud to assign blame and recover losses. Today, nearly half of survey respondents say they are investigating it expressly to identify and improve control weaknesses.

'Governance issues remain top of mind for management in all markets, and corporate leaders are increasingly focused on fraud risk in light of those concerns,' Kitchens said. 'Surprisingly, however, even as global companies transition from local country GAAP to International Financial Reporting Standards, awareness of the likelihood of financial statement fraud and other white-collar fraud seems lacking.'

Fraud Risk in Emerging Markets is Ernst & Young's 9th Global Fraud Survey. Research firm Taylor Nelson Sofres conducted 586 telephone interviews with senior executives in large organizations in 19 countries between February and April of 2006. Eight of these countries were classified as 'merging markets' in terms of market development, financial controls, banking and other investments, and country GDP.

More information is at www.ey.com/ global/content.nsf/International/FIDS_ - 9th_ Global_Fraud _Survey.