Corporate fraud booms as downturn rolls on

26 May 2009

Some 60pc of Irish business leaders expect corporate fraud to rise as a result of the current economic downturn, according to a new survey by Ernst & Young, with factors such as pressures resulting from corporate restructuring largely to blame.

The information is contained in the Ernst & Young European Fraud Survey, which shows worrying trends from across Europe about what company employees believe is acceptable business behavior.

The responses come from over 2,200 individuals in major companies in 22 countries across Europe, and show that half of those surveyed thought that one or more types of unethical business behavior was acceptable, including 25pc of respondents who thought it acceptable to give a cash bribe to win work.

By country, this latter figure rose as high as 30pc in Spain, 43pc in the Czech Republic and 53pc in Turkey, compared to 15pc in Ireland.

Irish businesses would also appear less tolerant than their fellow European respondents when it comes to fraudulent financial reporting, with just 1pc of Irish respondents believing it was justifiable to deliberately mis-state financial performance – this is in comparison with a European average of 8pc.

Irish businesses also are leading the way in the adoption of anti-fraud measures, including internal audit (86pc Ireland, 77pc UK, 68pc Europe average), code of conduct (72pc Ireland, 71 pc UK, 49pc Europe average) and HR/Legal Counsel (51pc Ireland, 56pc UK and 38pc Europe average).

“The findings of this survey show there is a disappointing tolerance of unethical behavior in companies across Europe. However, it is encouraging to see that Irish businesses are bucking this trend,” said Julie Fenton, Ernst & Young’s Business Risk Management Partner at its Irish firm.

“Their lack of tolerance of corporate fraud will be critical in terms of maintaining Ireland’s reputation as an attractive place to do business and make investment.

“Not only does any downturn expose more fraud, as the masking effect of economic growth is withdrawn, but as the pressure intensifies on management to maintain income and earnings, the incentive to commit fraud increases.

“In the current climate, management are under incredible pressure to stabilise their businesses and meet financial targets – both at a personal and organisational level,” said Fenton.

A frequently shifting organisational structure and blurred reporting responsibilities provide opportunities for fraudulent behavior in good economic times. This is intensified in a recessionary environment where such issues become more widespread. On this point, Ireland fared worse in comparison to European averages.

“When companies are making redundancies, or they are undergoing changes in ownership, gaps can appear in financial controls,” Fenton explained. Some 43pc of Irish respondents believed that normal policies and procedures are likely to be overlooked as staff redundancies are made, compared to 36pc across Europe.

In Ireland, some 45pc said that damage to morale was a key factor that increased fraud risk following two companies merging, in stark contrast to just 24pc across Europe.

Fenton said the Irish results, in particular, highlight difficult challenges for non-executive directors and management.

“With 69pc of Irish respondents agreeing that management is likely to cut corners in the downturn, and the concern over damage to morale from redundancies among the highest in Europe, the scene is set for a potentially significant rise in both financial statement fraud and employee misconduct.”

In general, Irish management also appear to employees as being honorable, with 41pc of respondents believing that their management always acts with a high level of integrity – well above the 24pc European average.

“The lack of tolerance demonstrated by Irish businesses for fraud must be seen to be driven from the top down, so it’s reassuring to see data which reflects that point in today’s survey results.”

Fenton said there is a silver lining now that fraud is 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.”

By John Kennedy

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years