How Many Companies Are Cooking the Books?

A combination of sluggish growth, complacency, and outright greed is leading to a “do whatever it takes” mentality in the business world — even if that means cooking the books or conducting other acts of fraud.

Out of almost 3,500 employees polled in 36 countries around the globe, one in five admit to being aware of financial manipulation in their own companies over the past year, according to the latest survey from Ernst & Young. Furthermore, 42 percent of board directors and top managers were aware of irregular financial reporting at their employers. The regions in the survey include: Europe, the Middle East, Africa, and India.

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The amount of fraud is more pronounced in high-growth markets, where over 25 percent of respondents are witnessing financial manipulation. Almost 50 percent of respondents in these areas believe that companies in their countries often deceive when it comes to financial performance, compared to 29 percent in Western Europe.

Brian Loughman, Americas Leader of Fraud Investigation & Dispute Services for the global Ernst & Young organization says, “For U.S.-based executives responsible for businesses in these regions, such findings should be cause for concern. The possibility of inaccurate financial reporting to headquarters, or corrupt payments being made to secure sales, undermines the parent company and could expose it to enforcement action by regulators.”

The survey also finds that the overall business environment is quite corrupt. Fifty-seven percent of all respondents believe bribery and corruption are widespread in their country. This figure rises to 67 percent in rapid-growth markets. Twenty-six percent of people polled said they feel it is common practice to use bribery to win contracts in their own sector.

Loughman says, “Given the economic volatility and financial stresses being felt in many of these markets, revisiting existing risk assessments is a prudent measure. Today’s survey findings regarding conduct in some of the most important overseas markets for U.S. business should provide a fresh and urgent impetus to these fraud and bribery risk mitigation efforts.”

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The United States was not included in this year’s survey, as the focus was on Europe and growth countries. However, Arkansas-based Wal-Mart (NYSE:WMT) became the center of attention late last year. Bribery allegations materialized after The New York Times published two reports that detailed the financial incentives given to Mexican officials by the company’s affiliate, Wal-Mart de Mexico. One of the largest was a $52,000 bribe paid to change a zoning map so that the retailer could open a store located near ancient pyramids in Teotihuacan. Evidence was also uncovered that contradicts statements made by the company after the Times story was published.

Wal-Mart’s bribery case fails in comparison to the recent Libor scandal, in which at least three major banks – and perhaps as many as 16 banks – have been manipulating worldwide interest rates on financial securities worth more than $300 trillion. The Royal Bank of Scotland (NYSE:RBS), Switzerland’s UBS (NYSE:UBS), and Britain’s Barclays (NYSE:BCS) have all agreed to pay minimal fines for their involvement. Other major banks such as JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C) are also under investigation.

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While most of the respondents in the Ernst & Young survey are aware that their employer has an anti-bribery/anti-corruption policy, its effectiveness is clearly in doubt. Sixty percent of directors and senior managers believe their company would support whistleblowers, but only 34 percent of other employees agree.

Loughman concludes, “Instilling a commitment to ethical conduct across a global organization is a daunting task. Establishing a rigorous compliance program, appropriately tailored to the industry sector and operating geographies, is a start. But companies need to continually challenge themselves on the practical aspects of their compliance programs if they are to effectively manage the risk of fraud, bribery and corruption. The efficacy of existing training programs should be reviewed, and the internal audit function challenged on whether forensic data analytics are being adequately employed to mitigate these complex risks.”

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