By Daniel Hunter
Cuts in pay, salary freezes and intense demands to hit targets in the downturn are putting more pressure on UK employees to commit fraud, Ernst & Young’s Fraud Survey has revealed.
The Ernst & Young 2013 Europe, Middle East, India and Africa (EMEIA) Fraud Survey reveals that 71% of UK workers at large companies have experienced some form of pay freezes, cuts, reduction or scrapping of bonuses, and salary rises below the rate of inflation.
UK workers are also under extreme pressure to deliver financial results — with three-quarters of UK directors and managers facing increased demands to hit targets despite the economic downturn.
The survey of more than 3000 board members, executives, managers across 36 countries, including the UK, shows that cumulative pressures have seen 7% of UK companies workers claim to be aware of financial manipulation in their own company in the last twelve months. The most common UK frauds are revenues recorded before they should be to meet short-term financial targets; under-reporting of costs; and customers required to buy unnecessary stock to meet short term sales targets.
“The incentives for unethical conduct can be strong given the pressure on pay packets, job security and demand to deliver growth. At the same time, a focus on cutting costs can also weaken the systems and teams in place to prevent and detect these actions," John Smart, Partner and UK head of Ernst & Young's Fraud Investigation team, said.
“Shareholders expect management to take responsibility for protecting the business by implementing proper processes at all levels of their organisation. Boards must challenge management to ensure they are focused on high risk areas.”
The findings suggest pressures to compete and failures to address compliance gaps in checking suppliers, mis-selling or offering bribes will result in further high profile corporate fraud or bribery cases.
Despite the horsemeat scandal, only 12% of managers have been asked to carry out checks on third parties or suppliers. The survey found only 16% of UK managers were required to provide more detailed information on contracts signed with third party agents or suppliers, many of which are in countries where attitudes towards bribery, fraud or corruption are more complacent, according to the survey.
In financial services, the findings across all 36 countries, show that despite intense regulatory action, 9% of executives in the financial services industry admit cases of revenues recorded before they should have been; 7% were aware of under-reporting of costs; and 9% knew of customers being sold unnecessary products to meet short-term sales targets.
“The damage to shareholder value that can arise as a result of misreporting or corruption can be far greater than regulatory fines. The reputational damage inflicted on companies that are found to be complicit in such failings can last for years," Smart continued.
And despite the UK Bribery Act coming into force nearly two years ago in the UK, one third of UK companies say bribery and corruption is widespread in the UK, while 19% of UK executives felt it was justified to make cash payments to win or retain business — higher than the average of all countries surveyed.
The survey also found 9% of UK workers feel their bribery compliance programmes are damaging their ability to compete in the downturn. The findings also reveal a worrying gap between the theory and reality of compliance programmes, with only 45% of UK respondents agreeing their company’s bribery or fraud policies are relevant to their work, and 17% unaware of any programme.
“Many incorrectly assume that the mere existence of an anti-bribery programme is sufficient to mitigate their risk. Companies must ensure the programme is communicated effectively, employees are trained adequately and it is continuously monitored and updated," added Smart.
“Our experience also shows that leaders of organisations that successfully manage the risk of fraud, bribery and corruption ask the difficult questions and demand answers, particularly about the financial reports they receive”.
The fraud survey also provides an important focus for UK companies looking to invest abroad, with 58% of respondents in rapid growth markets considering unethical practices justified if they help a business survive an economic downturn. The challenge for UK companies is that more than a quarter of respondents in rapid growth markets agree their domestic enforcers regulate foreign businesses more closely than local ones.
“The findings provide a stark reminder that UK companies investing overseas need to be extra vigilant. Businesses need to understand who the business partners and agents of the acquired business are through risk-focused due diligence. Although exporting to new markets is a crucial plank of our economic growth, it is important to understand any risks involved," Smart concluded.
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