Managing fraud and corruption in Asia Pacific

By Roderick M. Vega

First Published in Business World (10/7/ 2013)

THERE HAS BEEN much talk about how rapid growth markets (RGMs) are expected to be the drivers of the global economy over the next decade. RGMs are countries that emerged from the 2008 recession with minimum damage and which project significant growth. They include a number of economies from the Asia Pacific region. While this is certainly cause for cautious optimism, it also raises the concern that the pressure for these markets to generate growth may also increase the risk of fraud, bribery, and corruption.

The Ernst & Young Asia Pacific Fraud Survey Report 2013, released just last Sept. 26, indicates that while many companies in the region have created, or are in the process of creating, policies and procedures to deal with fraud, bribery and corruption, there is often a disconnect in the local application of, and compliance with, these policies. The report surveyed top executives from Australia and New Zealand, China, Indonesia, Malaysia, Singapore, South Korea and Vietnam. While the Philippines was not included in the survey, there are many important lessons that local executives can glean from the report. It complements government’s current anti-corruption stance and a similar drive in the private sector for more transparency and integrity in dealing with government.

Here are some of the key perceptions presented in the recent fraud survey report:
Analysts are beginning to see a slowdown in Asia Pacific economies. Companies are starting to face budget restrictions and are struggling to meet revenue targets, which may result in questionable practices. There is also increasing scrutiny and tighter regulations from regional and global anti-bribery/anti-corruption (ABAC) regulators, which means additional regulatory burdens for companies.

In general, there are three key areas of concern:
• Control systems are still weak in many Asia Pacific countries. Companies face significant risks as internal controls and compliance programs are not implemented as thoroughly as they should be. What is more worrying is that only 40% of the respondents indicate that their companies have internal ABAC policies, and of these companies with ABAC policies, about 48% of survey respondents even say that their policies, while sound in principle, do not work in practice, especially if companies are compelled to work in line with local business cultures that may conflict with global ABAC compliance policies.

• Since companies are under pressure to show positive results despite slower growth market conditions, company leaders may take shortcuts to meet targets. Nineteen percent of respondents reveal that bribery and corruption practices have even increased due to tougher economic conditions and increased competition. For example, some companies may be tempted to misstate their financial statements, such as by bringing forward revenue recognition or reducing depreciation costs.

• There is a perception that fraudulent practices are rising. Many respondents perceive that bribery and corruption are widespread in their home countries, particularly in RGMs. This in turn increases the risk of financial and reputational losses for companies should they be found out. It is important to note, though, that bribery does not always take the form of cash — some countries still see gift-giving and entertainment to win business as a common practice.
Given these conditions, companies should consider implementing better fraud prevention and detection tools and systems. They may use technology more effectively to proactively detect and reduce the risk of fraud, bribery and corruption before they happen. Companies usually use technology to investigate these issues after the fact, which means companies are already one step behind fraudsters. Using technology to examine all transactions in the company would result in better fraud detection and more effective prevention. This is one area where companies should evaluate whether the cost to invest in prevention systems will outweigh financial losses and penalties.

Another approach to take is to implement whistleblowing programs that provide avenues for employees to safely and discreetly report unethical behavior. Most companies do not have such a system in place, perhaps due to the general attitude in the region towards whistleblowers as “not team players” or “traitors”. Culture is therefore something that management will need to consider in the implementation of such a system.

Ultimately, companies will need to truly focus on their ABAC policies if they wish to create an ethical business culture within and outside the organization. The key takeouts from the report are that companies should:
• Open two-way communications. Leaders need to set the tone from the top with a solid framework of rules, employee standards and a culture of compliance. On the other side of the coin, employees will need to take the initiative and step forward when they think unethical behavior is happening.

• Accountability must be shared. Preventing fraud should not be a standalone issue, but should be a primary pillar of the company’s culture. Companies need a strong code of ethics, supported by the will to implement disciplinary action for any breaches.

• Localize solutions. On the one hand, companies need to ensure that local compliance policies are relevant to the company’s global best practices, considering that different countries often have different local rules and regulations. On the other hand, they also need to take account of local customs and cultures, such as providing ABAC policies and whistleblowing systems in the local language for improved application.

• Engage local independent parties to undertake regular ABAC assessments to ensure that local subsidiaries are compliant with local as well as global regulations. It is important to conduct assessments in a proactive manner, update results regularly, and share the findings with management to help the company design related internal controls.

• Invest in the right resources and tools to detect and deal with fraud risks. This can be challenging since RGMS have different business cultures and fewer safeguards and procedures compared with developed markets. Local companies should apply proper data forensics tools to deal with the large volume of data generated internally and from third companies, and convert them into business intelligence.

The reality is that fraud, bribery and corruption are very difficult to control or eliminate, especially in developing countries. It will take a significant and collective effort from a company’s leaders, employees, and stakeholders to effectively manage this risk. Yet, in the long run, this is something that has to be done in order to truly create an ethical business environment in the region.

Roderick M. Vega is a partner and the fraud investigation and dispute services leader of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.