Overcoming compliance fatigue

SUITS THE C-SUITE By Roderick M. Vega

First Published in Business World (06/30/2014)

EARLIER this month, findings of an Ernst & Young (EY) survey on fraud, bribery and corruption made the headlines. It revealed a concerning picture of some executives’ attitudes towards private sector misconduct in the Philippines and 58 other countries. It is only apt, then, to now discuss how to uncover such unethical practices and minimize their impact on business.

The issue is becoming more important than ever. According to EY’s 13th Global Fraud Survey, “Overcoming compliance fatigue: Reinforcing commitment to ethical growth”, many of the world’s regulators are stepping up investigations against misconduct. Authorities from the United States, United Kingdom, Germany, Italy, France, Japan and even emerging economies like India, Brazil and China are adopting stronger enforcement against violations such as insider trading, money laundering, price manipulation, cartels, and bribery. Here in the Philippines, high-profile cases in the public and private sectors are progressing through the legal systems as well.

Consumers and investors are likewise increasing their scrutiny in the aftermath of the financial downturn. Regulators, in response, are expected to use a broader scope in enforcing good corporate conduct.

However, despite this heightened regulatory pressure, the incidence of fraud and reported levels of corruption do not appear to be declining, according to the EY report. Of the 2,700 executives surveyed across 59 countries from November 2013 to February 2014, 38% believe bribery and corrupt practices happen widely in business. This is the same percentage recorded two years ago. Moreover, more than one in 10 executives surveyed said their company experienced significant fraud in the past two years, a figure similar to that recorded in 2008.

The stagnant results should be taken as a signal that efforts to battle fraud, corruption, and bribery may be losing momentum. There may be few low-hanging fruit left after companies have initiated their preliminary campaigns. From here on, substantial results in deterring and detecting misconduct may be harder to accomplish. What, then, can companies do to bring compliance to the next level? The EY report suggests a six-pronged approach that goes beyond the initial steps of communicating a code of conduct to the organization and conducting company-wide training.

One is to step up board engagement. The report urges the board to “ask tough questions” and hold senior management more accountable, especially as the C-Suite is especially exposed to risks. Chief executive officers are three times as likely as other respondents to be asked to pay a bribe, according to the EY report. Chief financial officers, meanwhile, are more likely than any other role to justify changes to assumptions relating to valuations and reserves so as to meet financial targets.

To address this, oversight from the board must be continuous and unrelenting. Presence during an anti-corruption campaign launch is not enough. Board members need to exert ongoing and meaningful pressure to ensure positive behavior becomes the standard in the company.

Second, companies are advised to mine “big data” using forensic data analytics to improve compliance and investigations. Testing can cover accounts payable data, vendor master data, expenses and entertainment transactions, payroll and capital projects data, and even external sources such as social media.

The use of such analytics is key to helping the organization assess risks of fraud, bribery, or corruption and identify the necessary and appropriate safeguards as an early deterrent.

Third is the recommendation to conduct anti-corruption due diligence. Transactions, such as mergers and acquisitions (M&A), can be a high-risk area for bribery and corruption. Unfortunately, nearly 40% of businesses never conduct forensic or anti-corruption due diligence as part of their M&A processes, according to the EY report. Forensic data analysis should be applied in this stage as well, as deal breakers are unlikely to surface through questioning alone.

Fourth, companies need to improve their escalation procedures to respond to whistle-blowers, a cyber fraud incident, and violations to minimize damage and speed up the process by which the board is notified. Board engagement is important at this level as well. They should be concerned with how the business is rewarding ethical behavior and not just the usual growth performance indicators. The remuneration committee, for instance, should consider how to monitor performance against this metric.

The last two recommendations have to do with enhancing training and allotting sufficient budget support. Companies are advised to customize anti-bribery and corruption training programs to the job function and level of seniority of people in their organization. Furthermore, the C-Suite needs to be at the forefront of and attend such trainings.

With regard to budget support, the EY report states that internal audit and compliance functions need to be sufficiently funded as they provide valuable assistance in keeping the company out of trouble.

Companies will be wise to consider such concrete recommendations to battle compliance fatigue. In this era of increased regulatory scrutiny and ever increasing fines and reputational damage, it is not the right time to lower our guard against bribery and corruption and other irregularities. Companies should stay on the right path towards driving ethical growth.

Roderick M. Vega is the partner for fraud investigation and dispute services 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.