Unethical conduct ….. on the rise????

By Roderick M. Vega

First Published in Business World (8/20/2012)

Some people might say that the recent troubles in global politics, finance and economies have created an environment that is less than conducive for business. Not surprisingly, there is a growing perception that more and more people are giving in to unethical conduct to ensure the survival of their businesses or to continue to grow in this tough economic environment.

Ernst & Young recently released the results of its 2012 Global Fraud Survey, with potentially alarming figures. Out of more than 1,700 interviews conducted in 43 countries between November 2011 and February 2012, many respondents believe that corruption and unethical behavior are on the rise, particularly in fast-growth emerging markets. Companies are at increasing risk of compromising their standards in order to compete, and the risk of fraud in organizations is perceived to be rising.

Companies are aware of these situations, and are increasingly taking steps to mitigate the risks to their organizations. However, survey respondents report mixed results from these risks mitigations, and many plan to do more to strengthen the effectiveness of their monitoring of unethical conduct across their organizations.

The Ernst & Young 2012 Global Fraud Survey also highlights certain key points:

Bribery and corruption are rampant

Among the respondents, 39% report that bribery and corruption occur frequently in their countries, and this is perceived to be significantly worse in rapid-growth markets.

In the Far East Asia, with survey respondents from China, Indonesia, Vietnam, Malaysia and Singapore, 36% of the respondents replied that corruption happens in their respective countries, and 31% replied that corruption escalated because of the economic downturn.

It is good news though that in the Philippines, we seem to be bucking the trend. In the 2011 Corruption Perception Index released by Transparency International Philippines, our ranking rose to 129 from 134, the highest since 2007. This improved rating may be a result of the Aquino administration’s hard-line stance on corruption. Indeed, in his recent State of the Nation address, President Aquino pointed out the advances the government has made in addressing corruption, as well as its continuing efforts to promote the “straight and righteous path” of good governance.

Increasing acceptance of unethical behavior

While it is true that bribery and corruption may have always been present, it is also true that the global economic situation has contributed to the decline of ethical standards. What is alarming, though, is that acceptance of this reality is growing, with 15% of survey respondents saying that they are willing to make cash payments to ensure the survival of their business, while another 16% declared it is justifiable to provide personal gifts for the same purpose.

The survey also focused the spotlight on the Chief Finance Officers (CFOs) who are relied upon by the Board of Directors, regulators and other external stakeholders to provide details on ethical compliance. The results of the survey showed that 15% of the CFOs are willing to make cash payments to win or retain business, and 4% of them are willing to misstate financial performance if it will help the business survive. This is quite alarming! Because of their responsibility and authority in the business, CFOs are uniquely positioned to override controls. Some of the biggest financial frauds have been perpetrated by or with complicity of CFOs.

Control environments are not strong enough

One of the reasons for this growing area of concern is that there is a perceived lack on the part of management for a clear ethical position. There is a lack of widespread training on anti-bribery/anti-corruption (ABAC) practices, and when breaches occur, people are not penalized. This sends a mixed message to people in an organization.

Additionally, recent cost-cutting measures in many organizations have resulted in internal audit and compliance functions being reduced and becoming a lower priority for management, and often there is a diminished capability to investigate allegations or identify issues.

In the Philippines, multinational companies (MNCs) can be expected to have ABAC policies and practices, particularly if these MNCs are covered by the US Foreign Corrupt Practices Act or the UK Anti-Bribery Law. Even then, there are reported violations of these companies’ ABAC policies and practices, ostensibly to help their companies survive local competition and grow more profitably in the country. Examples of these violations are offering or paying bribes to customer officers and employees to win contracts, and paying bribes to government employees to facilitate the grant of permits and licenses and to minimize duties and taxes.

On the other hand, local conglomerates and companies have varying degrees of ABAC policies and practices, depending to a large extent, on the risk tolerance of the board and senior management of these organizations. But unlike MNCs where regulators for the US FCPA or UK Anti-Bribery Law seriously pursue compliance and persecute violators, there may be less pressure for these local conglomerates and companies to implement and actively enforce ABAC policies and practices.

Managing third parties is a top priority

A critical area where many companies have shown inadequate risk management is in the area of third-party partners. Particularly for companies that are entering new markets, the need for local contacts and context means that they have to rely on local companies – without adequate due diligence and compliance audits on these third parties for ABAC risks.

This is a significant concern for companies based in the US and Europe, given the increased scrutiny by their regulatory bodies on corruption practices. There have been several well-publicized cases where a US company was penalized for the actions of third parties acting on its behalf. Given this, local companies looking to do business or act as intermediaries for MNCs may well consider doing their own internal audits to ensure that they can meet the ABAC compliance standards of potential partners.
Ultimately, the survey highlights the increasing pressure on a corporation’s Board, particularly the audit committee, to manage the risks of bribery and corruption. A key to this is creating and maintaining a strong corporate culture of integrity and ethical conduct. Given, however, the need to have an in-depth understanding of the business, the pressure to sustain growth or survive downturns, the overwhelming amount of information on risk management and compliance, and possible resistance from senior management, are the Boards of today’s companies really effective in helping reduce the incidence of unethical behavior?

Roderick M. Vega is a Partner 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.