Company boards concerned about exposure to fraud
by Ernie Davitt, National Affairs Editor, ASM
There has been a noticeable worldwide increase in fraud and corruption in the wake of the global recession. As Ernie Davitt writes, a major international survey has indicated that boards, particularly in Australia, are getting increasingly nervous.
According to the Ernst & Young 11th Global Fraud Survey, 76 per cent of respondents believed their boards were becoming increasingly concerned about their personal liability for actions carried out by the company.
More than 1,400 Chief Financial Officers (CFOs) and heads of internal audit, legal and compliance in major companies in 36 countries were included in the survey.
A worrying finding for Australia was that four out of five boards believed they were not adequately prepared to cope with fraud as the world economy improved.
It seemed that while board members were increasingly aware of fraud and corruption risk, and what it meant to their personal liability, a surprising number of boards did not appear to be behaving in a way that would manage the risk.
Half of the CFOs surveyed agreed that directors needed a more detailed understanding of the company’s fraud risk exposure, if they were going to play an effective governance role in the management of the risk.
Worryingly, only 40 per cent of CFOs interviewed had been asked to review anti-fraud and corruption controls in the previous 12 months, and just 28 per cent had been asked to produce a fraud risk assessment.
Many said boards were not sufficiently prepared to deal with the fraud risks as companies returned to growth mode.
Eighty-one per cent of Australian respondents said they were especially worried about their lack of preparation. This compared with the highest rates of concern in Latin America (95 per cent), the Middle East and Africa (87 per cent), and central and eastern Europe (84 per cent).
At a time when increased enforcement against fraud and corruption in many major markets is a priority, the need has never been more pressing for boards and management to be seen to be managing these risks.
Ernst & Young Fraud Investigation & Dispute Services Leader Paul Fontanot said: “The survey reveals that legal and internal audit departments are feeling the pressure of budgetary constraints, yet are expected to do more with less. This is in part leading to risk management concerns around growth.
“The key concern is that businesses have experienced cost cutting, they are now returning to growth and they are not in the best position to manage risk. Growth opportunities encompass different markets and different economies.”
When coupled with the findings that 29 per cent of Australian companies were focusing on aggressive growth over the coming year, board and executive concerns appeared valid, given that many of these growth opportunities may be in new and potentially foreign markets.
In western Europe, for example, companies which experienced a significant instance of fraud in the past two years rose from 10 to 21 per cent. Local business needed to be alert to the possibility that these companies might be suppliers, business partners or the next acquisition target.
“With aggressive growth comes risk, including fraud and corruption. To minimise these risks, organisations should really know who they are doing business with. They should undertake thorough due diligence, be it background research on potential business partners, agents or suppliers or focused pre-acquisition due diligence,” Mr Fontanot said.
It was concerning that 30 per cent of respondents said they rarely or never undertook pre-acquisition due diligence, whilst 42 per cent said they rarely or never undertook post-acquisition due diligence.
“Australian respondents put the most confidence in strong internal controls, rigorous internal audit, regular rotation of personnel, regular management reviews, and education. Interestingly, many of these fraud prevention and detection strategies are buckling due to budgetary constraints,” he said.
Recent fraud events have shown companies should no longer view fraud risk management as a discretionary spend in good times. Australian boards should be calling for fraud risk management to be a permanent and non-negotiable element of an effective risk management regime, if they aren’t already.
This article was first published in Australian Security Magazine (ASM) Sep/Oct 2010