Companies Willing To 'Bend' Rules To Stay Afloat

by Ulrika Lomas, Tax-News.com, Brussels

28 May 2009

The Ernst & Young European Fraud Survey released May 19 reveals that as the recession in Europe deepens there are worrying trends in what company employees believe is acceptable business behaviour.

The responses of over 2,200 individuals in major companies in 22 countries across Europe vary by jurisdiction but there are some consistent themes. An alarming half of the surveyed European respondents, and 40% of the Swiss respondents thought that one or more types of unethical business behaviour were acceptable. For example, 25% of the European and 20% of the Swiss respondents thought it fine to give a cash bribe to win contracts.

There was even a significant minority of 8% of the European interviewees who felt that distorting their company’s financial performance was justifiable to survive today’s turbulent economic climate. While only 2% of all Swiss respondents shared the same feeling as their European counterparts.

Michael Faske, Ernst & Young’s Fraud Investigation & Dispute Services Leader in Switzerland says:

“Even though the Swiss differ somewhat in their views regarding fraud, the findings of this survey show there is a disappointing and frightening tolerance of unethical behaviour amongst employees in companies across Europe.”

“Making cash payments to win business, and even deliberately misstating financial performance to mask disappointing results were supported by alarmingly large numbers of respondents.”

Not only does a downturn expose more fraud as the masking effect of economic growth is withdrawn, but as the pressure intensifies on management to maintain income and earnings, the incentive to commit fraud increases, noted Ernst and Young’s document.

“In the current climate, management is under incredible pressure to stabilise their businesses and meet financial targets - both at a personal and organizational level,” Faske continues.

“A frequently shifting organizational structure and blurred reporting responsibilities provide opportunities for fraudulent behavior in good economic times. This is of course intensified in a recessionary environment where such issues become more widespread.”

“When Swiss companies are making redundancies or they are undergoing changes in ownership, gaps can appear in financial controls.” According to Ernst and Young’s survey, in Switzerland, 30% of the respondents think fraud rises during mergers or takeovers (compared to 45% across Europe). According to a high 88% of the Swiss respondents, redundancies are a main reason for increased fraud risks resulting from a merger. 37% of the Swiss respondents to the survey believe that normal policies and procedures are likely to be overlooked as staff redundancies are made and 60%, more than the European average, believe that the differing standards of behaviour that are typically held by two merging companies poses a major challenge to anti-fraud efforts.

Over half of those individuals surveyed (53% of the Swiss respondents and 55% of the European respondents) expected corporate fraud to increase over the next few years. The increase of corporate fraud is expected because of changes that will be made to businesses in response to the economic downturn, reduced focus on anti-fraud, pressures to protect the future of the company and the pressure to keep bonuses and compensation greater. In Switzerland, only 5% of respondents thought that corporate fraud would decline. “Geographic location or relative economic wealth makes little difference to expectations of increased fraud across Europe. This is a global recession and fraud is a global problem,” Faske adds.

The Swiss respondents to the survey do not differ much from their European counterparts in their belief that far from setting a leading example, all levels of management of companies are in fact part of the problem, if not the biggest risk of fraud, with 38% citing senior management and 36% middle management as being the levels in an organization where there is the biggest risk of fraud being committed. Some 71% of respondents had cause to doubt the integrity of their company’s management, which is almost equal to the 69% European average. Furthermore, 88% think management is likely to cut corners to meet targets when economic times are tough. Only 22% of the Swiss respondents (and 24% of the European respondents) believed that their company’s management operates with a high level of personal integrity.

As a result of this mistrust of management, the research suggests that employees expect regulators and other authorities to do more to protect them and to ensure their bosses are compelled to intensify their efforts to defend companies from fraud. The survey highlighted the fact that the Swiss believe much more strongly than the average European in the need for more governmental and regulator presence and supervision to actively combat and reduce the risk of fraud.

“Worryingly, the senior management of the population that we surveyed are more likely to condone bribery and financial statement fraud than those of junior rank,” Faske continues. “Indeed our interaction with regulators suggests that they are very conscious of the shortcomings in corporate governance and are positioning themselves for much more aggressive enforcement action. Furthermore, 66% of the Swiss respondents agreed that directors should be held personally liable for lapses through fraud occurring under their watch.

As Faske concludes, there is a silver lining with fraud now so high on the corporate agenda. “The good news is that the current period of adversity can present opportunities to drive change more rapidly and effectively than in more prosperous times. Now is the moment for management to act urgently and emphatically to reinforce the importance of ethical business conduct.”

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