Disconnect between Policies and Practice Exposes Asia-Pacific Companies to Greater Fraud and Corruption Risks

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EY publishes first Asia-Pacific Fraud Survey.

Conduct by US companies in the Asia-Pacific region continues to be under close scrutiny by the Department of Justice and Securities and Exchange Commission. - Brian Loughman, EY Americas Leader of FIDS

Disparity between policy, enforcement and execution is hampering efforts to tackle fraud and bribery in Asia-Pacific. Nearly half (48%) of the executives polled for EY’s first Asia-Pacific Fraud Survey titled “Building a more ethical business environment,” said their companies’ anti-bribery and anti-corruption policies are good in principle but do not work well in practice.

Chris Fordham, EY Asia-Pacific Leader of Fraud Investigation & Dispute Services (FIDS), believes while there is disparity between policy and practice when it comes to anti-bribery and anti-corruption, progress is being made in Asia-Pacific with 40% of respondents stating that their company does have an anti-bribery policy or code of conduct.

“This research indicates fraud and corruption is on the radar for companies, however, when we compare the results with EY’s last Global Fraud Survey in 2012 (81%) and our Europe, Middle East, India and Africa (57%) survey published earlier this year, companies in Asia-Pacific are still lagging behind,” said Fordham.

Disconnect creating false illusion of protection
The disconnect between theory and reality also indicates that many organizations could be under a false illusion that they are adequately addressing fraud, bribery and corruption issues when in reality they are still exposed to substantial risks. Indeed, our survey results demonstrate that these risks are rising given the challenging economic environment, with 19% of respondents reporting that bribery and corrupt practices have increased.

For international companies with operations in the region, this complacency could expose them to significant regulatory risk. As Brian Loughman, EY Americas Leader of FIDS, notes: “Enforcement of the Foreign Corrupt Practices Act remains robust, with numerous corporations and their executives facing prosecution for corrupt payments. Conduct by US companies in the Asia-Pacific region continues to be under close scrutiny by the Department of Justice and Securities and Exchange Commission. Refreshed risk assessments and compliance reviews that include forensic data analytics are prudent measures.”

Jacqueline Fan, a FIDS partner of Ernst & Young LLP in New York, originally from China, explains, “A deep understanding of how business is conducted across the Asian markets, the schemes that are used to perpetrate frauds or to enable corrupt payments, is essential to the risk assessment process. Developments in the market may have undermined the effectiveness of the corporate compliance program, exposing the company to new risks.”

While the EY Asia-Pacific Fraud Survey revealed a disconnect between theory and practice, it also highlighted methods and tools available to senior management to help them tackle complex fraud and bribery issues.

For example, in Singapore - perceived as one of the least corrupt countries in the world - over 59% of the respondents say that their anti-bribery policy is good in principle but does not work well in practice, compared to the Asia-Pacific regional average of 48%.

“Organizations wanting to build a robust compliance capability should be sure to conduct anti-corruption due diligence when executing acquisitions, to support whistleblowing programs to uncover unethical activities, and to deploy forensic data analytics to detect fraud. Our survey shows that executives are willing to use these tools; for example, 81% of respondents said that they would be prepared to use a whistleblowing scheme, yet only 32% said their company has one in place,” commented Fordham.

Technology underused
Fordham believes these techniques can also be used as preventative measures, but many companies are not proactively utilizing technology to its full capacity to mitigate fraud risks.

In Indonesia, close to 30% of respondents say that leading anti-fraud technologies, such as transaction monitoring or forensic data analytics, are not being used; whereas 54% of the respondents strongly agreed that the use of technology to look at company transactions would have more success in detecting fraud, bribery and corruption.

“Despite a broad understanding of the significant capabilities that forensic technology has to offer in the fight against fraud and corruption, the survey reveals that this tool is rated as only the third best way to proactively detect fraud and corruption, ranking after stronger internal audit team and stronger government regulations,” said Fordham.

The survey of eight markets also indicated that the risk of financial statement fraud remains a challenge in the region with 11% of Asia-Pacific respondents claiming that bringing forward recognition of revenue or reducing depreciation costs is a common practice.

Anti-fraud measures falling by the wayside
The polled respondents also believe that compliance and anti-fraud measures can fall by the wayside when market conditions are volatile or challenging, with 27% of respondents agreeing that company management is likely to take shortcuts to meet targets in harsh economic conditions.

Loughman says: “Audit committees are keenly aware of the pressure on management to drive the financial performance of the business. Building the business in emerging markets may be the company’s top priority. Yet Audit Committees must challenge management on their approach to anti-fraud and anti-corruption. The internal audit and compliance functions must have adequate budgets to support essential field work and need access to leading technologies to leverage the firm’s ‘big data’ to help mitigate risk.”

Fordham concludes: “If anything, the last few years have shown us that compliance is not something companies should only focus on during the good times. If companies in Asia-Pacific really want to look at ways they can reduce their exposure to fraud and corruption, they should be looking at it as a holistic issue and addressing it across all levels of the organization.”

Notes to Editors

About the survey
The Asia-Pacific Fraud Survey is commissioned by EY and carried out by Asia Risk who polled over 600 working level staff and senior executives from March to May 2013 across the Asia-Pacific area comprises Australia, China, Indonesia, Malaysia, New Zealand, Singapore South Korea and Vietnam. The polling sample was designed to elicit the views of staff with responsibility for tackling fraud, bribery and compliance matters at multinational corporations, domestic companies and state owned enterprises across sectors, including Oil and Gas, Financial Services, Technology, Private Equity, Retail, Hospitality, and Mining and Minerals. A copy of the survey is available at ey.com.

About EY
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more of the member firms, of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

This news release has been issued by Ernst & Young LLP, member firm of EY serving clients in the US.

About EY’s Fraud Investigation & Dispute Services practice
Dealing with complex issues of fraud, regulatory compliance and business disputes can detract from efforts to succeed. Better management of fraud risk and compliance exposure is a critical business priority – no matter what the industry sector is.

Our more-than-2,000 fraud investigation and dispute professionals around the world bring the analytical and technical skills needed to quickly and effectively conduct financial and other investigations and gather and analyze electronic evidence. Working closely with you and your legal advisors, we assemble the right multidisciplinary and culturally aligned team, and bring an objective approach and fresh perspective to these challenging situations, wherever you are in the world.

And because we understand that you need a tailored service as much as consistent methodologies, we work to give you the benefit of our broad sector experience, our deep subject matter knowledge and the latest insights from our work worldwide.

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Lizzie McWilliams
Ernst & Young LLP
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