Corruption: Why Are Asian Firms Failing to Make Headway in Ethical Growth?

Almost every week we read of companies being fined for fraud, bribery or corruption, fines that are often to the tune of hundreds of millions of dollars. Such fines either by local or international regulators almost seem too big to comprehend. However, while there is outrage for a few days, it soon appears that the company carries on with business as usual.

This begs the question, what can be done to encourage companies to proactively address and mitigate the risks of fraud, bribery and corruption? How can we as a business community encourage companies to strive for ethical growth?

If companies fail to proactively address fraud, bribery and corruption, they will not only face a backlash from shareholders, but they will also face a compliance landscape that is ever more robust. They will struggle to catch up

In Asia, with our financial markets in various states of maturity, this raises several challenges but it also presents opportunities for our region to take the global lead when it comes to ethical growth.

Compliance fatigue

EY’s global research and the client work we conduct across the Asia Pacific region suggest that one of the reasons companies are not making more headway towards ethical growth is compliance fatigue. There is a feeling that there are so many regulations, existing and new, that achieving full compliance appears impossible.

Many companies have worked hard on compliance improvements during the last few years and have achieved easy gains and quick wins, yet they are now finding it hard to make further progress.

But as EY’s 13th Global Fraud Survey shows, executives know a problem exists when it comes to fraud, bribery and corruption. Forty per cent of executives said they consider bribery and corruption to be widespread. Respondents also described a business environment of pervasive corruption in many countries.

Yet despite knowing that bribery and corruption is widespread and seeing businesses face some of the biggest enforcement actions under the US Foreign Corruption Practices Act (FCPA), many companies are still not increasing their efforts to drive ethical growth.

Business confidence

The need to reinforce a commitment to ethical growth, particularly in Asia, is more important now than ever before. As Asia continues to play an increasing role in global financial markets, companies within the region, and particularly those operating in China, need to demonstrate they are committed to ethical growth to help reinforce overall business confidence.

It only takes one fraud case to potentially tarnish a whole industry; witness the pharmaceutical and banking industries for recent examples.

Ethical growth cannot be something that companies plan to do, but never implement. But why is this the case?

We know that not all the regulations resulting from and in response to the recent global financial crisis have been formulated or enforced yet.  We know there is more pressure on companies to provide returns to shareholders.  And we also know that human nature is such that incidents of fraud and corruption may never be completely eradicated.

However, if companies fail to proactively address fraud, bribery and corruption, they will not only face a backlash from shareholders, but they will also face a compliance landscape that is ever more robust. They will struggle to catch up – the hill they have to climb today will soon become a mountain, if they do not start their journey now.

What to Do

So, how do companies proactively address fraud, bribery and corruption and grow ethically?

Firstly, board engagement should be top of mind for all companies. Unfortunately, it still isn’t. The EY survey indicates that there has been a reduction in the level and standards of reporting on compliance issues to boards. This reduction means compliance risks cannot be effectively addressed. 

It is essential that the board sets a demanding timetable, continues to ask tough questions and actively holds senior management accountable for the results. A higher degree of scrutiny will drive a higher level of commitment among senior executives and reduce the risk of compliance activities being delegated too far down the chain of command.

Secondly, companies need to set the right ‘tone at the top’. The attitude of management - CEOs, CFOs, MDs, Compliance Officers, Sales and Procurement Directors - defines the culture of an organization.

Management has a responsibility to ensure that every employee, agent and representative of the organization is not only aware of ethics and the consequences of non-compliance. Each one must also witness the practice of ethics in the day-to-day actions of business leaders.

It needs to be made clear that the culture of the organization reinforces the message that ‘doing it right is doing it well.’

Setting the tone at the top includes making compliance part of the performance review process for management, in essence incentivizing compliance. Hitting growth targets is great for profits but if it is done unethically it should not be rewarded.  Attaching compliance metrics to the performance review is becoming more common in other markets but it is rarely seen in Asia. By not including compliance as part of the performance review, companies in Asia are sending mixed messages to employees regarding their real commitment to ethical growth.

Management also needs to understand the consequences of non-compliance for themselves as individuals. Industry reports, as well as research conducted by EY in India, suggest that since 2009 over 110 individuals (globally) have been prosecuted under the FCPA compared with 68 companies. Out of the 30 individuals prosecuted in the last three years, 12 held the post of CEO/MD /Founding Chairman, nine were presidents or vice-presidents and two were General Counsel/Head of Internal Audit.

Companies should also be examining the role that anti-fraud due diligence can play. This is especially relevant in Asia, with its vibrant and burgeoning IPO and M&A markets. It is a continuing surprise that such an important process is the exception and not the norm for many of the IPO and M&A transactions taking place in Asia.

Globally the EY survey showed that 40% of businesses never conduct anti-fraud or anti-corruption due diligence as part of their mergers and acquisitions processes. What does this mean and why should we care? In the most basic sense this lack of due diligence means fraud, bribery and corruption risks can fall through the cracks, leaving a company’s profitability and reputation at risk in the future.

No quick fix

There is no quick fix that can be applied to eradicate fraud, bribery and corrupt practices. But business leaders should not be discouraged from putting robust measures in place.

Nor should the business community become desensitized by the enforcement of large scale fines. Eventually the pressure to change will come from shareholders, who will begin to demand that business leaders demonstrate commitment to ethical growth.  

Let’s see which companies in Asia are up to the challenge.

About the Author

Chris Fordham is Managing Partner, Asia Pacific, Fraud & Dispute Services, at Big Four accounting firm EY. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Member firms of the global EY organization cannot accept responsibility for loss to any person relying on this article.

Photo credit: Shutterstock

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