The shareholder spring must now pounce on fraud
THE “shareholder spring” has shown investors ferociously protesting about corporate governance, accountability and payouts. But a far deeper financial and reputational time bomb is ticking in many corporations.
Today’s Ernst & Young global fraud survey shows the staggering exposure to fraud, bribery and corruption in UK companies. The numbers have risen during the economic downturn at all levels, exposing businesses to risks that put their current problems into sharp relief.
The most shocking statistic is that despite their role in running the finances of companies, 47 per cent of chief financial officers would not rule out performing unethical actions, including giving cash or personal gifts to retain business. Less than half had personally attended anti-corruption or bribery training.
Overall, 42 per cent of employees across UK companies agreed that management was now more likely to cut corners. The numbers who said they would provide personal gifts to secure business has nearly doubled in two years, potentially falling foul of the UK Bribery Act.
Action taken in recent years by US enforcers shows a path UK prosecutors may follow. More than 90 per cent of reported Foreign Corrupt Practices Act cases have involved third-party intermediaries. In one of the most significant recent cases, Panalpina was fined $81.9m (£51.9m) by the US Department of Justice and the US Securities and Exchange Commission for alleged payments on its customers’ behalf to local officials to speed up import procedures. In the UK, a judge sent two former executives to prison last year for making illegal payments to the Iraq government in violation of United Nations sanctions, and police arrested three UK directors of an engineering firm over allegations concerning bribes being paid to secure contracts abroad.
Companies are reporting a mixture of complacency and institutional fatigue. Many are doing all the right things. The UK could be called the whistle blowing hotline capital of Europe, with 90 per cent of companies having set one up to detect wrongdoing (compared to 49 per cent in the rest of Western Europe). The survey found 100 per cent have an anti-bribery policy. Despite this, UK companies have shown weakness in punishing bribery and corruption. Only around one in four have taken any action compared to 40 per cent globally.
Many UK companies are tackling the problems, but others are not asking the right questions. Most do not realise that their company and third parties may both be culpable for corrupt acts. More than one in five companies do not regularly perform pre-acquisition due diligence, looking for fraud or bribery skeletons in the closet. Many have no provisions to tackle fraud in other countries.
Boards, rather than requiring more information, need to shine more light into their companies’ affairs. Without this, fresh from a spring unrest, they could stumble into a far bleaker winter of discontent.
John Smart is UK head of Ernst & Young’s Fraud Investigation team.