Sep 08, 2014

EY Fraud Survey & Compliance Fatigue. Do as I say not as I do.

A few weeks ago I postedEY Global Fraud Survey: “Depressing,” yes, surprising, no” and shortly thereafter, Philipp Kloeber, Consultant at Ernst & Young, Melbourne, Australia (LinkedIn profile here) was kind enough to refer me to the EY paper “Overcoming compliance fatigue, Reinforcing the commitment to ethical growth.” My reaction to this work is that it is reflective, well thought out and extremely thorough in its methodology (2,700 executives across 59 countries); however, my conclusion remains, “depressing yes, surprising, no.” However, there are significant issues that the EY Survey elevates, which while some might think as having nothing to do with foreign corruption,  from my perspective are very much inter-related, not to mention perilous for all involved.

The paper addresses “compliance fatigue,” as representative of the “easy gains and quick wins for the compliance function,” but that “further progress from here is likely to be difficult.” As stated in the Executive Summary “the survey results provide a warning to boards of directors that compliance efforts may be losing momentum,” due to the trend that those companies which have an anti-bribery/anti-corruption (ABAC) policy has “increased by only 1% over the past two years.” In addition, “a persistent minority has yet to take even the basic steps toward an effective compliance program.” In more statistical terms, “one in five businesses still do not have an ABAC policy,” and “less than 50% of respondents have attended ABAC training.” Among C-Suite respondents, only 38% attended ABAC training and only 30% participated in an ABAC risk-assessment.

Wait, more depressing, yet unsurprising, findings:

  • “ABAC training is less likely to occur in jurisdictions where there is a higher perceived risk of bribery.”
  • “Sales and marketing executives are the least likely of all our respondents to be included in risk assessments, despite being exposed to and aware of significant risks.”

I appreciate the elevation of those dynamics, as having written about the need for compliance personnel to listen to those at the front lines of international business in order to better understand the risks and challenges they face. As I have shared, the more disturbing those conversations may be, the better they are, as you “can fix what you know.” Driving down rules and procedures to front line business personnel without their participation and “buy-in,” will be viewed as nothing more than a set of rules and procedures. Without a true ethical commitment to anti-corruption whereby field personnel are brought into the ABAC process at the inception, those at the front line will see policy as coming from “those who don’t know what we face.”

 Fraud is Fraud

Now, lets leave the world of ABAC for a moment to look at what I consider to be a significant and related trend with respect to the Survey’s findings. According to EY, “executives at senior levels are as likely to justify certain questionable or unethical acts as their more junior colleagues.” Of particular note, “CEOs are more likely to justify it than other colleagues.” As the report well states, “the risk posed by these individuals acting unethically have the potential to cause the most serious damage to their organizations.” Details?

  • “CFOs are more likely than any other role to justify making changes to assumptions relating to valuations and reserves to meet financial targets.”
  • “General counsel respondents are more likely than others to justify backdating contracts to meet financial targets.”
  • “Sales and marketing respondents are more likely to justify introducing more flexible return policies to meet financial targets.” (In sales speak, we used to call this “stuffing the channel.”)

So, what does any of this have to do with foreign bribery and anti-corruption? How about EVERYTHING (emphasis added, in case you missed it) Let me put forth a few scenarios referencing the above. I ask, what messages are those at the front line of  international business  receiving when C-Suite executives:

  1. Encourage, authorize or in fact direct the shipment of product (to record a sale), knowing that a significant percentage of the product will be returned in a subsequent financial period?  This often happens at the end of one fiscal quarter, and the product is returned in another fiscal quarter.
  1. Refuse to write down obsolete inventory of which front line personnel know very well the details, as they are well aware of  what constitutes salable product.
  1. Delay writing down bad debt, again, with the front line personnel usually “in the know.”
  1. Authorize the shipment of product to third parties, such as freight forwarders, warehouses, etc, just to record a sale, when the financial terms and documentation needed to contractually finalize the sale are not yet complete.

I asked Scott Killingsworth, Partner, Bryan Cave,  and author of “ ‘C’ Is for Crucible: Behavioral Ethics, Culture, and the Board’s Role in C-Suite Compliance,” (link here) about this dynamic.  Scott commented, “This reminds me of the Economist’s 2013 global survey of financial services executives, half of whom were in the C-Suite. Almost everyone (91%) said that at their company, “ethical conduct is just as important as financial success.” But at the very same time, a majority said that “it is difficult to make career progression at my firm without being flexible on ethical standards.”

Furthermore “the cognitive dissonance between these statements is staggering, but we have this amazing ability to compartmentalize “ethics” or “compliance” from “business” when we are aiming at a business goal. All it takes is a plausible business reason and many of us are ready to condone and justify misconduct. In the case of the Economist study, we find such a reason in the response to another question, where 53% agreed that “being too rigid over ethical standards will make my firm less competitive.”

In other words, as Scott maintains, the Economist survey demonstrates that “ethical conduct is just as important as financial success, as long as it doesn’t get in the way of the firm’s financial success – if it does, being ethical can hurt your career.” In addition, “Senior executives are carefully watched by their subordinates, and in a workplace with a weak ethical culture, this message about priorities echoes down the ranks quite clearly.”

I totally agree,  and when it comes to “weak ethical culture,” these trends, which some might characterize as “accounting fraud,” are absolutely inter-related to bribery and corruption. When front line personnel know that C-Suite engage in such conduct “to make the numbers,” (often, field personnel are involved by having to call customers to arrange  shipments, agree to the returns,  etc.) and in publicly listed corporations, where this dynamic repeats every quarter, what is the message? When such individuals and teams, especially those in high-risk (corrupt) areas confront requests for small bribes, and corrupt transactions, how do you think this impacts what I have called “rationalizing bribery?”

I asked Walt Pavlo, Forbes contributor, who has written extensively on white collar crime issues, for his perspective. Walt stated, “Many businesses manage their financial results each month, quarter and year. The purpose of doing this is that executive management believes it presents their company in the best light, just like photo-shopping makes people appear in their best light.” Furthermore,  “the problem is, neither of these reflect reality. So when a salesperson sees the company taking shortcuts on financials, something like a bribe no longer looks like a bribe, but a solution.” As he concludes, “the way companies handle bad news or challenges, is fairly reflective of how its people will handle them.”

As if the front line challenges were not great enough, this elevates yet another component of the “perfect storm of rationalizing bribery” which I did not consider prior to reading the EY Survey. The newest addition is the “hey, it’s not like the home office is any power of example.” This is not an attempt to justify illegal conduct, but these are serious issues that impact the thought process of those at the front lines of international business, and not often considered or even acknowledged by compliance professionals. Furthermore, as the Survey states, not only are executives exposed to risks, but also they have “an apparent willingness to take them.” Over one third (on average) of C-Suite personnel felt the following would be justified “to help a business survive.”

  • Offering entertainment to win/retain business.
  • Personal gifts to win/retain business.
  • Cash payments to win/retain business.

And we wonder why the wave of anti-bribery enforcement does not seem to be waning? In addition, the averages for C-Suite respondents on the above were HIGHER (emphasis added) as compared to the entire respondent group. Again, is this an attempt to lay responsibility for individual illegal conduct at the front door of the C-suite? Absolutely not, and I speak through the experience of accepting responsibility, pleading guilty to bribery, and consequential incarceration. However, as the Survey states “if senior management is not significantly engaged, significant risks may not be effectively managed or addressed.” Furthermore, “it is difficult to convince your business that fraud, bribery and corruption compliance are serious issues if senior executives are not seen to be doing what they are telling their teams to do (emphasis added).”

In other words, corporate edicts of “don’t bribe” on one hand, accompanied by “who can you call to ship a bunch of product, even if it gets returned next quarter,” on the other, deliver the same message: rules are made to be broken. The Survey concludes with, “fraud, bribery and corruption are unlikely to disappear.” Agreed. And my compliments and appreciation to EY for raising awareness of how C-Suite behaviors can have such a tremendous impact (positive or negative) on front lines of international business through the  “power of example.”

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