Risk Management

Emerging Markets Raise Added Fraud Risk

Of companies that assess fraud risk before entering a new market, one in five decides not to move forward, according to a new survey
Stephen TaubJune 19, 2006

Emerging markets may offer the greatest prospects for growth, but according to a new report, those markets also present the greatest risk of fraud.

In a global fraud survey by Ernst & Young, 60 percent of respondents said they perceive a greater threat in their emerging market operations than in their developed markets. E&Y also noted that 40 percent of companies still have no formal or documented anti-fraud policy, a percentage hardly changed since the firm’s previous fraud survey, in 2003.

For this latest survey, the firm conducted telephone interviews earlier this year with 586 senior executives — including chief executive officers, chief financial officers, chief risk officers, internal audit directors, and business unit directors — across 19 countries.

“Companies who do business overseas are increasingly concerned about risks in emerging markets,” noted Ernst & Young partner Dale Kitchens, in a statement. “But to defeat or mitigate such fraud, they need a more programmatic, comprehensive approach.”

Among the multinational companies tripped up by overseas operations:

• Xerox, whose accounting scandal began in 2000 as an investigation of accounting practices at its Mexican operations

• United Parcel Service, which is investigating possible violations of the Foreign Corrupt Practices Act based on its acquisition of a freight forwarding business from Fritz Companies

• DaimlerChrysler, which dismissed or suspended several employees after determining that “improper payments” were made in Africa, Asia, and Eastern Europe

• Titan, which agreed to plead guilty to criminal and civil charges and pay $28.5 million in fines stemming from payments to a presidential election campaign in Benin

• Halliburton, which disclosed that the Department of Justice and the Securities and Exchange Commission are looking into possible bribery of officials in Nigeria.

E&Y maintained that according to its survey, respondents with formal worldwide anti-fraud policies were overwhelming most likely to decline a potential investment following a thorough assessment of the fraud risks. Of companies that do assess fraud risk before entering a new market, one in five decides not to move forward, the firm noted.

“Companies without a fraud assessment policy run much higher risk in entering a new market than those that do,” said Kitchens, in a press release. “If you’re assessing fraud risk up front, you better appreciate what the new investment could mean. If you don’t have anti-fraud policies, your chance of losses is predictably higher. And fraud risk is particularly acute in emerging markets.”

The survey also found that robust internal controls remain the first line of defense against fraud for companies in all markets. However, anti-fraud controls are not always integrated into an anti-fraud program and monitored for compliance.

4 Powerful Communication Strategies for Your Next Board Meeting