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New Study Shows “Compliance Fatigue” Setting in as Regulators Step Up Corporate Oversight

Posted  July 17, 2014

By Gordon Schnell

The level of government enforcement activity has never been greater.  The DOJ and SEC appear to be on a spirited mission these days to go after all forms of corporate malfeasance, and to hold out for big payouts in the process.  There have been several billion-dollar settlements in the past two months alone — Citigroup, BNP Paribas, SunTrust, Credit Suisse.  They are even starting to go after some of these offenders criminally.

And the US is not alone in this newfound enforcement drive.  Regulators in the United Kingdom, Germany, Italy and France, among others, have all been involved recently in major enforcement actions.  Even the likes of Mexico, India, Brazil and China are poised to join the party with new legislation to go after corporate fraud.  But despite this groundswell of more aggressive enforcement activity, it seems that many corporations are greeting it with a big yawn, taking a “just business as usual” approach to this increasingly more challenging regulatory climate.

At least that is the ultimate conclusion of the 13th Global Fraud Survey just released by Ernst & Young (EY).  It interviewed more than 2,700 corporate executives in 59 countries on the level of fraud they were seeing and what steps their companies were taking to deal with it.  Here are some of the survey’s more notable findings:

  • Roughly 12 percent of the executives surveyed reported their company having experienced a “significant” fraud in the past two years.  For some countries, this figure was significantly higher — US (16%), Germany (26%), Norway (26%), Egypt (44%).
  • More than a third of the executives surveyed would be willing to engage in potentially unethical conduct — such as offering gifts or cash payments to get business — to help their company survive an economic downturn.
  • The most senior executives — including CEOs, CFOs and General Counsel — are just as likely, and in some cases even more likely, as their more junior colleagues to “justify certain questionable or unethical acts.”
  • Almost 40 percent of the executives surveyed believe bribery and corruption are pervasive in their country.

But what is far and away the most surprising and concerning finding of the survey is that despite this persistent level of fraud, and the more rigorous regulatory response to addressing it, many companies have stalled in their internal compliance efforts to keep their corporate houses clean.  According to Ernst & Young, “our research suggests that the percentage of companies that have anti-bribery/anti-corruption (ABAC) policies has increased only by 1% over the past two years, and a persistent minority has yet to take even the basic steps toward an effective compliance program.”

It is a development Ernst & Young refers to as “compliance fatigue.”  Based on the survey, it is borne out by the fact that one in five companies still do not have an ABAC policy, less than half of respondents have attended ABAC training, and the level of reporting on compliance issues to boards has fallen.  It is also demonstrated by the lackadaisical, if not downright hostile, approach so many companies are still taking towards whistleblowers.  According to the survey, 45 percent of businesses still do not have any kind of whistleblower hotline, what Ernst & Young describes as an “essential starting point” to “promoting and incentivizing ethics.”

The bottom line in all this, as Ernst & Young makes amply clear in its report, is “fraud, bribery and corruption are unlikely to disappear.”  So if a company wants to avoid being the next DOJ billion-dollar poster child for corporate wrongdoing, it best ramp up its compliance and internal audit efforts.  That means at the very least, training executives and staff on ethical corporate behavior, having an active and engaged board that keeps management in check, and perhaps most importantly, implementing a strong whistleblower program that employees can trust to provide a safe and effective channel to report fraud in its earliest stages.