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Asia-Pacific Fraud Study Finds Gap Between Policy and Practice

Jaclyn Jaeger | September 26, 2013

Disparities between the compliance policies that companies have in place and how they are applied in practice is significantly hampering efforts to tackle bribery and corruption among Asia-Pacific companies.

That's according to the findings of a recent fraud survey conducted by Big Four accounting firm Ernst and Young, which surveyed more than 600 senior executives in companies across the Asia-Pacific region, including Australia, China, Indonesia, Malaysia, New Zealand, Singapore, South Korea and Vietnam.

According to the study, 48 percent of respondents said their companies' anti-bribery and anti-corruption policies are good in principle but do not work well in practice. Such a disconnect indicates that Asia-Pacific companies “could be under a false illusion that they are adequately addressing fraud, bribery and corruption issues when in reality they are still exposed to substantial risks,” EY stated.

For example, over 59 percent of respondents in Singapore, which is perceived as one of the least corrupt countries in the world, stated that their anti-bribery policy is good in principle but does not work well in practice, compared to the Asia-Pacific regional average of 48 percent.

For U.S. companies with operations in the region, such complacency could expose them to significant regulatory risk. “Risk assessments and compliance reviews that include forensic data analytics are prudent measures,” advised Brian Loughman, EY Americas leader of fraud investigation and dispute services.

Essential to the risk assessment process is “a deep understanding of how business is conducted across the Asian markets, the schemes that are used to perpetrate frauds or to enable corrupt payments,” said Jacqueline Fan, a partner of EY's fraud investigation and dispute services. “Developments in the market may have undermined the effectiveness of the corporate compliance program, exposing the company to new risks.”

Anti-corruption fraud measures are particularly important in volatile markets, which face higher fraud risks, often because companies are under pressure to show positive results to stakeholders regardless of market conditions. According to the study, 27 percent of respondents said that management is likely to take shortcuts to meet targets when rough economic times.

Despite gaps between compliance policies and practice when it comes to anti-bribery and anti-corruption, Asia-Pacific companies do appear to be making some progress; forty percent of respondents do have an anti-bribery policy or code of conduct in place, the study found. 

Detection Tools

The survey also highlighted methods and tools available to senior management to help them tackle complex fraud and bribery issues. Respondents ranked a “stronger internal audit team” (34 percent) and “stronger government regulations” (29 percent) as the top two most important tools to detect corruption and fraud.

When it comes to stronger government regulations, essential elements that are common in Western markets are noticeably absent in the Asia-Pacific market, including robust regulatory framework; government oversight; a culture of compliance; and an effective judicial system. According to the study, 26 percent of respondents believe that government efforts against bribery are working but still want governments to do more.

Ranking as the third most effective tool to detect fraud and corruption is technology tools, such as transaction monitoring or forensic data analytics. Most companies aren't proactively using technology to its full potential to mitigate fraud risks, using it instead as a reactive fraud investigation tool, the report stated.

According to the study, 78 percent of respondents agreed that the use of technology to examine all transactions across the company would result in better fraud detection and more effective prevention of corruption.  Only 53 percent of respondents, however, said their companies use technology to monitor activities that are at higher risk for bribery and corruption.

“What you still find is that IT investment in most Asia-Pacific countries is seen as a cost and burden rather than as a tool to create valuable insight into an organization's operations,” said Torsten Duwenhorst, a partner in EY's fraud investigation and dispute services practice in China.  “That is what separates the developed markets from the rapid growth markets.”

The study also found that many companies overlook the importance of whistleblowing hotlines. According to the survey, only 32 percent of respondents said they use a whistleblowing hotline, whereas 81 percent said they'd be willing to have such a reporting mechanism in place.  “This suggests a disconnect between the availability of whistleblowing schemes as a means to prevent fraud and employees' ease of access and willingness to use the scheme in practice,” EY stated.

A large difference in the attitudes toward the actual use of whistleblowing schemes can also be found across Asia-Pacific.  For example, 100 percent of respondents in New Zealand said they'd be prepared to use a of whistleblowing hotline, compared with only 18 percent in South Korea.

Different Asia-Pacific countries also expressed different concerns when it comes to having such a mechanism in place. For example, respondents in Vietnam are concerned over the lack of legal protection, whereas in Indonesia they are concerned over the lack of independence of the person receiving the complaint. In China, Singapore, and South Korea, respondents said they're concerned that reports would not be treated confidentially. 

Chris Fordham, EY Asia-Pacific leader of fraud investigation and dispute services concluded: “If companies in Asia-Pacific really want to look at ways they can reduce their exposure to fraud and corruption, they should be looking at it as a holistic issue and addressing it across all levels of the organization.”