More than a third of executives polled in a recent survey believe companies in their country are exaggerating their financial performance, according to an annual Ernst & Young fraud report released this week.
That's not just a problem for developing countries, as the survey pinpointed several European countries where executives indicated companies often are “cooking the books.” Ernst & Young's 2013 Europe, Middle East, India and Africa Fraud Survey found that 38 percent of those polled believe companies in their home country often exaggerate their financial performance. Posting higher than average numbers were Turkey, with 45 percent; Greece, with 46 percent; Austria, with 51 percent; Serbia with 54 percent; and Spain and Russia, each with 61 percent.
Other European nations posted better numbers. In Germany and Belgium, 34 percent of respondents for each said cooking the books is prevalent. In the UK, the percentage was 27 percent. France and Switzerland each came in at 16 percent while Finland came in at just 7 percent.
More than 3,000 board members, executives and managers from 36 countries participated in the annual survey. Among the findings, 42 percent of those surveyed are aware of irregular financial reporting within their own company. Another 57 percent felt corrupt practices are widespread in their country.
The survey results “make for uncomfortable reading,” wrote David L. Stulb, Ernst & Young's global leader for fraud investigation and dispute services. He said an alarming number of executives are aware--or even comfortable with--unethical conduct.
“This includes recording revenues early, underreporting costs or encouraging customers to buy unnecessary stock. This is coupled with the perception that bribery and corruption remain widespread in several markets,” Stulb said. He noted that companies have good reason to take a critical look at their numbers. Management needs to ask the right questions early and often.
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Managers face increasing pressure to produce results in a tight market, which can include personal pressure in the form of salaries or bonuses. While an average of 60 percent believes their company's managers will be under increased pressure in the next 12 months, that percentage was even higher in certain European countries: 65 percent in Russia, 66 percent in Greece, 74 percent in Norway, and 80 percent in Ireland. That pressure, the report notes, can make unethical behavior all the more tempting.
The pressure to meet short-term financial goals is so great that many respondents say they have witnessed unethical behavior at their own companies. In fact, one in five respondents said they have seen financial manipulation occur in their company. When broken down to the financial services sector, 9 percent have seen revenues recorded before they should have been; 7 percent saw underreporting of costs; and 9 percent said customers were being sold unnecessary products in order to hit sales targets.
The survey showed many executives believe corruption is widespread in their country (57 percent), but not in their sector (26 percent). That discrepancy was even greater in several European nations. In Romania, 61 percent said bribery is widespread in their country, while 19 percent said bribery is common practice in their sector. In Greece, the results were 84 percent versus 29 percent. In Hungary, the results were 70 percent versus 29 percent. Portugal and the Czech Republic had similar results. And in Croatia, 90 percent felt corruption and bribery are widespread in the country, while 40 percent acknowledged it is common practice in their sector.
That so-called perception gap narrowed somewhat in countries including Poland, Italy, Belgium and Austria. Only 37 percent of those surveyed in the UK said bribery is widespread there, and a mere six percent said it is common practice in their sector.
“We continue to see too many executives thinking fraud and corruption are problems faced only by other companies or in other sectors,” Stulb said.
The survey also said compliance officials should suffer no illusion that all of their employees are on board with anti-corruption policies. In fact, more than a quarter of sales and marketing respondents said they consider it acceptable to offer gifts or services in order to win or keep business. One in six respondents believes his company's compliance program harms its competitiveness.
Stulb also noted that a similar survey of European executives two years ago shows the percentage of those believing their company's anti-corruption policies are relevant to their work has actually decreased. Now fewer than half say their colleagues would consider the policies relevant.