This report follows the two earlier Ernst & Young biannual reports on fraud, the 10th global fraud survey, “Corruption or Compliance: Weighing the Costs,” issued in May 2008, and the 9th global fraud survey, “Fraud Risk in Emerging Markets,” issued in June 2006.
The “European Fraud Survey 2009,” prepared by Ernst & Young's Fraud Investigation & Dispute Services practice, is subtitled “Is integrity a casualty of the downturn?” The authors of the report believe, according to what they describe as their “startling” results, that it is. They find an “alarming tolerance of unethical behavior” on too wide a scale in terms of fraudsters paying cash bribes and falsifying business performance in financial statements. They also find mistrust by many survey respondents of their own top management who call for tougher regulation to prevent fraud, especially when corporate managements are reducing their staff responsible for internal controls, as part of corporate downsizing. Wayward managements instead of being expected and trusted to prevent fraud are considered part of the problem. The report authors conclude that both the incentives and opportunities for corporate fraud, which is the intentional deception of employees, investors and government agencies for unethical and unlawful private gain, have increased. Not surprisingly, they also repeatedly suggest that corporations should spend more money on internal audit and compliance, which would of course benefit audit and consulting companies such as Ernst & Young.
The “European Fraud Survey 2009” measures the perception of fraud risks among employees at all levels, "from the shop floor to the boardroom," and assesses the corporate management responses to those risks in 22 European countries, including Turkey. The survey results are based on interviews, all conducted in local languages, by telephone or online, in January and February 2009, with 2,246 employees of stock-exchange-listed or multinational companies, in both manufacturing and services sectors, mostly with over 1,000 employees.
Some of the report's results for Turkey, based on 102 interviews, compared with those based on 2,246 interviews across 22 countries, can be summarized as follows: (1) Compared with 55 percent of the all respondents in the survey, 67 percent of the Turkish respondents expect corporate fraud to increase in the next few years. The highest percentage, 76 percent, belongs to Greece, and the lowest percentage, 31 percent, belongs to the Netherlands. (2) Compared with 44 percent all respondents, 46 percent of Turkish respondents said their companies' efforts to fight fraud increased in the last few years. The highest percentage, 58 percent, belongs to Slovakia, and the lowest percentage, 29 percent, belongs to Sweden. (3) Compared with 67 percent all respondents, only 49 percent of Turkish respondents agreed that their companies' managements are likely to cut corners to meet targets under worse economic conditions. The highest percentage, 95 percent, belongs to Slovakia; Turkey has the lowest percentage. (4) Regarding the efforts to win/retain business as justifiable actions for survival, the Turkish responses differed the most from all the other responses among the 22 countries in the survey. Turkish respondents favored cash payments 53 percent to 25 percent, personal gifts 49 percent to 24 percent and entertainment 32 percent to 19 percent. Only 18 percent of the Turkish respondents chose none of these three ways to win/retain business, compared with 41 percent of all respondents.
Although these results, for Turkey in particular, and the entire set of results -- not all which are reported on an individual country basis in the report available on the Ernst & Young's global Web site -- are interesting, they are not on the whole totally consistent with each other. (For some reason the report is unavailable on the Ernst & Young's Turkey Web site although its results were discussed last week at a press conference conducted by Dilek Çilingir, a partner of the Fraud Investigation and Dispute Services, and Osman Dinçbaş, the general manager of Ernst & Young Turkey.) The inconsistencies probably reflect deficiencies in the design of the survey as well as less than carefully considered survey responses.
Although we might quibble with some of the specific results of the “European Fraud Survey 2009,” its overall message rings true. We know and expect, based on experience, that bad economic conditions coincide with a higher incidence of both individual fraud, such as Ponzi schemes (see my column “Bernie Madoff's Giant Ponzi Scheme,” on Dec. 29, 2008), and corporate fraud, such as those of Enron and WorldCom. Moreover, recent surveys by the Association of Certified Fraud Examiners, the world's largest anti-fraud organization and major provider of anti-fraud training and education, with nearly 50,000 members, and Compliance Week, an information service on corporate governance, risk, and compliance in the US, mentioned in an interview by Paul E. Zikmund, a US legal expert in corporate fraud, confirm the Ernst & Young report's results.
They, too, find an expected increase in fraud cases in 2009 resulting from the Great Recession. As Mr. Zikmund explains, much of the higher incidence of corporate fraud can be explained in terms of the fraud triangle concept, involving pressure, opportunity and rationalization.
According to this concept, first formulated by the famed criminologist Donald R. Cressey in the 1950s, all three elements must be present for the commission of fraud. Pressure (incentive or motivation) is what leads someone to commit fraud, often due to either financial problems or just plain greed, although non-financial reasons, such as peer pressure or prestige, can also come into play. Opportunity is the ability to commit fraud, often due to either weak internal controls or abuse of authority. Rationalization (attitude) is the fraudsters' reconciling their crime with widely accepted norms of decency and trust by coming up with different types of convenient excuses. The most effective way to prevent fraud is to focus on eliminating the opportunity to commit fraud -- especially when the pressure to commit fraud rises during a severe financial and economic crisis -- through strong internal controls and effective checks on the power and authority of those who are likely to do the most fraud damage. Ernst & Young's “European Fraud Survey 2009” rightly emphasizes the critical importance of that way of preventing fraud, notwithstanding the fact that it has understandably an axe to grind when it comes to selling its anti-fraud services.
