It seems that every time you turn on the news, there is a report about a large fraud, a foreign bribery case or a corruption scandal – like the Unaoil scandal about corrupt payments to foreign officials in oil-producing countries, or the Panama Papers investigation, which revealed that far too many rich, famous, politically connected people, as well as crime bosses, are using secret companies to hide their wealth, evade taxes and/or launder money from illicit activity. It seems that no sector or industry is exempt – fraud and corruption occurs in the private, public as well as the not-for-profit sector, from oil and gas to construction, from sport to education, from health to transport and so on.
What is happening in Australia?
Australia used to be seen as a ‘clean’ place to do business, and when compared to the rest of the world it still is relatively so. It should be noted however, Australia has slipped down the ranks on Transparency International’s1 Corruption Perceptions Index (CPI)2 ladder from 7 in 2012, to 9 in 2013, 11 in 2014 and 13 in 2015. Recent reports in the media about Leighton Holdings being embroiled in the Unaoil scandal, and the recent resignation of Elmer Funke Kupper as the CEO of the Australian Stock Exchange amid an investigation into an alleged $200,000 bribery payment made during his time as CEO of Tabcorp, shows that some business dealings in Australia are far from clean.
Australia has been heavily criticised by the Organisation for Economic Co-operation and Development (OECD) for its lack of enforcement of foreign bribery. Australia has recently responded to these criticisms by:
- introducing two new false accounting offences to the Criminal Code Act 1995 (Cth) in March 2016, which criminalises the intentional and reckless false dealing of accounting documents for the purposes of concealing or enabling bribes to be paid to a foreign public official.
- holding a senate enquiry into foreign bribery, including the consideration of a federal independent anticorruption commission. The Senate is expected to report on its findings by 1 July 2016.
What else is happening?
Another area of concern for organisations is the prevalence of what is termed ‘C-suite frauds’, a disturbing statistic that was recently observed by RSM. These are frauds that are committed by the highest level of management of an organisation, such as CEOs and CFOs. In the past 18 months alone, RSM’s Fraud & Forensic Services team has investigated three cases of alleged C-suite frauds – one which involved a CEO of a national professional association, and two separate frauds committed by the organisations’ CFOs.
When a fraud is committed by a member of the senior management team, the loss is often significant both in financial and non-financial terms, and affects every level of the organisation. In one of the cases, where the alleged fraud was estimated to be over $10m, the company had to shut down its operations at a number of locations which resulted in many redundancies. It is in these cases that the board has the responsibility to become involved and take the necessary actions in a timely manner, in order to restore the employees’ faith and confidence in the rest of the senior management team.
For further discussion on C-suite frauds and what can be done to prevent and detect these frauds, please see C-Suite’s Dirty Little Fraud Secret, an article written by RSM’s National Head of Fraud & Forensic Services, Roger Darvall- Stevens.3
What should board members do to mitigate the risks of fraud, bribery and corruption in their organisation(s)?
There is a large bank or library of resources that board members can access, to help their organisations mitigate the risks of fraud, bribery and corruption. These include resources and tools available on the Transparency International, International Chamber of Commerce4 and Association of Certified Fraud Examiners5 websites, and many more.
Fraud and corruption control
A leading practice that is recommended by many anti-fraud experts is the Australian Standard AS 8001 Fraud and Corruption Control. AS 8001 provides an outline for a suggested approach to controlling the risk of fraud and corruption within a wide range of entities in all industry sectors and in government, from planning and resourcing, to prevention, detection and response. The standard is available for purchase here.
Third party providers is a major area of exposure for businesses. Boards should ensure that third parties engaged by the organisation to act on their behalf have undergone a stringent due diligence process. Board members should also note that the International Organisation for Standardisation (ISO) is in the final stages of drafting the international standard ISO 37001 Anti-bribery Management Systems. The standard, which is due to published later this year, is designed to help organisations establish, implement, maintain, and improve an anti-bribery compliance program or ‘management system’. It also includes a series of measures and controls that represent global anti-corruption good practice.
Organisational culture and the ‘tone from the top’
An organisation’s culture however is the most important element or ingredient in its fraud, bribery and corruption control programme. Boards should ensure that there is a strong ‘tone from the top’ in these matters, that there is a clear and consistent message from the board and senior management that improper behaviour will not be tolerated. There should be strong and regular communications of the organisation’s code of conduct, policies and procedures, and the ramifications of non-compliance.
A good example of this type of message is Siemens’ former CEO Peter Löscher’s letter to the company’s employees following the corruption scandal in 2006, in which he wrote:
“We only do clean business. And only clean business is sustained business. This holds true always and everywhere. Please attend to our clients and our business with this attitude and great commitment. Then we are on the right track.”
Board members should consider how staff performance is measured and managed, and whether the KPIs and remuneration structure encourage the right behaviours.
Boards and senior management should also be concerned about creating an environment in which employees feel safe to challenge management’s decisions or speak up if they think something is wrong, without any repercussions for doing so. According to the Association of Certified Fraud Examiners’ global fraud study, over 40% of all frauds are uncovered by a ‘tip off’ or a whistleblower. Organisations that implement a whistleblower hotline or other anonymous reporting avenue should ensure that staff and external parties (e.g. vendors, contractors, etc.) are aware of its existence through regular and visible communications (e.g. posters in staff or other communal areas, on the organisation’s website, etc.), and periodically test the effectiveness of these hotlines or reporting avenues to ensure that they are working properly. An organisation that is not receiving any calls or reports on their hotlines is not necessarily one that is free from fraud or impropriety. It may be that people are too afraid to speak up, or they may feel that it is pointless or futile to do so. In these cases, employee fraud surveys can be an effective way of tapping into what employees are witnessing or observing.
Lastly, studies have found that the presence of women on boards promotes good corporate governance, as women are generally less tolerant of poor or improper behaviour. Research has shown that organisations with more female representation on their boards engage in more ethical practices and therefore have greater integrity. A leading example of this is the AFL, which is traditionally heavily male dominated, appointing more females to their ethics and integrity committees. This initiative is working with great success, in cleaning up the sport and bringing integrity back to the game.6
1Transparency International (TI) is the global civil society organisation leading the fight against corruption. Through more than 90 chapters worldwide and an international secretariat in Berlin, Germany, TI raises awareness of the damaging effects of corruption and works with partners in government, business and civil society to develop and implement effective measures to tackle it. For more information about what TI does, check out their website at www.transparency.org
2TI has been publishing their Corruption Perceptions Index (CPI) since 1995. The CPI measures the perceived levels of public sector corruption worldwide, based on expert opinion.
4The International Chamber of Commerce (ICC) is a global business organisation that is concerned with strengthening commercial ties among nations to promote good business and global living standards. See www.iccwbo.org for more information about the ICC.
5The Association of Certified Examiners (ACFE) is the world’s largest anti-fraud organisation and premier provider of anti-fraud training and education. For more information about the ACFE, see www.acfe.com.
6‘Integrity in Sport’ presentation by Gerard Ryan APM, Senior Investigator at the AFL to the CPA Forensic & Financial Investigation Discussion Group on 30 March 2016.