Fraud Investigation & Dispute Services Corporate misconduct individual consequences

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1 Fraud Investigation & Dispute Services Corporate misconduct individual consequences Canadian highlights of EY s 14 th Global Fraud Survey

2 Foreword In the aftermath of recent major terrorist attacks and the revelations regarding widespread possible misuse of offshore jurisdictions, and with geopolitical tensions at levels not seen since the Cold War, governments around the world are under increased pressure to face up to the immense global challenges of terrorist financing, migration and corruption. At the same time, Canada s economy is still struggling to rebound from slumping oil prices and a weakened dollar, creating conditions that increase the risk of fraud. Board members and senior management should be aware that governments are increasingly coordinated and regulators are more focused on misconduct, including recovering the proceeds of corruption as well as focusing on individual misconduct. EY s 14th Global Fraud Survey of nearly 3,000 senior executives in 62 countries and territories across the world found that bribery and corruption continue to represent a substantial threat to sluggish global growth and fragile financial. Canadian executives stood out among their global peers: they have low tolerance for justifying unethical behaviour, they view cybersecurity as a risk for their organizations, and they support the prosecution of crimes as a deterrent against fraud, bribery and corruption. However, there is still more to be done; effectively managing fraud, bribery and corruption is an ongoing process. Moreover, as Canadian companies look for growth in overseas and emerging, there is a much higher propensity for unethical behaviour, which increases their exposure to risk. Whether predominantly domestic or with a large global footprint, Canadian companies must establish the right tone at the top and practise values-based compliance. A strong anti-fraud program requires continually assessing and mitigating the risk environment and, if necessary, immediately responding to fraud, bribery and corruption incidents with a well-coordinated plan. Directors need clear action plans to execute on their diligence over management and there should be continued support to prosecute crimes and deter future events. Mike Savage EY Canadian Leader, Fraud Investigation & Dispute Services

3 Bribery and corruption as an ongoing challenge Globally, 39% of respondents considered bribery and corrupt practices to happen widely in their country, with no improvement since our last EY Global Fraud survey. Although Canada consistently ranks better than other countries, bribery and corruption are still ongoing challenges. Thirty percent of Canadian respondents believe bribery and corrupt practices exist across businesses in Canada, which is 10% higher than last year. Further, as Canadian companies look for growth in other, they need to be cognizant of the bribery and corrupt practices perceived to occur in those countries and develop plans to mitigate risk in their global operations. For example, bribery and corruption are more than 20% higher in emerging than in Canada. When it comes to prosecution, Canada fares better than its global peers: Nearly all Canadian respondents (92%) believe that prosecuting individual executives would help deter fraud, bribery and corruption. More than half of the Canadian executives and business leaders surveyed believe that Canadian regulators and law enforcement agencies appear willing to prosecute crimes of bribery and corruption and seem effective in securing convictions (vs. the global average of 33%). Bribery and corrupt practices happen widely in business Q. For each of the following, can you indicate whether you think it applies, or does not apply, to your country or industry? Bribery/corrupt practices happen widely in business in this country. 30% 32% Canada North America 21% Developed 51% Emerging Base: Canada (50); North America (100); Developed (1,100); Emerging (1,725); All respondents (2,825) 39% All respondents Corporate misconduct individual consequences 1

4 Combatting corruption is a global priority As Canadian companies expand globally, they should be aware that entering into joint ventures or local partnerships in foreign jurisdictions can bring additional risks and that there is appetite from regulators to hold companies responsible for the conduct of any third party acting on its behalf. Regardless of whether the inappropriate conduct is by a company itself or a third party acting on its behalf, the company faces potential liability. As the world becomes more globally connected, international bodies, such as the G20 and the World Bank, have made concerted efforts to apply international standards on transparency of company ownership. Similar to their global peers, 92% of Canadian executives and business leaders surveyed, agreed it is important to understand the beneficial ownership of the entities with which they do business. However, our survey results indicate that, relative to their global counterparts, Canadian companies are doing less due diligence on both country-specific and industry-specific risks. Companies are doing less due diligence than before Q. Which, if any, of the following are not included in your forensic or anti-corruption due diligence? Country-specific risks Canada 44% North America Developed Emerging All respondents Assessment of anti-corruption policies Industry-specific risks 36% 32% Interview with key individuals in the organization Identification of third parties 16% 20% % not included Base: Canada (50); North America (100); Developed (1,100); Emerging (1,725); All respondents (2,825) 2 Corporate misconduct individual consequences

5 Justifying unethical behaviour and misconduct Globally, 36% of business executives and leaders surveyed can justify at least one form of unethical behaviour to help a business survive an economic downturn, such as cash payments or offering entertainment. While Canadian business executives and leaders surveyed have almost no tolerance for such acts, they appear more willing to participate in activities such as changing assumptions in determining valuations/reserves or having more flexible product return policies when under pressure to meet financial targets. Actions justified to meet financial targets Q. Given the pressure that often exists to meet financial targets, which, if any, of the following activities do you feel can be justified to meet those targets? At least one of these Changing assumptions determining valuations/reserves More flexible product return policies Extended monthly reporting period Backdate a contract Book revenues earlier than they should be Don t know Canada 14% 12% 2% 2% 2% 2% 24% North America Developed Emerging All respondents None of these 74% % applies Base: Canada (50); North America (100); Developed (1,100); Emerging (1,725); All respondents (2,825) Corporate misconduct individual consequences 3

6 Cybersecurity Cyber risk is high on Canadian executives and business leaders agendas, at 72% versus 47% globally. We are seeing boards asking management direct questions about cybersecurity strategies and having the appropriate controls in place to mitigate risk. Respondents recognizing cybercrime as a risk Q. How much of a risk would you say cybercrime poses to organizations like yours? Canada North America Developed 53% 63% 72% Whistleblowing As whistleblowing frequently exposes fraud, bribery and corruption, regulators are adopting new tools to support and encourage individuals to come forward. While our global survey finds that 55% of companies have a whistleblowing hotline in place, companies should not assume that such mechanisms are always effective. For example, almost 20% of global respondents cited that their employees loyalty to their company and/or colleagues would prevent them from reporting an incident of fraud, bribery or corruption. Unlike business executives and leaders from around the world, a minimal number of Canadian survey respondents believed their employees loyalty to the company or colleagues would prevent them from reporting an incident of fraud, bribery or corruption in their company (2% and 6% respectively). Emerging All respondents 43% 47% CFO/FD Other finance 41% 39% Very/fairly high risk Base: Canada (50); North America (100); Developed (1,100); Emerging (1,725); All respondents (2,825); CFO/FD (655); Other Finance (769) The continual update of risk management policies and procedures is key 4 Corporate misconduct individual consequences

7 What steps should executives and business leaders take to minimize risk? What does this mean for the board? While Canada fared better than its global peers, managing fraud, bribery and corruption risk is an ongoing process, particularly with the increased efforts and scrutiny of governments, regulators and investors. Moreover, as Canadian companies look for growth overseas and in emerging, they should consider the results of this survey, which indicate a higher propensity for fraud, bribery and corruption in those. Companies should use both traditional and innovative fraud detection practices and ensure they develop and implement a comprehensive anti-fraud program that incorporates: Fraud prevention policies, including adequately resourced compliance and investigations functions Fraud awareness, communication and training that includes clear whistleblowing channels and policies Fraud risk assessment, including cybersecurity, an assessment of potential data-driven indicators and emerging risks Fraud controls monitoring, including use fraud data analytics Fraud response plan to quickly identify and respond to fraud, bribery and corruption in the event an incident occurs, minimizing risk to operations and brand and including a cyber breach response program that brings all parts of the business together in a centralized response structure Before entering a new market, acquiring a foreign business or entering new business relationships, companies should understand the practices in those and undertake robust forensic and anti-corruption due diligence on third parties. Companies and their boards need to deliver on these priorities. The risks companies face as they continue to expand their global reach are evolving, and the scrutiny under which businesses and individuals now come is greater than ever. Boards must respond proactively and be able to demonstrate that they are stepping up to the challenge. Managing fraud, bribery and corruption risks is not only the responsibility of company management but their boards as well. Ensure your board: Maintains an adequate understanding of what the specific risks are to the business. What are the business risks? How are changing risks assessed? What controls are in place to mitigate risk? Assesses the risks their businesses are exposed to from their global operations. Are boards confident that those leading on the ground in high-risk understand the business culture and how work is won? Is the business focusing the right resources on the right risks in the right locations or is it failing to keep up with the evolving environment? Monitors the big picture indicators that could indicate impropriety. Are boards comfortable that the company s financial statements are reasonable and balanced and reflect reality? Where there is evidence of systematic minor breaches of financial controls, could this be indicative of a wider tendency towards non-compliance? Understands the drivers of individual behaviour in their businesses. Does the way in which individuals are rewarded incentivize impropriety? What could encourage individuals to act properly in the interests of the business? Which areas of the business are likely to feel under the greatest pressure to perform? Corporate misconduct individual consequences 5

8 Contact: Mike Savage EY Canadian Leader, Fraud Investigation & Dispute Services EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com/ca Ernst & Young LLP. All Rights Reserved. A member firm of Ernst & Young Global Limited ED 000 This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication. ey.com/ca