Chinese companies admit ignorance about fraud risks

PUBLISHED : Wednesday, 26 May, 2010, 12:00am
UPDATED : Wednesday, 26 May, 2010, 12:00am

More than one in 10 firms in Hong Kong and on the mainland have reported fraud in the past two years, according to a survey, but the actual figure may be higher because 40 per cent of the Chinese companies surveyed said they lacked internal policies to prevent and detect fraud.

Ernst & Young interviewed 1,409 company executives, including chief financial officers, heads of internal audit groups and compliance officers from 36 countries between November and February for its Global Fraud Survey.

Fifty of the executives were from companies on the mainland.

The survey found that 12 per cent of the Chinese respondents had experienced fraud, such as corruption and bribery, in the past two years, against a global average of 16 per cent.

The 12 per cent was down sharply from 81 per cent in the previous survey conducted in 2008, although there was no explanation for the steep decline.

'The current trajectory of growth in China together with the increased regulatory and enforcement activity has created an environment where addressing fraud risks is very much in focus,' said Joseph Quiazon, the firm's fraud investigation and dispute services partner.

The research also found an increase in fraud cases worldwide amid the latest economic turmoil.

In western Europe, the number of companies that had uncovered fraud in the past two years surged to 21 per cent from 10 per cent.

Fraud levels also remain high in Latin America (21 per cent) and the Middle East and Africa (18 per cent).

The study also reported that 52 per cent of the Chinese respondents' companies did not allow 'facilitation payments', a term it did not define, while 42 per cent were uncertain if such a payment was permitted.

But four in 10 respondents from Hong Kong and the mainland had never carried out a fraud risk assessment, compared with a global average of 15 per cent, even though Chinese companies were growing more aware of the need to establish them.

'They (chief financial officers) are increasingly concerned about their personal liability,' Quiazon said, adding that there were laws in place in Hong Kong and on the mainland.

He said the number of fraud risk assessments had been increasing at the Chinese firms surveyed, jumping from 6 per cent over a year ago to 24 per cent in the past six months.

Four in five of the Chinese respondents were confident that internal audits could help detect fraud, bribery and other corrupt practices.

David Stulb, the leader of the fraud investigation team, warned that companies might be exposed to corruption as they looked for growth opportunities.

'When growth returns, we expect more challenges, more potential for fraud, more exposure to corruption and more interest from regulators,' he said.

'In the coming months, if they haven't done so already, companies will need to review or improve their procedures to achieve long-term sustainable and ethical growth.'

The accounting firm advised businesses to ensure they did thorough due diligence before making acquisitions, and to make sure staff were educated about how to prevent, detect and report fraud.

Dirty hands

The Ernst & Young survey looked at fraud around the world

The proportion of Chinese companies reporting incidents was: 12%

The proportion of western European companies with problems was: 21%