Hong Kong has a history of taking the right steps to investigate and prosecute cases of alleged corporate fraud, but there is still room for improvement in its approach to anti-fraud defences.
Findings from Ernst & Young's 2012 Global Fraud Survey suggest that as businesses continue to face challenging economic environments, bribery, corruption and fraud are likely to remain widespread.
As a major business hub, Hong Kong is not immune from these unethical practices and while the tools for detection may exist here, one key area requires closer attention - legislation to protect whistle-blowers. Hong Kong not only lags behind other jurisdictions; it has failed to make any strong inroads in the past few years.
The role of whistle-blowing in the detection of fraud has been highlighted by a recent global survey by the Association of Certified Fraud Examiners that found over 43 per cent of fraud was detected by a tip. And the majority of tips come from employees of the organisation.
The survey also revealed that corporate fraud costs businesses globally an estimated US$3.5 trillion each year, showing that the issue can't be ignored.
In the past two years, Hong Kong Exchanges and Clearing has taken some steps in the right direction, saying that all listed companies should install a whistle-blowing policy to enable employees and other business associates to raise concerns to the company of suspected malpractice. What's missing here is the legislation required to offer them protection.
Hong Kong has some protections - in the case of money laundering, for example - but these do not go far enough. So what is needed?
First, protection from retaliation is particularly important for employees who fear that raising the flag on inappropriate management behaviour could have ramifications for their career. The other key measure is protection from claims for breach of confidentiality which would prevent attempts to gag staff. This is particularly important for professional advisers who fear ramifications for breach of client confidentiality.
In Britain, the Corporate Governance Code protects whistle-blowers. In March, an independent commission was set up to look at how laws and attitudes to whistle-blowing should be changed to encourage people to speak out. In the US, the Sarbanes-Oxley Act gives whistle-blower protection for employees and mandates that companies establish procedures to permit anonymous reporting.
While such models may not be perfect for Hong Kong, we can learn from them. Most people want to do the right thing; they don't want to be associated with so-called "bad" or unethical behaviour. But what stops people from standing up in Hong Kong is that, first, they don't know who to turn to and, second, if they do blow the whistle, they can probably say goodbye to their career.
Companies can be reluctant to address the issue because of concern over the costs involved or the potential for frivolous claims. Yet, in the long term, the cost of setting up a framework to deal with frivolous claims is negligible, compared to the damage to reputation and the legal costs involved in a big case of corporate fraud.
There is no silver bullet for the prevention and detection of fraud. However, the creation of a comprehensive whistle-blower scheme, in which employees and other stakeholders are protected by law, may result in more Hongkongers doing the "right thing". Such legislation is long overdue. Unfortunately, it's not on the horizon.
Additional Fraud Detection and Prevention Measures companies can take:
- Predictive analytic models that assist in scrutinising financial statements to highlight red flags, such as revenue manipulation;
- Use of forensic data on a company’s books and ledgers designed to show potential patterns of behaviour or anomalies in the data that could indicate fraudulent activity;
- Sentiment analysis on emails and description fields in financial records that can highlight the stresses within an organisation which may lead to pressure on management to commit fraud;
- Visualisation tools that allow compliance professionals to quickly drill down on sensitive areas within the data.
Chris Fordham is the managing partner, Asia Pacific, for fraud & dispute services at Ernst & Young
This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Member firms of the global Ernst & Young organization cannot accept responsibility for loss to any person relying on this article.