BDO Dunwoody Weekly CEO/Business Leader Poll By COMPAS in Canadian Business For Publication May 29, 2008 COMPAS Inc. Public Opinion and Customer Research May 29, 2008
1.0. Overview CEOs and business leaders on the COMPAS panel believe that fraud is under-reported mainly because it is undetected or for practical reasons, as shown in table 1a. This is the main finding from this week's websurvey of CEOs and business leaders for Canadian business under sponsorship of BDO Dunwoody LLP. Table 1a: (Q1) A recent overview of Canadian corporations by a major accounting firm reports no incidents of corporate fraud, bribery, or corruption. So far as you can tell, which of the following best describes the true situation? RANDOMIZE (percent) The true rate of fraud is at least somewhat higher than the reported rate because fraud is 42 sometimes/often undetected The true rate of fraud is at least somewhat higher than the reported rate because companies 34 sometimes have practical reasons for not pursuing dishonest employees and reporting their conduct The true rate of fraud is essentially the same as the 15 reported rate Don t know or no opinion 8 Table 1b displays responses to more detailed, follow-up questions. Corporate unawareness remains a top consideration. Other impediments to action or reporting include concern about embarrassment and costs of action. 2
Table 1b: (Q2) On a 7 point scale where 7 means it s a major factor and 1, the opposite, to what extent is fraud among employees, including senior employees, not reported for each of the following reasons? RANDOMIZE Mean 7 6 5 4 3 2 1 DNK The company is unaware of it 5.0 20 26 18 9 5 10 5 7 It would be embarrassing to report on the conduct 4.4 12 18 16 15 16 10 6 8 It would be risky or costly to report on the conduct 4.4 6 16 21 21 16 8 2 10 Company policies are not clear enough to treat the conduct as fraud 4.0 4 17 22 13 15 13 10 7 The following verbatims provide a nuanced sense of opinion: After a lot of years in business I've only seen a handful of cases of fraud. One was prosecuted, two were fired and two were swept under the carpet. What is interesting in these cases was that the higher the person was in the organization the less severe the action against them was. Fraud often occurs at the highest levels in public corporations by people who think it is their "right" and anyone below them that know about it are afraid for their job if they say anything. If they cannot handle being part of it they go find another job. Also CA firms do not delve into possible fraud at the highest levels because their assignment may be at risk. I can tell you this because I have experienced both. Ninety-five percent of employees are honest and trustworthy. A sound environment of high ethics is one where fraud has difficulty in breeding. Also having an effective whistle blower program with no repercussions against the one doing the blowing is also an assist. However, past practices do 3
indicate that whistle blowers are treated worse than those that defrauded their company. Awareness at upper, middle, or lower management levels may vary. Does upper management always get the full story from those below? Do managers at less than senior levels cover-up on the premise that they can correct any wrong before problems are known to all? Better detection methodologies (internal controls) are required in cases; however, more significant repercussions are also needed. In pursuing legal action against employees, police often do not get involved due to minimum thresholds they establish and the cost of companies to recover can be seen as having negative returns in terms of cost or benefits (if based on financial cost or recovery alone). Burden of proof may be an issue. Computer system back-ups and more 'hands on' by senior staff. Definition of fraud varies from company to company and sector to sector. Detection of fraudulent practices remains a challenge. Whistle blowers are often the most useful tool for fraud detection. Also, the materiality of the incident could determine a company s ability to detect the fraud. Obviously, a smaller or less material matter could go undetected for a longer period of time. Easier, faster, and cheaper to make a deal with the culprit offering not to prosecute in return for them "resigning" or agreeing to be "laid off". Employees cover up for each other. Fear of legal recourse by employees. Fraud is low when management is good. It is also a reflection of staff responsibility. 4
I believe the low rates are because many smaller cases are quietly dealt with and the employees dismissed without many people being aware of the circumstances. I believe there is more fraud than reported, but not that much more. I believe Canadian firms and people have much more of a culture of honesty than some other countries where Fraud is pervasive. Les gens sont en general foncièrement honnête. Looking at it from a supplier's point of view there are always ways to beat the system. For example, some companies want three prices on everything. So [they] get three prices - one from your favorite supplier and two from suppliers that you know will not be competitive. Many companies do not have appropriate reporting mechanisms for reporting of fraud and independent bodies within the organization that are available to deal with such issues at arm s length from management. Generally there is no driving force for this in many Canadian corporations and thus little to report. Methods by which fraud is perpetrated are becoming more sophisticated, thereby making it more difficult to detect. No whistle blowers because of the ramifications. Not enough protection for whistle-blower[s]. People are generally very reluctant to become known as a whistle blower. People involved in fraudulent activities often attempt to have close relationships with those in power and use that relationship to avoid detection. Prosecution is very difficult and the sentences are too light to deter anyone. Signal[s] or admission to other employees that the company is subject to fraud by its employees, especially if the 5
company is unwilling to take much action against the perpetrators, sends the wrong message to other employees, particularly the honest ones. The hard thing is to prove the person is defrauding the company. Fear of not successfully proving the fraud and the accused coming back [to] the company. The new accounting laws of governance and the resulting prison terms for fraud. Better methods of control and accountability. The sophistication of the fraud schemes, lack of resources within the company to detect fraud, high cost of external resources (auditors). Until proven in court potential liable issues, executives or [the] board would rather keep a low profile on such issues to not create an image of lack of diligence. Hands on management with management involvement is an important factor. There is too much paper management without real responsibility. More people need to go to jail for fraud in Canada. We have had people defraud our company and when we report them to the police the police have advised they will not do anything unless we gather more evidence. 2.0. Methodology The COMPAS web-survey of CEOs and leaders of small, medium, and large corporations was conducted May 20-22, 2008. Respondents constitute an essentially hand-picked panel with a higher numerical representation of small and medium-sized firms. Because of the small population of CEOs and business leaders from which the sample was drawn, the study can be considered more accurate than 6
comparably sized general public studies. In studies of the general public, surveys 125 are deemed accurate to within approximate 8.8 percentage points 19 times out of 20. The principal and co-investigator on this study are Conrad Winn, Ph.D. and Tamara Gottlieb. 7