For treasurers and other finance managers who've spent theircareers in the United States, bribery and corruption may seemfar-removed from reality. But for those who are responsible forfinancial management in other parts of the world, an insularattitude may be setting them—and their companies—up for someunpleasant surprises. A recent global study by Ernst & Youngtitled “Navigatingtoday's complex business risks: Europe, Middle East, India, andAfrica Fraud Survey 2013” reveals that some activities whichseem taboo to most businesspeople in the United States are not asuncommon in the developing world.

“Sometimes it's a challenge for U.S.-based finance managers ortreasury folks who have never worked abroad to understand thatpeople in their foreign subsidiaries may have a completelydifferent perspective on how the world works,” says Brian Loughman,Americas leader for fraud investigation and dispute services withErnst & Young. “That can lead to attitudes that could be veryprevalent in India or Africa but would be incomprehensible to theaverage American. The culture will have an impact on howtransactions get recorded. It will have an impact on the level ofdetail that gets recorded in the system, on what people think of asbeing normal, and on what people think is important versus whatthey think isn't important.”

The survey polled more than 3,000 board members, executives,managers, and employees in 36 countries around the world. Inrapid-growth markets, 26 percent of respondents have heard ofpeople “cooking the books” in their company within the past year;see Figure 1, below. In the developed world, this number is half aslarge, although among respondents from all regions of the globe, 42percent of board members and 24 percent of finance staff are awareof occurrences of financial manipulation in their organization.

Bribery and corruption are also more widespread in thedeveloping world than a U.S.-based management team might expect. Inthe Ernst & Young survey, 57 percent of respondents in thedeveloping world said that bribery or corrupt practices happenwidely in business in their country.

“What's interesting is that in a lot of cases, a largepercentage felt that bribery and corruption was widespread in theircountry, but a smaller percentage felt it was applicable to thesector that their business is in,” Loughman says (see figure 3).“Clearly, that can't hold water. If two-thirds of people thinkthere's a problem in their country but only 20 percent think itoccurs in their industry, finance managers with operations in thatcountry should make sure their controls are attuned to that sort ofthing.”

“If I were a finance manager sitting in Peoria, Illinois, I'dsee this survey as a very good refresher for internal controls,”Loughman adds. “I would look at making sure all the checks andbalances in place in my organization were tweaked appropriately toreflect the inherent risks that appear obvious from thissurvey.”

In many companies, treasury plays a key role in overseeingchecks and balances that prevent bribery and related activities.One way is to keep a close eye on aspects of performance that canbe verified independently, such as cash flows and bank accounts. Inone company Loughman worked with, his team discovered bank accountsthat the corporate treasury function was unaware of.

“It was a very large, U.S.-headquartered company, and treasuryreally didn't know how many bank accounts the company had in itsoverseas network,” he says. “When we went overseas to differentlocations, we found 10 or 15 bank accounts that treasury didn'tknow existed. That's not to suggest there was any fraud, but thingshappen over time away from the home office. Treasury could havebeen leveraging all those accounts, and it created a lot of issues from agovernance point of view.”

Cash is monitored even less closely in some companies. “Somedivisions of a company may be a bit of an outpost,” Loughman says.“For example, if you're in the oil and gas industry in the MiddleEast, most of your locations are going to be remote.” Theselocations may have to pay local suppliers in cash, so the companymay keep a lot of cash on hand. “We've found that a lot ofcompanies fill out this type of function without buildingsufficient controls around it. I had one client that had $500,000in cash in just one country with no controls. That probably startedas an initial request for a $5,000 cash float, and then over timeas the business grew, it got bigger and bigger and no one everchecked on it.”

This obviously opens doors for corruption. “In the Middle Eastor Africa, if you have a lot of cash lying around, a lot ofbusiness managers may be tempted to leverage it to get things donemore quickly with the government,” Loughman warns. “That couldcreate a lot of FCPA [Foreign Corrupt Practices Act] exposure forthe company. And ultimately, it's a books and records issue, whichcomes back to finance.”

Loughman offers several suggestions for mitigating potentialproblems. First, treasury and finance can work with internal auditto rethink controls in parts of the world that may need deeperinvestigation, perhaps on a rotational basis. “As companies grow indeveloping markets, they need to allow their checks and balances toflex accordingly,” he says. “They don't have to go chasingeverything down with a microscope, but an internal audit review inthis part of the world shouldn't look the same as it looks for theoperation in Cleveland. Companies really need to make sure they'retouching things that they would take for granted in the U.S.”

Second, Loughman recommends reconsidering training for staff whohandle money in far-flung locations. In the example of the companyLoughman worked with that had bank accounts the central treasuryteam didn't know about, internal audit tweaked its processes, andthe U.S.-based treasury function conducted training exercises.“Companies should recognize the risk inherent in doing business inthese locations, especially when they need to use cash rather thanchecks or credit cards,” Loughman says. “They need to look at thetraining they provide around anti-corruption for folks who haveaccess to a lot of cash.”

Training sessions can also have the benefit of bringing newinformation to light. “If you get people together in the same roomas part of a regular training, you can talk about the sorts ofrisks and issues they're dealing with,” Loughman says. “You need tobe sensitive to the right kind of format for the culture, but youmight be amazed at how much candor you can get in these sorts ofdiscussions. That can be very powerful for corporate treasury andfinance staff because it gives you a defensible basis for tweakingyour processes.”

Loughman's third recommendation is to bring as many of thecompany's locations as possible onto centralized electronicplatforms. “I think the days of allowing overseas locations to dodelayed reporting or batch processing are over,” he says. “Theexpectation now is that data will come into your system from everylocation in a way that is analogous to how you collect it in thehome office.” This enables companies to engage in forensic dataanalytics and to proactively monitor data. “That leads to exceptionreporting and allows time for the company's limited resources tofollow up on issues.”

Finally, he says, the best way for a company to prevent problemsis to crack down anytime it discovers noncompliance withanti-corruption, financial management, or other corporate policies.“In my experience, the most effective way to get a far-flungoverseas location on board with how things are supposed to happenis to have consequences of improper behavior,” Loughman says.“Although it's always difficult to deal with those things, when youdo, people tend to pay attention. That's when they really getit.”

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Meg Waters is the editor in chief ofTreasury & Risk. She is the former editor in chief ofBPM Magazine and the former managing editor ofBusiness Finance.