Reality Check - Benchmarking Anticorruption Resources (whitepaper)

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According to a recent survey, 47% of chief compliance officers saw staffing and budget increases in 2012. How should a company measure the appropriate level of resources to devote to combating corruption? The simple answer is this: the level of resources should be proportional to the level of risk. But how do you quantify risk? And how do you translate a risk assessment into an appropriate allocation of resources? This whitepaper proposes a methodology to translate a risk assessment into an appropriate allocation of resources.

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Reality Check - Benchmarking Anticorruption Resources (whitepaper)

  1. 1. Reality CheckBenchmarkingAnticorruptionResources
  2. 2. Introduction 47%C 41% ompanies are reportedly devoting increased resources to their anticorruption efforts in response to the string of high-profilesettlements under the US Foreign Corrupt Practices Act 12%(FCPA) and the threat of the seemingly stricter UKBribery Act. Staffing No Change StaffingAccording to a recent survey, 47% of chief compliance Increased Decreasedofficers saw staffing and budget increases in 2012. How did your 2012 compliance staff change from 2011? Source: Consero Group: http://consero.comGiven some previously lax policies among globalcompanies, these increases are probably well deserved. 47% 45%But how should a company measure the appropriatelevel of resources to devote to combating corruption?The simple answer is this: the level of resources shouldbe proportional to the level of risk. 8%But how do you quantify risk? And how do youtranslate a risk assessment into an appropriate Budget No Change Budgetallocation of resources? Increased Decreased How did your 2012 compliance budget change from 2011? Source: Consero Group: http://consero.com 2
  3. 3. Siemens (2010) $800 Million KBR/Halliburton (2010) $579 Million BAE (2009) $400 Million Snamprogetti/ENI (2011) $365 Million Technip S.A. (2010) $338 Million JGC Corporation (2010) $219 Million Daimler AG (2010) $185 Million Alcatel-Lucent (2008) $137 Million Magyar/Deutsche Telekom (2011) $95 Million Panalpina (2010) $82 Million Top Ten FCPA Settlements Source FCPA Blog: http:www.fcpablog.comE veryone involved in anticorruption efforts has the FCPA, but no one should mistake this list as a seen the list of top ten FCPA settlements. This representation of the measure of corruption risk faced list went unchanged in 2012. (There are reports by any other company.that the French “supermajor” oil and gas company, As data points, the top ten cases are statistical outliers.Total SA, may debut in 2013 with a $398 million They can make a dramatic opening slide to capture thesettlement. This would put Total SA at number four, attention of company executives and board members,and push Panalpina off the bottom.) but they are not appropriate data points to measureEvery compliance officer has seen these numbers. And corruption risk—unless there is evidence thatevery CEO should see them as well. They illustrate how corruption is so pervasive within a company as to put itaggressive the US authorities have become in enforcing among the worst companies of all time. 3
  4. 4. Measuring Corruption Risk $375K $250K $250KThe current top ten cases span a five-year period from2008 through 2012. But instead of benchmarking riskagainst the worst cases, look instead at median lossesduring the same time period. Median losses provide a 2008 2010 2012more accurate assessment of the corruption risks thatcompanies face. Median Corruption Losses Source: Association of Certified Fraud Examiners http://www.acfe.com/According to the Association of Certified FraudExaminers (ACFE), the median loss due to corruption Financial Statement Fraud $1,000,000as reported in 2011-2012 was $250,000, significantly less Corruption $250,000than the losses from of the top ten FCPA cases. Check Tampering $143,000But median losses are only part of the risk assessment. Billing $100,000To put the losses into perspective, you also need to Non-Cash Misappropriations $58,000know how corruption losses compare with losses from Skimming $58,000other occupational frauds. Cash Larceny $54,000According to the ACFE, corruption losses are second Payroll $48,000after financial statement fraud losses, with these two Expense Reimbursements $26,000categories topping the list of all occupational frauds. Cash Register Disbursements $25,000 Misappropriation of Cash on… $20,000The remaining occupational frauds—from checktampering to misappropriation of cash on hand—are all All Occupational Fraud Lossessubcategories of asset misappropriation. Source: Association of Certified Fraud Examiners http://www.acfe.com/ 4
  5. 5. Fraud SchemesThe ACFE classifies occupational fraud schemes into threeprimary categories:Financial statement fraud schemes: where anemployee intentionally causes a misstatement oromission of material information in the organization’sfinancial reports (e.g., recording fictitious revenues,understating reported expenses or artificially inflatingreported assets)Corruption schemes: where an employee misuses hisor her influence in a business transaction in a way thatviolates his or her duty to the employer in order to gaina direct or indirect benefit (e.g., schemes involvingbribery or conflicts of interest)Asset misappropriation schemes: where an employeesteals or misuses the organization’s resources (e.g., theftof company cash, false billing schemes or inflatedexpense reports) 5
  6. 6. AnalysisApplying probabilistic risk assessment analysis, we can Financial Statement Fraud $1,000Kquantify the comparative risk of each risk category by Corruption $250Ktaking the median loss (magnitude) multiplied by the Asset Misappropriation $120Kfrequency of occurrence (likelihood): [Risk] = [Magnitude] x [Likelihood] Median Losses Source: Association of Certified Fraud Examiners http://www.acfe.com/This provides raw scores of 76 to 104. But we can scalethe results from 1 through 10 and create a simple scaleto measure relative risk. Financial Statement Fraud 7.6% Corruption 33.4%Financial statement fraud causes the greatest losses, butit occurs so rarely that it is the lowest fraud risk. It Asset Misappropriation 86.7%earns a raw score of 76 and the lowest scaled score of 1. Frequency of Losses – Percent of CasesOn the other side of the scale, asset misappropriation Source: Association of Certified Fraud Examiners http://www.acfe.com/causes the lowest median loss per incident, but it occursso frequently that it is the highest fraud risk. It earns araw score of 104 and the highest scaled score of 10. Financial Statement Fraud 1.0 Corruption 3.4Corruption sits in the middle, both in terms ofmagnitude and likelihood. It earns a raw score of 83.5, Asset Misappropriation 10.0and a middling scaled score of 3.4. Calculated Risk Factor [Risk] = [Magnitude] x [Likelihood} 6
  7. 7. Reality CheckWe can apply the results of our risk assessment as areality check to gauge the appropriateness of anycompliance budget.We previously said the level of resources should beproportional to the level of risk. This means that theresources allocated to combating corruption should besomewhere in the middle—between the resourcesallocated to combating financial statement fraud andthe resources allocated to asset misappropriation.Specifically, it should slightly below the midpoint,approximately 34% of the way up from the low point tothe high point.This metric can apply to any budget size. 1.0 3.4 10.0 Financial Corruption Asset Statement Fraud Missappropriation 7
  8. 8. Why is this Important?In the same survey in which 47% of chief complianceofficers reported staffing and budget increases, there Nowas a similar 47% who said they do not have sufficient 47% Yesresources to manage a compliance program effectively. 53%Our probabilistic risk assessment is a reality check forthis claim.It measures how much of the overall budget should be Do you have sufficient resources to manage a compliance program effectively?allocated to corruption risk out of the total budget for Source: Consero Group: http://consero.comcombating all forms of occupational fraud.It provides one benchmark derived from real wordfraud data in the form of a simple ratio that can bescaled to any budget size.Of course, this is not a substitute for an individualizedcompany risk assessment, but it is a perfect startingpoint to help decide where to allocate internal companyresources. 8
  9. 9. About the AuthorsEric Pesik is an Associate General Counsel and Compliance Officer at Seagate Technologyhttp://www.linkedin.com/in/ericpesik/Deanna Purnell Pesik is an independent legal and regulatory compliance professionalhttp://www.linkedin.com/pub/deanna-purnell-pesik/3/a47/481This work represents the opinions of the authors alone, and not the opinions their employers or clients. The authors arenot rendering business or legal advice; and this publication is not a substitute for business or legal advice. The authors arenot responsible for any loss sustained by any person or entity that relies on this work. You are free to share, copy,distribute, and transmit this work; to remix or adapt this work; and to make commercial use of this work, under thecondition that you must attribute this work to the authors (but not in any way that suggests that they endorse you or youruse of this work).Creative Commons Attribution Licensehttp://creativecommons.org/licenses/by/3.0/Copyright © 2013 Eric and Deanna Pesik. 9
  10. 10. Data Source AcknowledgementsFCPA BlogTop Ten Corruption Settlementshttp://www.fcpablog.com/blog/tag/top-tenAssociation of Certified Fraud Examiners2012 Report to the Nations on Occupational Fraud and Abusehttp://www.acfe.com/Consero Group LLC2012 Chief Compliance Officer Data Surveyhttp://www.consero.comImage Source AcknowledgementsVictor 1558, Woman Measuring Floorhttp://www.flickr.com/photos/76029035@N02/6829354783/Images of Money, Euroshttp://www.flickr.com/photos/59937401@N07/5930032284/Microsoft Office Online, Measuring Tapehttp://office.microsoft.com/en-us/images/results.aspx?qu=MP910218070Images of Money, Stack of Pound Coinshttp://www.flickr.com/photos/59937401@N07/5930116778/Victor 1558, Man with Tape Measure in Empty Office Spacehttp://www.flickr.com/photos/76029035@N02/6829361737/D Sharon Pruitt, Coiled Tape Measurehttp://www.flickr.com/photos/pinksherbet/3209939998/ 10

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