Finance: New markets bring some old problems

The opening-up of world markets has created significant opportunities for business. But, as observers of recent events in the Far East will be aware, it also has its downside. One particular aspect of this, writes Roger Trapp, is fraud.

In the latest addition of the KPMG magazine Fighting Fraud, staff from the firm's forensic accounting department warn that poor research, inconsistent controls, bribery, unscrupulous joint venture partners, remote communications and inadequate understanding both of local legislation and of local fraudulent practices are just some of the major pitfalls awaiting companies wishing to cash in on new market opportunities.

"It is perhaps unsurprising that in the race for new markets, fraud can be low on the risk profile. Senior management often collapse fraud risk into country risk, even though separate identification of fraud risks at an early stage enables appropriate countermeasures such as awareness training and the closer supervision of procurement and commission payments," says Adam Bates, fraud investigation partner at KPMG.

Giving power to local management to lead a company's business in an environment has many advantages, but the team also points out that there are potential drawbacks in loss of control and the resulting increase in fraud risk.

For example, bribery is known to be a widespread phenomenon in some countries, but it is much more global than that. The council of the OECD is currently putting forward proposals to criminalise the bribery of foreign public officials and to withdraw the tax deductibility of offshore bribes that still exist within a number of countries.

Remote locations and language barriers tend to reduce the efficacy of an audit, and occasionally put companies off auditing foreign subsidiaries completely.

The magazine quotes one head-office controller of multinational businesses as saying: "We don't audit our Egyptian operation because the Egyptian state authorities perform a very thorough review" and another as explaining: "We haven't audited our Brazilian operations because we don't employ any Portuguese speakers and in any case it is quite a trip." It then points out: "Any reader of Rogue Trader will note that [Nick] Leeson's concern that his fraud might be discovered rose in line with the expectation of a thorough audit."

Noting how he was able to relatively easily satisfy queries made by telephone, KPMG stresses that "face-to-face control is the key for good management and effective control".

Lack of understanding of the local conditions can lead to companies unwittingly falling foul of the law or - as has become a particular issue in parts of Africa - being victims of attempted "advance fee fraud".

Joint ventures can be difficult because in certain parts of the world - such as China and the Middle East - they are a requirement for setting up in business there. In other cases, they help "open doors". While due diligence of such operations can be difficult, "not doing so can have disastrous consequences", says the magazine.

Investing overseas can produce a host of problems other than fraud, but the "seven deadly sins", as the firm dubs poor market research, inconsistent controls, bribery and corruption, remote locations, inadequate understanding of local legislation, limited awareness of scams and unsuitable joint venture partners, can greatly increase the risk.

Mr Bates's solution is to devise a strategy around conducting full research, proper assessment of potential partners, structured analysis of the fraud risks and ensuring that controls and ethical standards match those in the rest of the business.

Companies that strive to do this will limit their exposure to fraud, he adds.