Tunnel Vision or the Bigger Picture

By EY

The EY Global Integrity Report 2022 reveals how a focus on governance can help reimagine corporate integrity.

In brief

More companies than ever value corporate integrity, but many professionals say the pandemic has made it difficult to carry out business with integrity.
The EY Global Integrity Report 2022 reveals a growing gap between what senior leaders assert is important and what they are prepared to do for individual gain.
Businesses are adopting new reporting methods that improve rigor and transparency and bring opportunities to leverage advanced analytics for risk mitigation.

Corporate integrity is highly valued among senior executives and employees worldwide. A record 97% of respondents to the EY Global Integrity Report 2022 (pdf) agree that integrity is important. More companies are investing in integrity training and have published statements of organizational values or conduct codes. Responding to societal expectations, businesses are also adopting corporate and social responsibility standards and environmental, social and governance (ESG) measures that demonstrate their commitment to those sentiments.

Read the Global Integrity Report 2022

However, the report reveals that senior management is often overconfident in the effectiveness of its corporate integrity programs. The report exposes a disconnect between what respondents say they consider important and the types of fraudulent conduct they would be willing to overlook or engage in for personal gain. The survey also shows that the pandemic has created additional challenges, with more than half of respondents saying that standards of integrity have stayed the same or worsened during the past 18 months.

“Integrity is a difficult concept to define, as companies face different ethical dilemmas. It’s about making the intangible tangible, about committing to the interdependence of business and society by embedding integrity into the culture and behaviors of the organization,” says Katharina Weghmann, Partner, Forensic & Integrity Services, Ernst & Young GmbH. A progressive integrity agenda goes beyond restrictive compliance (what the law prevents); opportunistic compliance (what the law allows); and avoidance of litigation.

The 2022 report shows only a third (33%) of respondents say behaving with ethical standards is an important characteristic of integrity, while half (50%) cite compliance with laws, regulations and codes of conduct. And even when it comes to compliance, the report’s findings show more willingness among the most senior company ranks to act outside the rules.

“Integrity isn’t an easy topic,” says Jon Feig, EY Americas and EY US-Central Region Leader, Forensic & Integrity Services. “The integrity agenda rests on organizational intent and actual behavior. A wrong decision for the right reasons is still a wrong decision if it fails ethical values.”

Management should be under no illusion that creating a culture of integrity is a quick fix. Although organizations are investing more in communication and training programs, such efforts are not enough. While 60% of board members say that their organization has communicated about the importance of behaving with integrity frequently in the last 18 months, only 30% of employees remember it.

“Organizational culture is dynamic and takes far longer to change than rules and regulations,” says Maryam Hussain, Partner, Forensic & Integrity Services, Ernst & Young LLP, United Kingdom. “Too often, fraud is focused on a bad apple, a lone unscrupulous anomaly,” Hussain says. “But bad actors rarely thrive in a business culture with high integrity values.”

As we emerge from the pandemic and begin the process of rebuilding the economy and recalibrating work processes in a digital operating environment, leaders have an opportunity to close these gaps. Insights from the EY Global Integrity Report 2022 reveal how companies can define and instill integrity into their culture; create the optimal environment for integrity to thrive; and innovate and transform the integrity agenda to minimize external threats and protect long-term value.

“Too often, fraud is focused on a bad apple, a lone unscrupulous anomaly. But bad actors rarely thrive in a business culture with high integrity values. “

Maryam Hussain

Partner, Forensic & Integrity Services, Ernst & Young LLP, United Kingdom

Chapter 1: Bridging the Gap Between Intentions and Behaviours

Corporate Messaging is not enough to create a culture of integrity.

The EY Global Integrity Survey 2022 reveals that the pandemic has made it harder for businesses to act with integrity. While compliance programs have grown in scale, organizational leaders appear to have become more tolerant of unethical behavior, particularly among themselves. When compared with the responses from two years ago, the 2022 report shows a growing number of respondents would participate in dishonorable behavior. The percent of respondents who would be willing to ignore unethical conduct by suppliers, distributors or other third parties is up from 6% to 17%; 15% admit they would falsify financial records, up from 3% two years ago; and 18% said they would mislead external parties such as auditors or regulators, up from 3% in 2020.

This year’s survey shows that standards at the top have dropped significantly since the onset of the pandemic: more than 4 in 10 (42%) board members agree that unethical behavior in senior or high performers is tolerated in their organizations (up from 34% in 2020), and more board members (34%) agree that it is easy to bypass the business rules in their organization than in 2020 (25%).

The EY Global Integrity Report 2022 shows a heightening in awareness of risks, especially when working with suppliers and third parties. M&A activity, currently running at historic levels, also exposes the organization to significant risk. Compared with two years ago, awareness of cyber risks is up from 20% to 27%; accounting misstatements are up from 17% to 25%; and hidden high-risk relationships are up from 17% to 24%.

Chapter 2: Creating the Optimal Integrity Environment

Employees must feel empowered to speak up and protected from retaliation.

This year’s survey shows what can happen when organizations simply “check the boxes” to create integrity standards without building a deeper culture of integrity. Mismatches between senior management’s perceptions and their employees can develop quickly.

Creating an optimal integrity environment is a whole-enterprise environment, in which values are shared across every level of seniority and function and there is a high degree of transparency and zero tolerance of transgression.

The degree to which companies offer protection to whistle-blowers in their organizations is an essential benchmark of integrity culture. Employees at all levels need to be confident that they can report without fear of negative consequences and that violations bear consequences. Too often, employees feel reporting won’t trigger change: indeed, survey respondents say the dominant reason (38%) for non-reporting is a concern that no action would be taken (up from 33% in 2020).

“It’s fundamental to trust between management and employee that whistle-blowers are protected,” says Feig. “It’s a mutual protection: we ask that employees keep the business safe, and in return we need to protect them from any negative consequences.” It is encouraging to see that protection measures have improved significantly over the last three years.

Chapter 3: Driving a Sustainable Future

Technology can play an integral role in a company’s compliance strategy.

Good governance and transparency are essential to the trust that underpins government, the capital markets and society.

Corporate reputations and the careers of CEOs are quickly destroyed by public disclosures of a “say-do” gap, and those reputations will be even more closely scrutinized as rigorous disclosure obligations on a company’s ESG performance come into force.

Leaders can harness the momentum to drive change and energize the integrity agenda. Organizations are leveraging sophisticated data analytics that can map human behavior to pinpoint potential adverse changes in day-to-day operations of a business unit, team or department. These can be early warning signs toward an inconsistent or eroding culture.

“Tech is the big play in advancing the integrity agenda,” says Corey Dunbar, Principal, Forensic & Integrity Services, Ernst & Young LLP, United States. “From anonymous hotlines to regulator enforcement, there will be fewer places to hide as data increases the transparency of all a company’s interactions and transactions.” By focusing on tech-driven and data-centric ways to measure integrity culture and build the right controls, processes and insights, companies can transform their compliance programs to create long-term value.

It’s about making the intangible tangible, about committing to the interdependence of business and society by embedding integrity into the culture and behaviors of the organization. Katharina Weghmann, Ernst & Young GmbH, Forensic & Integrity Services, Partner.

Chapter 4: 5 Actions to Accelerate Your Integrity Agenda

Strengthening organisational culture requires continuous evaluation with commitment at all levels.

Five actions to accelerate your integrity agenda

1. Really know your business

Fraud and corruption risk assessments are at the heart of the journey to protect your organization. Beyond that, they need to be taken seriously from the top down, be data-enabled, and be regularly and robustly performed with any gaps or weaknesses exposed.

2. Put the human into compliance

Recognize that systems and processes don’t commit fraud – humans do. The best compliance frameworks can be breached if there isn’t a culture of doing the right thing, which makes building a strong integrity culture as important as the control environment.

3. Be empowered by the power of your own data

Treat the growth in data volumes as an opportunity to aid the combat of fraud, not a threat. Use your own data to detect irregular behavior and guide your response to preventing and investigating it. Look for ways of collecting data that supports your ESG journey and aligns to your integrity agenda.

4. Educate, don’t train

As the report highlighted, the integrity message is slowly landing, and yet appetite for malpractice is growing. Continue the journey of communicating and awareness building by moving from training to educating, so everyone understands the “why” as well as the “what” of business integrity.

5. Speak up and support whistle-blowing

Give people the opportunity to report suspected wrongdoing, in good faith, and make them feel safe by establishing that there is protection against retaliation.

Summary

Integrity in business is not about compliance and risk management: it is about protecting the organization, its assets and its reputation. It is foundational to fostering trust between shareholders and executives, companies and employees, suppliers and partners. The EY Global Integrity Report 2022 sounds a warning bell to corporate boards, chief legal officers and compliance officers to focus on high ethical standards throughout the organization and to harness data to deliver these goals.

The article was first published here.

Photo by Nastuh Abootalebi on Unsplash.