While Canadian companies are equally concerned that fraud will occur in their developed or emerging country operations, at a global level respondents in developed countries are more likely (60%) to believe their operations are at greater risk to fraud in emerging markets, according to study on fraud released today by Ernst & Young.

The experiences of fraud reported by respondents in developed markets differ from their expectations that emerging markets are riskier. Of these respondents, 75% have experienced significant fraud at home or in their developed market operations, while only 32% report a similar experience in emerging markets. Nevertheless, the belief that emerging markets are more susceptible to fraud is strong enough to lead one in five firms globally to forgo investing in developing markets as a result of a fraud risk assessment.

Such a gap between perception and experience should sound an alarm that many companies are taking inappropriate steps to manage actual fraud risks in either market, cautions Mike Savage, a partner in Ernst & Young’s Fraud Investigation & Dispute Services (FIDS) practice in Toronto: “While there is a sense that emerging markets are inherently more risky when it comes to fraud, companies need to have the proper controls in place to detect and react to fraud anywhere.”

“A third of Canadian companies and an astounding 40% of global organizations surveyed still have no documented anti-fraud policy – a number virtually unchanged from Ernst & Young’s 2003 8th global fraud survey,” he adds.

“Even when formal fraud policies are in place, without properly educating employees and ensuring accountability, such policies can be rendered ineffective. There is room for improvement in most anti-fraud programs,” says Savage.

“Preventing fraud is far better than reacting to it,” says Savage. “Companies should weigh the price of anti-fraud programs against the true cost of fraud, bearing in mind that the harm fraud inflicts on an organization extends far beyond the actual financial loss to include the reputation of the organization, which may never recover.”

The study also finds that Canadian and American organizations are more likely to encourage and protect whistleblowers than are their global counterparts. “The North American reliance on whistleblowers may be a function of Sarbanes-Oxley and the underlying corporate scandals that plagued the business world in recent years,” says Mr. Savage. “In Canada particularly, companies are 15% more likely to say whistleblowers could detect and prevent fraud than their global counterparts. While whistleblowing is useful, it’s not a sufficient anti-fraud measure on its own. The need for other controls is especially evident where obstacles are present, such as language or biases against whistleblowers, as may be the case in many emerging markets.”