Fraud Prevention Efforts Still Evolving: Many Firms Don’t Do Diligence

February 2014

IN THIS ISSUE

— Is Ignorance Bliss? New Study Reveals Less Than Half of Companies Perform Due Diligence
— Preventive Measures: The Benefits of Due Diligence

GREETINGS!

Welcome to the February edition of our newsletter! In this issue, we’ll examine a recent study about trends among end users of investigative due diligence — particularly why some potential users aren’t engaged in such research.

IS IGNORANCE BLISS? NEW STUDY REVEALS LESS THAN HALF OF COMPANIES PERFORM DUE DILIGENCE

The business news headlines paint a daunting picture: insider trading convictions, bribery scandals, accounting fraud on a nearly daily basis. Given this landscape, you might expect that corporate counsels and executives would bulk up fraud prevention efforts, rather than pay fines and handle embarrassing press coverage after a fraud is revealed by others. Yet a new study by consultancy AlixPartners LLP, which surveyed more than 250 general counsels at large companies, found that less than half — 43 percent — regularly performs due diligence before retaining third parties.

According to the study, the largest barriers to conduct routine due diligence were “staffing constraints” (which was attributed as a cause by 65 percent of respondents), which was tied with jurisdictional regulations and restrictions (particularly outside of the United States.) While 30 percent of respondents said they had ceased doing business with certain parties due to perceived risk, 70 percent of respondents said they had not made such an effort.

PREVENTIVE MEASURES: THE BENEFITS OF DUE DILIGENCE

Looking at the reasons listed by survey respondents, several possible remedies present themselves. Using outside consultants to conduct at least some investigative work eases staffing concerns, as well as lowering overhead expenses such as office space and health insurance. Jurisdictional issues abroad can be researched and explored by fraud investigators who have a strong network of experts are resources in other parts of the world. Curiously, the survey also found that only one-fifth of European respondents perceived risk in dealing with third parties, which was half the percentage (40 percent) reported by United States respondents.

The study illustrates the point that a global economy, where companies and countries are increasingly dependent on one another, requires increased risk prevention efforts and more comprehensive strategies. The alternative is to have regulators or law enforcement knock on the door and read about your company’s troubles in the morning newspaper.