Audit’s Response to Risks in Emerging Markets
Emerging markets will be the primary engine of global long-term economic growth and consumer demand. Unsurprisingly, companies are looking to emerging markets as sources for corporate growth and expansion. Since 2009, emerging markets have attracted more foreign direct investment than developed countries. Companies are investing in all parts of their operations including sales & marketing, manufacturing, call centres, Shared Service centres, and R&D facilities in emerging markets.
Emerging markets pose serious challenges that Western firms are often unaccustomed to managing. A working definition of emerging markets is territories that are new, different and remote to an organisation. Significant barriers to operations exist in these new territories; most of these barriers are likely to be either political or regulatory in nature and tend to be incredibly volatile. The volatility of most emerging markets adds to the difficulty anticipating and managing these challenges.
Corruption and bribery continue to be a common violation across the BRIC markets, for example, with competition law a particular concern in Russia. Compared to the global average, local employees observe:
- 700% more improper payments in China,
- 250% more conflicts of interest in Brazil,
- 250% more fraud in India, and
- 350% more business information violations in Russia.
Simultaneously, in these countries the rates of employee reporting of such unethical activities or regulatory breaches are much lower than the global averages.
Companies face substantial costs for compliance failures in emerging markets. In many cases, large fines are levied by governments both at home and in host countries. There is also uneven enforcement of laws and broad government investigative powers which can exacerbate market risks. While significant issues make headlines, smaller tax, custom, and corruption issues can be a routine drain on corporate time and finance.
Organisations expanding operations in new, different, remote territories face three major challenges which every CAE must understand and build a response into their 2013 audit plan:
Challenge 1: Hard to assess risks in rapidly changing environments
In the past two years, both business and regulatory volatility have increased in emerging markets. Responding to these changes with increased controls and processes becomes more difficult and cumbersome. Fundamental differences also exist across markets, exposing companies to greater legal and compliance uncertainty and risk.
Companies should evaluate the unique risks when assessing proposed investments in developing countries. Emerging market investments require greater acceptance of volatility and uncertainty. As a result of uncertainty, it is more important that CAEs ensure that management regularly evaluate their assumptions, especially predictions of revenue, market share and timescales.
Challenge 2: Hard to influence local culture (strong section and guidance here)
Culture is the key to local compliance risk management success. The ability to drive behavioural change, regardless of market, will ultimately define compliance and ethics program success.
Translate corporate values into employee-friendly terms and link them to local workplace behaviours. CAEs must evolve their audit methodology to evaluate the effectiveness of compliance training programs and also include audit of employee culture in emerging markets.
Challenge 3: Hard to know the state of compliance in local markets
Corporate Officers need visibility into local operations and confidence that there is adherence to global compliance standards. It is important to build a structure that promotes visibility into local risk conditions and creates local compliance and ethics accountability.
Business management must be provided with the tools and frameworks necessary for managing compliance and ethics implementation. In addition, the effectiveness of local compliance and ethics activities must be measured based on consistent oversight standards.
Finally where compliance is absent, CAES must step forward and take on compliance and ethics monitoring responsibilities.
What is ADR doing for members?
Assess your organization’s readiness to move into Emerging Markets by using this diagnostic to evaluate status across 8 key attributes
Protect against counterfeit products. This report explores the changing dynamics in international intellectual property trends, including measures designed to aid companies most affected by counterfeit products.
Emerging risks in Asia: This report includes findings from our Q2, 2012 emerging risks survey and highlights those risks that members have identified as emerging. Despite these threats, the typical audit department continues to spend the majority of its time on traditional assurance activities covering financial and compliance risks.
Managing ethical risks in Asia. Information on misconduct in Asia remains hidden from the corporate center, exacerbating the complexities of managing ethics and compliance risks. This report examines how thought leaders in the region navigate this uniquely Asian ethics risk challenge.
The UK Bribery Act and Global Anti-Corruption Priorities: The State of Play in 2012.
Q1 2012 Emerging Risks Webinar: Navigating Regulatory and Macroeconomic Risks.
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