CFO State of Ethics

Corporate IntegrIty praCtICe
Audit director roundtAble
the State of ethics and compliance in Asia

A Cross-Country Analysis
July 2011
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KEY FINDINGS
Many employees in Asia are unsure if they have observed misconduct. The proportion of dont know responses is up to four times higher in Asian countries than in the united States, which raises concerns that employees might not be well equipped to spot misconduct. Fewer employees in Asia who do observe misconduct report it. Among staff who say they have observed misconduct, reporting rates on average across Asia are 12 percentage points lower than the global average (46% versus 58%). Fear of retaliation tops the list of reasons for not reporting. Consistent with the global trend, fear of retaliation is the most important reason for not reporting misconduct in Asia too. The belief that the observer lacks enough information about the misconduct is another key reason for nonreporting. Managers are seen as poor role models. Managers in most Asian countries are seen to be far more likely to pressure their staff to act unethically as compared to their global peers.
From the AuDIT DIRECToR RouNDTABlE of the CoRPoRATE INTEgRITy PRACTICE www.adr.executiveboard.com 2011 The Corporate Executive Board Company. All Rights Reserved.ADR0906011SYN
CEBs Compliance and Ethics leadership Council (CElC) has developed the RiskClarity survey that allows companies to rigorously assess their ethical culture and benchmark it against peers.
approximately 30,000 employees from 15 countries in asia havecompleted the riskClarity survey. this report focuses on responses from China, India, malaysia, Indonesia, and singapore.
RISKClARItY SuRvEY uSED to ASSESS thE DRIvERS oF INtEGRItY At CoMpANIES

RiskClarity
Employee Survey and Scale
corporAte integrity prActice
Survey Statements
Strongly Agree
Agree
Slightly Agree
Neither
Slightly Disagree
Disagree
Strongly Disagree
I can report unethical behavior or practices without fear of retaliation. My company responds quickly and consistently to verified or proven unethical behavior. I am often exposed to situations that could lead to inappropriate conduct.
Key Demographics of Survey participants to Date 1

Multiple Industries
Participating companies represent the following industries: Automotive and Transport, Business Services, Chemicals, Computer Software, Electronics, Energy and utilities, Entertainment/leisure, Financial Services/Banking, Health Care, Insurance, Manufacturing, Technology, Telecommunication Services, and Retail.
2 All Business Functions
Respondents represent all business functions, including Corporate Administration, Customer Service, Human Resources, Finance/Accounting, Information Technology, legal, Manufacturing, Market Research, operations, Quality Control, Retail, Sales, Corporate Strategy, and Supply Chain.
3
All Employee levels
Employees at all levels, from the CEo and senior management to middle management and frontline employees
4 pan-Asian Coverage
Deep set of responses from across India, China, Malaysia, Singapore, and Indonesia
Note: All questions were coded or recorded in such a way to directionally be on the same scale.
RoAD MAp FoR thE pRESENtAtIoN
observation of Misconduct
reporting of misconduct
performance on select drivers of Corporate Integrity
program resources
high levels of Dont Know responses suggest that employees across Asian countries are not good at spotting misconduct.
the inability to spot misconduct could be because: employees perception regarding the clarity of guidelines is not accurate; employees lack the will to spot misconduct; and ethical guidelines are inadequate in helping employees spot different forms of misconduct.
hIGh pRopoRtIoN oF EMploYEES IN ASIA uNSuRE oF hAvING oBSERvED MISCoNDuCt

percentage of Employees
Dont Know
Have observed Misconduct Have Not observed Misconduct
10% 15%
8% 12% 44% 17% 12% 12% 31% 28% 26% 23%
17% 8% 75% 80% 52%
employees in China fare the worst in terms of spotting misconduct, with dont know responses over four times the United states rate. the percentage of employees not having observed misconduct varies between 48% and 65% in asia as compared to 75% in the United states of america.
48%
55%
62%
65%
united States
united Kingdom
China
Malaysia
Indonesia
Singapore
India
n = 131,089 united States; 9,745 united Kingdom; 12,753 India; 7,551 China; 2,087 Singapore; 1,874 Malaysia; 399 Indonesia.
Source: CElC RiskClarity Survey Data, 20092010.
hRrelated misconducts like preferential treatment and inappropriate behavior are most common globally, but conflict of interest is more common in Asia.
CoNFlICt oF INtERESt thE MoSt CoMMoN tYpE oF MISCoNDuCt oBSERvED IN ASIA

observed Misconduct by type
Percentage of Respondents Who Report Having Observed a Specific Type of Misconduct
12%
Asia Average global Average
10%
8%
6%
4%
2%
0% Violation of Environmental Regulation Misuse of organizations Time or Resources Improper Sales Improper Payments Data Privacy or Information Security Violation Alcohol and/or Drug Abuse Preferential Treatment Harassment Inappropriate Behavior Discrimination Inappropriate giving or Receiving Violation of Health or Safety Policy Stealing of Company Property Accounting Irregularities Business Information Violation Conflict of Interest Fraud Insider Trading
Note: The list of top five observed misconducts by country is included in the appendix.
observation of misconduct
Reporting of Misconduct
program resources
Reporting rate of business misconduct in Asia is much lower than the global average.
employees in China and malaysia fare the worst in terms of reporting misconduct.
MoSt MISCoNDuCt GoES uNREpoRtED IN ASIA

Reporting Rate of observed Business Misconduct
Percentage of Respondents Who Reported Observed Misconduct
Global Average = 58% 56% 49% 41% 51% Asia Average = 46%
32%
China
Malaysia
Singapore
India
Indonesia
n = 4,538 India; 3,962 China; 905 Malaysia; 809 Singapore; 182 Indonesia.

Fear of retaliation in Asia is much lower than the global average, but is nevertheless the main reason for not reporting.
a high number of employees in asia do not report misconduct due to lack of information; the asia average on this dimension is eight percentage points higher than the global average.
FEAR oF REtAlIAtIoN top REASoN FoR Not REpoRtING MISCoNDuCt IN ASIA

top-three Reasons for Not Reporting Misconduct
Percentage of Employees 49%
Singapore China Malaysia India
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Indonesia
37%
global Average Asia Average
24% 20%
16%
15%
Fear of Retaliation
I Did Not Think I Had Enough Information About the Misconduct
I Did Not Think the Company Would Do Anything About It
n = 12,753 India; 7,551 China; 2,087 Singapore; 1,874 Malaysia; 399 Indonesia.
organizational Imperative Provide more anonymous channels for reporting, assuring employees of confidentiality and appropriate action against reported misconduct.
Note: The list of top-five reasons for not reporting misconduct by country is included in the appendix.
10
Misconduct is more than three times more likely to be reported to managers than through the next most preferred channel (hR).
employees in malaysia are more likely to report misconduct to hr than their counterparts in other countries.
DIRECt MANAGERS pREFERRED ChANNEl to REpoRt MISCoNDuCt

top-three preferred Channels to Report Misconduct in Asia
Percentage of Employees
India
80%
Indonesia
72%
70%
Singapore Malaysia China global Average Asia Average
70%
60%
50%
40%
30%
25% 21% 23% 20%
20%
10%
0% My Supervisor/Manager Human Resources A Superior other Than the Manager
n = 4,538 India; 3,962 China; 905 Malaysia; 819 Singapore; 192 Indonesia.
organizational Imperative Educate managers on how to address, report, and escalate issues related to misconduct.
Note: The list of top-five preferred channels for reporting misconduct by country is included in the appendix.
11
performance on Select Drivers of Corporate Integrity
program resources
12
Employees in most Asian countries report clarity of ethical guidelines close to global average.
India, singapore, and China score well on clarity of guidelines, even though they report relatively high dont know scores on observation of misconduct.
ClARItY oF EthICAl GuIDElINES SIMIlAR to GloBAl AvERAGE

Clarity of Guidelines
Percentage of Respondents1 Who Believe Ethical Guidelines Have Been Clearly Communicated to Them
89%
83%
82% 78% 69%
Global Average = 84% Asia Average = 83%
India
Singapore
China
Indonesia
Malaysia
1
Respondents who selected Agree and Strongly Agree to the question on clarity of guidelines.
13
Managerial pressure to act unethically is higher in Asia than global average.
ASIAN MANAGERS pRESSuRE thEIR StAFF to ACt uNEthICAllY

percentage of Respondents1 Who Believe they Are pressured by their Managers to perform unethical Job-Related tasks
Percentage of Responses from Non-Management Staff 25%
20%
15%
9% Asia Average = 8% 4% Global Average = 3%

China India Singapore Malaysia Indonesia
1
Respondents who selected Agree and Strongly Agree to the question on manager pressure.
14
the perception of senior leaders varies widely across Asia, with India and Singapore faring the best.
only around one-half of the respondents in malaysia and China believe their senior leaders are honest and possess integrity. a similar percentage of respondents believe that senior leaders in malaysia and China fail to take necessary action on observing misconduct.
pERCEptIoN oF SENIoR lEADERS IN ASIA SIMIlAR to GloBAl AvERAGE But vARIES BY CouNtRY
percentage of Respondents1 Who Believe the Senior leaders at their organization Are honest and possess Integrity
75% 66% 61% Asia Average = 66% 50% Global Average = 63%
57%
India
Singapore
Indonesia
China
Malaysia
percentage of Respondents2 Who Believe the Senior leaders take Appropriate Action on observing unethical practices
77% 67% 64% 61% 51% Asia Average = 68% Global Average = 62%
India
Singapore
Indonesia
China
Malaysia
organizational Imperative Set the right tone at the top, ensuring senior leaders hold the highest ethical standards and ascertain that these standards permeate the organization while remaining comprehensible across all levels.
1 2
Respondents who selected Agree and Strongly Agree to the question on senior leaders honesty and integrity. Respondents who selected Agree and Strongly Agree to the question on senior leaders response to observing unethical practices.
15
program Resources
16
NEXt StEpS
Suggested Actions to Build an Effective Anti-Fraud program
Fraud Risk Assessment
Conduct a Fraud Risk Assessment Implement a comprehensive fraud risk assessment to identify, measure, and evaluate key fraud risks and related internal controls. Identify Frauds During an Audit Engagement Incorporate fraud prevention and detection techniques into every audit to broaden coverage of this risk.
hotlines and Investigations
Develop a Whistleblower hotline Expedite fraud-related whistleblower tips to ensure that important fraud leads are appropriately prioritized and acted on. Escalate Incidences to Investigations Implement a more proactive, tiered fraud-reporting structure that collects appropriate amounts of information and provides for timely escalation and resolution of fraud issues.
Awareness and training performance on Select Drivers of Corporate Integrity
Assess Fraud Awareness use surveys and interviews to test awareness in the organization and ensure that employees understand what constitutes fraud and the various reporting mechanisms available to them. Conduct Fraud training Aid in the creation of a comprehensive fraud training program that delineates all major fraud scenarios as well as all consequences for fraudulent activity and behavior.
17
RECoMMENDED RESouRCES
Select Resources from ADR to help Build an Effective Anti-Fraud program
Fraud Prevention and Detection Survey Tool that helps identify high-risk areas requiring in-depth fraud examinations BNSFs process to outline fraud risk assessment objectives and methodology Reynolds Americans Evaluation of typical fraud risks during every audit Fraud Risk Database to help develop potential fraud scenarios during the audit engagement
Nextels Development of a whistleblower hotline Whistleblower Policy generator to help produce a whistleblower policy for your organization BPs Process to expedite the fraud communication process georgia-Pacifics Tools for whistleblower employees to collect useful, actionable fraud information
Fraud Prevention and Detection Survey Tool that helps perform an assessment of gaps in fraud control practices Fonterras Fraud Awareness Checklist to enable management to assess and manage fraud risk on an ongoing basis Fraud Awareness Training Presentation that helps educate the business to create fraud awareness Fraud Detection Skills as developed by Dow
performance on Select Drivers of Corporate Integrity
18
Appendix
perceived Levels of public sector Corruption20 "top-Five" Lists by Country
observed misconducts21 reasons for not reporting observed misconduct22 Channels to report observed misconduct23
19
higher levels of corruption in most Asian countries necessitates greater focus from companies on compliance risk.
singapore stands out from other asian countries and is perceived as one of the least corrupt countries in the world.
pERCEIvED lEvElS oF puBlIC SECtoR CoRRuptIoN

Corruption perceptions Index, 2010
The 2010 Corruption Perceptions Index measures the perceived level of public sector corruption in 178 countries around the world.
less Corrupt
10
9.3
7.6 7.1
4.4 3.3 2.8 3.5
0 More Corrupt
Indonesia
India
China
Malaysia
united States
united Kingdom
Singapore
Source: Corruption Perception Index, Transparency International, http://transparency.org/policy_research/surveys_indices/cpi/2010/results, 2010.

20
preferential treatment, Misuse of organizations time or Resources, and Conflict of Interest are the most common types of misconduct observed in Asia.
top-FIvE oBSERvED MISCoNDuCtS BY CouNtRY

percentage of Respondents Who Report having observed a Specific type of Misconduct
China
India Preferential Treatment (10%)
Malaysia Discrimination (17%)
Singapore Preferential Treatment (10%)
Indonesia Preferential Treatment (16%)
Asia Average Conflict of Interest (9%)
Global Average Preferential Treatment (11%)
Conflict of Interest (12%)
Misuse of organizations Time or Resources (10%)
Preferential Treatment (8%)
Inappropriate Behavior (9%)
Harassment (8%)
Harassment (7%)
Preferential Treatment (14%)
Harassment (14%)
Harassment (11%)
Harassment (8%)
Harassment (8%)
Stealing of Company Property (6%)
Harassment (8%)
Discrimination (9%)
21
Fear of retaliation is the top reason for not reporting observed misconduct both globally as well as in Asia.
top-FIvE REASoNS FoR Not REpoRtING oBSERvED MISCoNDuCt

percentage of Respondents Who Selected a Specific Reason for Not Reporting
China India Fear of retaliation (31%) Malaysia Fear of retaliation (38%) Singapore Fear of retaliation (46%) Indonesia I did not think I had enough information (33%). Asia Average Fear of retaliation (37%) Global Average Fear of retaliation (49%)
Fear of retaliation (42%)
I did not think I had enough information (34%).
other (22%)
Fear of retaliation (25%)
I did not think the company would do anything about it (20%).
I did not want to get involved (18%).
Ive heard stories about people raising concerns before and nothing ever happened (17%). I did not think the company would do anything about it (17%).
other (20%)
The person who committed the violation was very senior (17%).
other (16%)
The person who committed the violation was very senior (14%).
other (19%)
I assumed the company already knew about the misconduct (20%). I did not want anyone to get fired or penalized (12%).
other (15%)
22
top-five channels for reporting observed misconduct in Asia are very similar to those used globally.
top-FIvE ChANNElS FoR REpoRtING oBSERvED MISCoNDuCt

percentage of Respondents Who Selected Specific Channels for Reporting (A Respondent Can Select up to two Channels)
China India Supervisor/ Manager (76%) Malaysia Supervisor/ Manager (67%) Singapore Supervisor/ Manager (66%) Indonesia Supervisor/ Manager (72%) Asia Average Supervisor/ Manager (70%) Global Average Supervisor/ Manager (72%)
Supervisor/ Manager (55%)
HR Department (25%)
A superior other than the direct manager (23%)
HR Department (39%)
HR Department (25%)
HR Department (30%)
HR Department (23%)
HR Department (25%)
HR Department (20%)
Hotline (11%)
Compliance and Ethics Department (7%)
Security Department (9%)
ombudsperson (3%)
Hotline (5%)
ombudsperson (9%)
ombudsperson (13%)
Hotline (5%)
Hotline (4%)
23
Corporate IntegrIty praCtICe
Audit director roundtAble
2011 The Corporate Executive Board Company. All Rights Reserved.ADR0906011SYN

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Corporate IntegrIty praCtICe

Audit director roundtAble

the State of ethics and compliance in Asia

RISKClARItY SuRvEY uSED to ASSESS thE DRIvERS oF INtEGRItY At CoMpANIES

corporAte integrity prActice

Key Demographics of Survey participants to Date 1

2 All Business Functions

All Employee levels

RoAD MAp FoR thE pRESENtAtIoN

performance on select drivers of Corporate Integrity

hIGh pRopoRtIoN oF EMploYEES IN ASIA uNSuRE oF hAvING oBSERvED MISCoNDuCt

Have observed Misconduct Have Not observed Misconduct

8% 12% 44% 17% 12% 12% 31% 28% 26% 23%

17% 8% 75% 80% 52%

CoNFlICt oF INtERESt thE MoSt CoMMoN tYpE oF MISCoNDuCt oBSERvED IN ASIA

Asia Average global Average

Source: CElC RiskClarity Survey Data, 20092010.

RoAD MAp FoR thE pRESENtAtIoN

performance on select drivers of Corporate Integrity

MoSt MISCoNDuCt GoES uNREpoRtED IN ASIA

Source: CElC RiskClarity Survey Data, 20092010.

FEAR oF REtAlIAtIoN top REASoN FoR Not REpoRtING MISCoNDuCt IN ASIA

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

global Average Asia Average

I Did Not Think I Had Enough Information About the Misconduct

I Did Not Think the Company Would Do Anything About It

Source: CElC RiskClarity Survey Data, 20092010.

DIRECt MANAGERS pREFERRED ChANNEl to REpoRt MISCoNDuCt

Singapore Malaysia China global Average Asia Average

25% 21% 23% 20%

0% My Supervisor/Manager Human Resources A Superior other Than the Manager

Source: CElC RiskClarity Survey Data, 20092010.

RoAD MAp FoR thE pRESENtAtIoN

performance on Select Drivers of Corporate Integrity

ClARItY oF EthICAl GuIDElINES SIMIlAR to GloBAl AvERAGE

82% 78% 69%

Global Average = 84% Asia Average = 83%

Source: CElC RiskClarity Survey Data, 20092010.

Managerial pressure to act unethically is higher in Asia than global average.

ASIAN MANAGERS pRESSuRE thEIR StAFF to ACt uNEthICAllY

9% Asia Average = 8% 4% Global Average = 3%

Source: CElC RiskClarity Survey Data, 20092010.

Source: CElC RiskClarity Survey Data, 20092010.

RoAD MAp FoR thE pRESENtAtIoN

performance on select drivers of Corporate Integrity

Fraud Risk Assessment

hotlines and Investigations

Awareness and training performance on Select Drivers of Corporate Integrity

performance on Select Drivers of Corporate Integrity

pERCEIvED lEvElS oF puBlIC SECtoR CoRRuptIoN

4.4 3.3 2.8 3.5

Source: Corruption Perception Index, Transparency International, http://transparency.org/policy_research/surveys_indices/cpi/2010/results, 2010.

top-FIvE oBSERvED MISCoNDuCtS BY CouNtRY

India Preferential Treatment (10%)

Malaysia Discrimination (17%)

Singapore Preferential Treatment (10%)

Indonesia Preferential Treatment (16%)

Asia Average Conflict of Interest (9%)

Global Average Preferential Treatment (11%)

Conflict of Interest (12%)

Misuse of organizations Time or Resources (10%)

Conflict of Interest (8%)

Misuse of organizations Time or Resources (15%)