Report suggests endemic corruption and malpractice in emerging Europe

Emerging Markets, EBRD editions, May 9 2013

A new report suggests worryingly high levels of corruption and malpractice among businesses in emerging European nations.

Ernst & Young’s Europe, Middle East, India and Africa Fraud Survey 2013, released this week, surveyed employees of large companies in 36 countries, some in the developed world, some in emerging markets.

Key findings for countries within the EBRD sphere of operations included:

• Slovenia ranked second after Nigeria for prevalence of companies “cooking the books” – reporting financial performance as better than it is – with 66% of respondents from that country reporting it as happening there. In Russia, Croatia and Serbia more than half of respondents reported the practice, compared to an average of 38% for the survey as a whole.
• Asked whether bribery or corrupt practices happen widely in business in their country, a remarkable 96% in Slovenia said yes – the highest in the entire survey. Exceptionally high responses also came in Croatia (90%), Slovakia (84%), the Czech Republic (73%), Hungary (70%), Serbia (83%), Ukraine (85%) and Russia (82%), compared to an average of 57% in the survey.
• Figures were lower when employees were asked if it was common practice in their own sector to use bribery to win contracts; Russia was the only country in the survey where more than half of respondents (56%) answered yes.
• 37% of respondents in Serbia, 28% in Russia and 25% in Croatia said they believed authorities in their country regulated foreign businesses more closely than local ones.

Ernst & Young declined to respond to Emerging Markets’ written questions about the performance of emerging European economies in their survey. However, speaking for the business environment worldwide, David Stulb, global leader for fraud investigation and dispute services, said: “The results make for uncomfortable reading. We found that executives and their teams are indeed under increased pressure – and it is being felt personally. They are also bleakly realistic about the market challenges they face.”

“To find growth and improved performance in this environment, an alarming number appear to be comfortable with or aware of unethical conduct,” he said, citing recording revenues early, underreporting costs or encouraging customers to buy unnecessary stock.

Of all countries in the survey, Slovenia is likely to be most alarmed by the results: not only an EU state but a Eurozone member, apparently showing more widespread corrupt practices than in Kenya or Nigeria, as well as its Balkan peers. By contrast, in Transparency International’s Corruption Perceptions Index for 2012, Slovenia ranked 37^th out of 176 countries, more than 100 places above Kenya.

Transparency International declined to comment on the Ernst & Young survey, but it is understood that a key difference is that the Ernst & Young report is based on interviews with employees within companies in-country, whereas Transparency Internationals combines a number of surveys which look at ease of doing business in a country from the perspective of an outsider.

The numbers for Croatia, due to join the EU this year, will also be alarming both to those within the country and in the EU.