August 26 2008
Massive in land size, population, and economic power, the BRIC countries—Brazil, Russia, India, and China—are global giants in every sense of the phrase. That includes the potential to give compliance executives giant headaches. Like it or not, Corporate America is stuck with doing business in the BRIC nations. They comprise 40 percent of the world’s population and have a combined gross domestic product of $15.4 trillion. (By comparison, the U.S. GDP in 2006 was approximately $13.1 trillion.)…
All that means compliance executives at U.S. companies have no choice but to learn the cultural differences, and obstacles, to conducting investigations and enforcing compliance in BRIC nations. A quick world tour of those obstacles and differences follows.
An investigation can succeed or fail depending on how much protection a country gives its workforce…the example of Brazil: Employee rights are extremely favorable in investigations, he said. “It would be incredibly difficult to terminate somebody for cause in Brazil.”
While Brazilian law typically does allow companies to conduct employee investigations, most union agreements prohibit any type of employee surveillance. In addition, “people tend to be very loyal to the chain of command,” Phillips said. As a result, getting employees to rat out a senior manager who is the focus of a crime investigation, for example, may be difficult.
Chinese culture, steeped in communist history, also operates along very pro-employee lines and makes corporate investigations or surveillance difficult. Employee rights in Russia, however, are more lax.
Perhaps least like the other BRIC countries when it comes to employee rights is India, where surveillance is typically allowed and few privacy laws exist, Phillips said. That said, Indian culture does value humility—so don’t expect employees to blow the whistle on fellow workers. “You can be blackballed for that,” he said.
Phillips also noted that only 8 percent of fraud is uncovered through whistleblowers, which means that companies will need to have ”better detection methods than just relying on tips from outside individuals,” he said.
Beyond employee rights, family ties can also bring investigations to a halt. Going against family, tribe, caste, or clan will often strike a BRIC citizen as simply unthinkable, no matter what threats or demands for cooperation a company might make. In China particularly, “The importance of family cannot be overemphasized,” Grayer said.
Like China, business in Russia depends on relationships. “Russians typically see themselves as members of some form of group,” whether they are part of a certain circle of family, friends, or an association, Grayer said. “Within the group, they can call upon each other for almost anything.” It’s an insider versus outsider way of thinking, and loyalty may come before the laws and regulations, he said…
I thought it would be interesting to look at how the Big 4 firms address their own internal ethics and compliance issues in the BRIC countries, in particular. I was especially interested in the availability of ethics/independence hot lines in these countries. Given the experience of Satyam and PwC in India, you have to wonder whether anyone on the PwC audit team suspected any inappropriate activities by the client management, the PwC partners now accused of allowing the alleged improprieties to occur, or both. If anyone had seen or heard any wrongdoing, could they have reported ethics, independence, or risk and quality concerns to anyone locally or internationally without risking retaliation or worse?
I saw that KPMG, one of the firms (with Deloitte) who has been asked to restate Satyams accounts had actually discussed the Satyam case on their global firm website.
Pretty “in-your-face” competitive of them!
A board of directors is expected to oversee the company’s operations, to set its strategy, to set high standards of conduct, and to provide oversight over management’s activities. Independent directors are expected to be able to objectively critique management quality, yet corporate governance failures show that all of this is not always effective.
Why is this? First, finding a truly independent director is challenging in India where corporate CEOs tend to be a ‘clubby’ community and family-promoters are firmly woven into the corporate fabric.
Second, if the role of independent directors is to ‘direct’ (i.e. guide and support) management with their expertise gained in other companies and industries, can they be truly independent of management? Third, there is a danger that promoter-led groups have imperious CEOs who extend invitations to independent directors to join their boards and then expect their full support without criticism. The practice of appointing an independent chairman or lead independent director is not widespread in India and tends to be found only in multinational companies.
So, Compliance Week tells us that, “…Indian culture does value humility—so don’t expect employees to blow the whistle on fellow workers. “You can be blackballed for that,” he said…” And KPMG tells us that in India it is challenging to find truly independent Directors, given the clubby atmosphere that is woven into corporate life.
So how internally clubby are the Big 4 firms operating in India? Do they value independence, integrity, and willingness to blow the whistle on superiors of there is illegal, unethical, or activities violating independence rules that are identified?
PricewaterhouseCoopers has an extensive Code of Conduct on their Global site.
Under “Behaving Professionally” it includes, for example:
- We deliver professional services in accordance with PwC policies and relevant technical and professional standards.
- We offer only those services we can deliver and strive to deliver no less than our commitments.
- We compete vigorously, engaging only in practices that are legal and ethical.
- We meet our contractual obligations and report and charge honestly for our services.
They include a response form on the Global site to enable anyone – an employee anywhere in the world, a vendor, a client, or interested party – to submit a comment or inquiry regarding business practices. It can be submitted anonymously. On their India site, a tab under the About Us section labeled “Code of Conduct” leads back to the Global Code of Conduct page. There’s no hot line or 800-number in India from what can be seen on the website or on the Global page, such as is available for the US firm on their intranet. I guess it’s too hard, even though these services are readily available and part of the GRC-type recommendations made by PwC to their multinational clients to insure Sarbanes-Oxley compliance.
So…Did anyone submit any comments, complaints, or questions about Satyam or the Indian partners accused of wrongdoing to the Pricewaterhouse Global Ethics and Code of Conduct people in the last few years?
Inquiring minds want to know.
Nota bene: A commenter asked me to provide a place to tell your stories of unethical/illegal behavior at the audit firms. Here you go. What would you tell the hotline if you could?