EY study concludes that Hungarian businesses do not take risk of corruption seriously

September 30, 2016

corruption

Hungarian businesses neither take the dangers of corruption seriously nor are they prepared to defend against it, according to a new survey by EY.

The willingness of businesses to take part in the survey has decreased significantly in recent years, with the percentage falling from 60-70 percent to 30 percent, said István János Tóth, the chief executive of MKIK GVI. According to Tóth, one of the reasons, aside from cyclical changes, is that potential respondents are more afraid of possible repercussions if they do so.

However, certain things have not changed.  Although respondents see the country’s situation worsening, they see their own situation more positive in the area of corruption, said Lívia Fábián, EY’s director for responsible corporate services.

When asked what they would do if their companies were in danger of experiencing a significant decrease in revenues, 12-18 percent of executives responded that they would consider a proposal to engage in corruption.

Furthermore, 54 percent said they have knowledge of at least one instance in which someone acting in an official capacity encouraged them to engage in an act of corruption.  Ferenc Biró, a partner with EY’s responsible corporate services, cites a typical example of  when a business does not want to pay a fine assessed by a tax authority agent.

Even though respondents believe corruption is worse than before, executives continue to be more concerned about employee theft than the risk of correction, particularly in businesses maintaining large warehouses.

Executives think there is a relatively low risk of abuse in the case of those working in business development and procurement (22 and 21 percent respectively), said Fábián, adding that procurement has been one of the most corrupt areas to work in for years. According to the EY study, this particular area still has room for improvement. 40 percent of businesses have no rules for engaging in procurement, 45 percent of businesses do not announce calls for tender, and one person issues the final decision on a procurement in 70 percent of businesses that do announce calls for tenders. According to Fábián, the rule of “two sets of eyes on the job” is not widely practiced.

It comes as no surprise, therefore, that fewer businesses in Hungary have ethical codex than the international average: 53.9 percent in Hungary compared to the international average of 81 percent, according to EY. The situation is similar with respect to corporate hotlines for reporting abuse, with only 28.5 percent of Hungarian businesses providing such services compared to the international average of 60 percent.

While the lack of ethical guidelines is certainly a problem, the larger problem is that ethical guidelines should be part of a much larger defense system, said Ferenc Biró. Having ethical guidelines will not guarantee that abuses will be prevented; the guidelines are only useful if they are being used.

Ethical guidelines most often cover the areas of handling confidential information (94 percent) and electronic data (87 percent). When asked what they thought was the most risk-prone area of sensitive information, executives offered a variety of answers.

Biró said companies are not entirely sure what kind of confidential information they have in their possession, despite this being the most sensitive data they store. He went on to say that it is also problematic when one considers that people usually do not supervise who, how or when that information is accessed.

One sign of this problem is that 61 percent of executives responded that they never supervise a departing employee because they are confident the employee will not take sensitive information with them. Most companies try to work around this by providing automated solutions, such as including a “black box” in their security systems. But trusting in technology too much does not offer sufficient defense, said Biró.

While many companies in Hungary have employees sign conflict of interest declarations, most of these stop here and do not investigate whether employees honor such agreements.  32 percent of respondents said their employees have no other business interests, but Fábián questions whether this is really the case or whether businesses blindly trust their employees.

Smaller companies are more exposed to such abuses, but it is clear that their larger counterparts dedicate proportionately less attention to preventing such abuses, Biró said.

In response to the question “What would you do if you knew that products you sold outside the country were being brought back and sold by your partners inside the country?”, 27 percent of the respondents said they would do nothing, and 22 percent said they have no idea how they would respond to the situation.

The reason why this is significant is because the Hungarian tax authority (NAV) would investigate whether the company had knowledge of this happening. If NAV could prove that the company had knowledge of this practice, then it would likely go after the company for fraud, Biró said.

In order for the aforementioned trends to change, Biró said small- to medium-sized business needs to become the backbone of the economy (as seen in Germany), not the multinational corporations that have set up shop in Hungary. But in order for this to happen, executives of smaller companies would need to accept the notion that “if I am the victim of theft, then I am making less money.” Progress can lead to two paths: you either work more, or pay more attention to certain things. The latter shows that a company’s performance can increase significantly, Biró said.