According to a recent survey, 47% of chief compliance officers saw staffing and budget increases in 2012. How should a company measure the appropriate level of resources to devote to combating corruption? The simple answer is this: the level of resources should be proportional to the level of risk. But how do you quantify risk? And how do you translate a risk assessment into an appropriate allocation of resources? This whitepaper proposes a methodology to translate a risk assessment into an appropriate allocation of resources.

1. Reality Check
Benchmarking
Anticorruption
Resources

2. Introduction 47%
C
41%
ompanies are reportedly devoting increased
resources to their anticorruption efforts in
response to the string of high-profile
settlements under the US Foreign Corrupt Practices Act 12%
(FCPA) and the threat of the seemingly stricter UK
Bribery Act.
Staffing No Change Staffing
According to a recent survey, 47% of chief compliance Increased Decreased
officers saw staffing and budget increases in 2012. How did your 2012 compliance staff change from 2011?
Source: Consero Group: http://consero.com
Given some previously lax policies among global
companies, these increases are probably well deserved. 47% 45%
But how should a company measure the appropriate
level of resources to devote to combating corruption?
The simple answer is this: the level of resources should
be proportional to the level of risk.
8%
But how do you quantify risk? And how do you
translate a risk assessment into an appropriate
Budget No Change Budget
allocation of resources? Increased Decreased
How did your 2012 compliance budget change from 2011?
Source: Consero Group: http://consero.com
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3. Siemens (2010) $800 Million
KBR/Halliburton (2010) $579 Million
BAE (2009) $400 Million
Snamprogetti/ENI (2011) $365 Million
Technip S.A. (2010) $338 Million
JGC Corporation (2010) $219 Million
Daimler AG (2010) $185 Million
Alcatel-Lucent (2008) $137 Million
Magyar/Deutsche Telekom (2011) $95 Million
Panalpina (2010) $82 Million
Top Ten FCPA Settlements
Source FCPA Blog: http:www.fcpablog.com
E
veryone involved in anticorruption efforts has the FCPA, but no one should mistake this list as a
seen the list of top ten FCPA settlements. This representation of the measure of corruption risk faced
list went unchanged in 2012. (There are reports by any other company.
that the French “supermajor” oil and gas company,
As data points, the top ten cases are statistical outliers.
Total SA, may debut in 2013 with a $398 million
They can make a dramatic opening slide to capture the
settlement. This would put Total SA at number four,
attention of company executives and board members,
and push Panalpina off the bottom.)
but they are not appropriate data points to measure
Every compliance officer has seen these numbers. And corruption risk—unless there is evidence that
every CEO should see them as well. They illustrate how corruption is so pervasive within a company as to put it
aggressive the US authorities have become in enforcing among the worst companies of all time.
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4. Measuring Corruption Risk $375K
$250K $250K
The current top ten cases span a five-year period from
2008 through 2012. But instead of benchmarking risk
against the worst cases, look instead at median losses
during the same time period. Median losses provide a
2008 2010 2012
more accurate assessment of the corruption risks that
companies face. Median Corruption Losses
Source: Association of Certified Fraud Examiners http://www.acfe.com/
According to the Association of Certified Fraud
Examiners (ACFE), the median loss due to corruption
Financial Statement Fraud $1,000,000
as reported in 2011-2012 was $250,000, significantly less
Corruption $250,000
than the losses from of the top ten FCPA cases.
Check Tampering $143,000
But median losses are only part of the risk assessment. Billing $100,000
To put the losses into perspective, you also need to
Non-Cash Misappropriations $58,000
know how corruption losses compare with losses from
Skimming $58,000
other occupational frauds.
Cash Larceny $54,000
According to the ACFE, corruption losses are second Payroll $48,000
after financial statement fraud losses, with these two Expense Reimbursements $26,000
categories topping the list of all occupational frauds. Cash Register Disbursements $25,000
Misappropriation of Cash on… $20,000
The remaining occupational frauds—from check
tampering to misappropriation of cash on hand—are all
All Occupational Fraud Losses
subcategories of asset misappropriation. Source: Association of Certified Fraud Examiners http://www.acfe.com/
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5. Fraud Schemes
The ACFE classifies occupational fraud schemes into three
primary categories:
Financial statement fraud schemes: where an
employee intentionally causes a misstatement or
omission of material information in the organization’s
financial reports (e.g., recording fictitious revenues,
understating reported expenses or artificially inflating
reported assets)
Corruption schemes: where an employee misuses his
or her influence in a business transaction in a way that
violates his or her duty to the employer in order to gain
a direct or indirect benefit (e.g., schemes involving
bribery or conflicts of interest)
Asset misappropriation schemes: where an employee
steals or misuses the organization’s resources (e.g., theft
of company cash, false billing schemes or inflated
expense reports)
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6. Analysis
Applying probabilistic risk assessment analysis, we can Financial Statement Fraud $1,000K
quantify the comparative risk of each risk category by Corruption $250K
taking the median loss (magnitude) multiplied by the
Asset Misappropriation $120K
frequency of occurrence (likelihood):
[Risk] = [Magnitude] x [Likelihood] Median Losses
Source: Association of Certified Fraud Examiners http://www.acfe.com/
This provides raw scores of 76 to 104. But we can scale
the results from 1 through 10 and create a simple scale
to measure relative risk. Financial Statement Fraud 7.6%
Corruption 33.4%
Financial statement fraud causes the greatest losses, but
it occurs so rarely that it is the lowest fraud risk. It Asset Misappropriation 86.7%
earns a raw score of 76 and the lowest scaled score of 1.
Frequency of Losses – Percent of Cases
On the other side of the scale, asset misappropriation Source: Association of Certified Fraud Examiners http://www.acfe.com/
causes the lowest median loss per incident, but it occurs
so frequently that it is the highest fraud risk. It earns a
raw score of 104 and the highest scaled score of 10. Financial Statement Fraud 1.0
Corruption 3.4
Corruption sits in the middle, both in terms of
magnitude and likelihood. It earns a raw score of 83.5, Asset Misappropriation 10.0
and a middling scaled score of 3.4.
Calculated Risk Factor
[Risk] = [Magnitude] x [Likelihood}
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7. Reality Check
We can apply the results of our risk assessment as a
reality check to gauge the appropriateness of any
compliance budget.
We previously said the level of resources should be
proportional to the level of risk. This means that the
resources allocated to combating corruption should be
somewhere in the middle—between the resources
allocated to combating financial statement fraud and
the resources allocated to asset misappropriation.
Specifically, it should slightly below the midpoint,
approximately 34% of the way up from the low point to
the high point.
This metric can apply to any budget size.
1.0 3.4 10.0
Financial Corruption Asset
Statement Fraud Missappropriation
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8. Why is this Important?
In the same survey in which 47% of chief compliance
officers reported staffing and budget increases, there No
was a similar 47% who said they do not have sufficient 47% Yes
resources to manage a compliance program effectively. 53%
Our probabilistic risk assessment is a reality check for
this claim.
It measures how much of the overall budget should be Do you have sufficient resources
to manage a compliance program effectively?
allocated to corruption risk out of the total budget for Source: Consero Group: http://consero.com
combating all forms of occupational fraud.
It provides one benchmark derived from real word
fraud data in the form of a simple ratio that can be
scaled to any budget size.
Of course, this is not a substitute for an individualized
company risk assessment, but it is a perfect starting
point to help decide where to allocate internal company
resources.
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9. About the Authors
Eric Pesik is an Associate General Counsel and Compliance Officer at Seagate Technology
http://www.linkedin.com/in/ericpesik/
Deanna Purnell Pesik is an independent legal and regulatory compliance professional
http://www.linkedin.com/pub/deanna-purnell-pesik/3/a47/481
This work represents the opinions of the authors alone, and not the opinions their employers or clients. The authors are
not rendering business or legal advice; and this publication is not a substitute for business or legal advice. The authors are
not responsible for any loss sustained by any person or entity that relies on this work. You are free to share, copy,
distribute, and transmit this work; to remix or adapt this work; and to make commercial use of this work, under the
condition that you must attribute this work to the authors (but not in any way that suggests that they endorse you or your
use of this work).
Creative Commons Attribution License
http://creativecommons.org/licenses/by/3.0/
Copyright © 2013 Eric and Deanna Pesik.
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10. Data Source Acknowledgements
FCPA Blog
Top Ten Corruption Settlements
http://www.fcpablog.com/blog/tag/top-ten
Association of Certified Fraud Examiners
2012 Report to the Nations on Occupational Fraud and Abuse
http://www.acfe.com/
Consero Group LLC
2012 Chief Compliance Officer Data Survey
http://www.consero.com
Image Source Acknowledgements
Victor 1558, Woman Measuring Floor
http://www.flickr.com/photos/76029035@N02/6829354783/
Images of Money, Euros
http://www.flickr.com/photos/59937401@N07/5930032284/
Microsoft Office Online, Measuring Tape
http://office.microsoft.com/en-us/images/results.aspx?qu=MP910218070
Images of Money, Stack of Pound Coins
http://www.flickr.com/photos/59937401@N07/5930116778/
Victor 1558, Man with Tape Measure in Empty Office Space
http://www.flickr.com/photos/76029035@N02/6829361737/
D Sharon Pruitt, Coiled Tape Measure
http://www.flickr.com/photos/pinksherbet/3209939998/
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