New NZX rules, effective October, will see Kiwi businesses encouraged to develop more robust policies around ethics in their companies.
The announcement comes after a year-long review by the NZX. The group sought feedback in 2016 on standards around ethics, rules about share trading and continuous disclosure, and more transparency over board appointments and chief executive pay.
The move is seeing Kiwi listed companies reviewing their policies – especially those around protecting whistleblowers and reporting processes for unethical behaviour.
Such a review makes sense. According to the Association of Certified Fraud Examiners 2014 International Study, on average, 5% of an organisation’s revenue is lost to fraud each year.
That same study also found that the median loss caused by a single case of occupational fraud is US$145,000, with 22% of occupational fraud cases causing losses of more than $1 million.
Independent whistleblower hotlines – as well as independent case management – are increasingly common and informally considered best practice for NZX listed companies. Now that’s expected to become the law.
Not only are such systems fully legally compliant, but they also produce measurably better results.
“Internal whistleblowing procedures don’t produce anywhere near the same outcomes as external systems,” says Report It Now director, Craig McFarlane. “Studies show that those businesses with an external reporting system receive 50% more submissions than those with internal procedures.”
“Some companies still consider ethics reporting systems a token gesture, but that will no longer be the case. Previously it was voluntary, now it’s compulsory, and those companies with a genuine commitment to doing the right thing invariably implement an external system.”
“For those companies who have an internal system in place, it’s good that they’ve at least thought about the challenges they face, but with the new NZX rules coming in, now is definitely the time to upgrade to an external, independent reporting system.”
“It demonstrates the character of the people in charge, it reduces dishonest behaviour and it shows a commitment to doing what’s best for the company.”
Other statistics from the ACFE study:
- Small businesses bear the brunt of fraud losses disproportionately – 28% higher median fraud losses for organizations with less than 100 employees
- When collusion is involved, median losses due to fraud increase substantially – $80,000 for one perpetrator; $300,000 for two or more perpetrators
- 77% of all occupational frauds originated in one of seven organizational departments: accounting, operations, sales, executive/upper management, customer service, purchasing and finance.
- The longer a fraudster had worked for a company, the more harm he or she was likely to cause – the average loss for an employee with 10+ years on the job? $220,000
- Organizations that had anti-fraud controls in place experienced lower fraud losses than organizations without these controls.
- 42% of frauds were detected via anonymous tipoffs.
- Tips are the most common means by which frauds are detected, but only 54% of victim organizations had a formal reporting mechanism in place.