1. Introduction

International trade is growing rapidly, for both developing and developed countries (World Bank Group, 2001), and economies of countries such as the USA and China have become increasingly intertwined (Atkinson, 2004). Multinational corporations must carefully consider how to manage their international affairs because many managerial principles are influenced by the cultural context in which they are applied (Earley, 1989; Hofstede, 1992), Western management systems may not work well in Asian cultures (Weltzein Hovik, 2007), and norms of ethical business behavior vary

widely across capitalist nations (Okleshen and Hoyt, 1996). Whistleblowing, in particular, may be affected by culture since perceptions of right and wrong, justice, morality and loyalty can differ across countries (Vogel, 1992). Similarly, the effectiveness of a code of conduct may be influenced by cross-cultural differences that shape perceptions about ethical dilemmas (Cohen et al., 1996). What may be considered legitimate in one culture may be considered corruption in another culture, and this lack of common understanding makes combating international corruption difficult. For example, what is thought of as a gift in Japan could be construed as a bribe in the USA (Watson, 2003).Another example is the propensity for managers in China to divert resources to "parallel operations" or other companies that they also have a stake in (Atkinson, 2004). Intellectual

property may be viewed as a communal good in Asian countries influenced by Confucian ethics (Yang and Sonmez, 2007). Moreover, technology can exacerbate this problem since people may be less aware of cultural differences when they are no longer meeting face to face.

Hofstede (2001) defines culture as a "collective programming of the mind", which includes ethical values. The purpose of this paper is to examine differences in managers' and employees' attitudes about fraud across different cultures, provide some theories as to why these differences exist, give some recent examples of cultural differences in ethical perceptions from practice, make recommendations as to how companies can address this issue and make improvements to their anti-fraud programs based on the country and culture in which they operate, and suggest some

opportunities for future research.

2. Literature review

2.1 Anti-fraud programs and culture

Fraud is a significant and growing problem for businesses. A recent study of 538 companies in 15 European nations found that fraud cost at least e3.6 billion (Zhuang et al., 2005). A recent survey by the Association of Certified Fraud Examiners suggests that corporations lose about 7 percent of revenues per year to fraud or $994 billion in total (Association of Certified Fraud Examiners, 2008). Detecting fraud has become very important to the accounting profession because failure to detect fraud can be damaging to capital markets (Palmrose, 1987; Bonner et al., 1998; Elliot, 2002; Public Company Accounting Oversight Board, 2004; Carpenter et al., 2007). Moreover, corporate management is now required to develop vigorous anti-fraud programs in response to the Sarbanes-Oxley Act of 2002.

However, these anti-fraud programs may not take into account cultural differences that may influence how employees respond to situations that may be indicative of fraud, despite the fact that cultural differences within multinational corporations have been well documented (Hofstede, 1987; Newman and Nollen, 1996), and linked to on-the-job values (Hofstede, 1980) and perceptions regarding business-related ethical dilemmas (Harzing and Hofstede, 1996; Alderson and Kakabadse, 1994; Zhuang et al., 2005). Cultural differences are significantly related to accountants 'perceptions regarding the severity of a range of fraudulent activities, including corruption. Accountants from the Asia-Pacific region do not view bribes or illegal gratuities, for example, as seriously as accountants from other geographic areas.

One explanation for these findings is that East Asians have a more holistic view of causality (i.e. everything is related to everything else), place more weight on situational factors, and are less likely to explain behavior in terms of individual traits or agree to punitive measures (Wong-On-Wing and Liu, 2007). For instance, Smith (2007), found that in response to bribery, US students focus on legalism and the categorical imperative, whereas international students focus more on cultural relativism. In addition, Albrecht et al. (2009) point out that some of the financial scandals in South Korea were perceived as smart financial moves rather than unethical corrupt acts.

2.2 The Foreign Corrupt Practices Act

An enhanced understanding of cultural differences in ethical perceptions may be particularly important given the globalization of business, the renewed emphasis on The Foreign Corrupt Practices Act (FCPA) of 1977 by the Securities and Exchange Commission and Department of Justice, as well as enhanced enforcement efforts against bribery and corruption worldwide (Ernst & Young, 2008). At the beginning of 2008, 80 FCPA investigations were ongoing, and 6,000 individuals were convicted from 2001 to 2005. International bribery investigations include Siemens AG in Germany, BAE Systems plc in the UK, and Samsung Group in South Korea. In 2007, almost 30,000 Communist party officials were indicted in China alone. The Foreign Corrupt Practices Act prohibits the bribery of foreign government officials (Maris and Singer, 2006) and has become the de facto international standard. The FCPA applies to publicly held companies, as well as officers, directors, employees or agents of those companies, and has been a significant driver of growth of public accounting firm's forensic accounting practices (International Accounting Bulletin, 2006). Compliance with the FCPA has become a significant issue as companies expand the scope and scale of their global supply chain because US corporations are required to abide by its rules, and Sarbanes-Oxley, whether operating in the USA or abroad. If corrupt payments follow through US banks it may be sufficient for the Department of Justice to bring charges.

The Act holds management criminally responsible for situations in which their employees engage in corrupt business practices. Enforcement actions related to the FCPA appear to be on the rise. Recently, for example, the president of American Rice, Inc. was sentenced to 63 months in prison, and the vice president was sentenced to 37 months, for lack of supervision and control of their 120 agents working in 60 countries (Norris, 2006). The ten largest FCPA prosecutions since 2007 have cost companies almost $175 million. Internationally, investigations by prosecutors in OECD countries have increased from 51 cases in 2005 to 270 cases in 2007, and 36 countries have ratified the OECD Anti-Bribery Convention (Ernst & Young, 2008).

This may be driven by the fact that 27 percent of reported fraud cases involve corruption, making it the most commonly occurring fraud scheme (Association of Certified Fraud Examiners, 2008), and median losses from corruption ($375,000) are second only to financial statement fraud losses. In addition, the number of companies reporting corruption and bribery has increased 71 percent. A recent international survey of business executives found that one in four reported that their company experienced an incident of bribery or corruption over the past two years, 23 percent knew someone who had been asked to pay a bribe to win or retain business, and 18 percent knew their company lost business because a competitor had been willing to pay a bribe (Ernst & Young, 2008). Furthermore, the rate of corruption appears to be highest in the Middle East, India, Africa and the Far East, particularly Japan.

2.3 Training

In response to this issue, many companies are increasing their ethics training. Okleshen and Hoyt (1996) suggest training may be a promising avenue for reducing the influence of cultural factors on ethical decision-making. They found that cultural differences related to ethical perceptions regarding fraud and coercion between US and New Zealand students were diminished after taking an ethics course. However, the ethics of business students in the USA and New Zealand may be fairly similar (Lysonski and Gaidis, 1991), and students may be more tolerant of fraud or coercion than managers (Harris, 1993). In addition, although case studies have been shown to be effective for teaching students about ethics, particularly with regard to situations involving bribery (Smith, 2007), the benefits of teaching ethics to students may be short-lived (Fullmer and Cargile, 1987; Weber, 1990). Future research is needed to examine the effects of training on the ethical decision making of managers across a

wide variety of cultures, and investigate how anti-fraud training programs should be adapted based on cultural differences in perceptions regarding situational ethics (Wong-On-Wing and Liu, 2007).

2.4 Risk assessment

Although many companies now include corruption risks as part of their due diligence process prior to an acquisition, a significant number of executives and heads of legal counsel indicated they did not does this, despite the high rate of FCPA prosecutions related to mergers and acquisitions (Ernst & Young, 2008). One reason for this may be a misplaced fear of offending the management of the acquisition target because of

cultural differences. In addition, risk management in some countries such as China focuses mainly on insurance (Atkinson, 2004). This suggest that many companies need formal procedures to assess corruption risks at acquisition targets to reduce the risk of future liability, reputation damages, and establish the true value of the target company. Part of the forensic due diligence could be tied to the country score in Transparency International's Corruption Perceptions Index, with companies in country's with lower scores receiving high levels of anti-corruption due diligence

efforts. Hiring a third-party auditor to conduct the due diligence investigation is recommended (Atkinson, 2004).

2.5 Internal audit

The internal auditing profession is also affected by culture. Internal audit appears to lack a clearly defined role, and may have lower status, in the Asia-Pacific region where the Confucian culture is prominent. For example, in Singapore, internal auditing is used to train future managers, potentially compromising independence and objectivity (Goodwin and Yeo, 2001).

In addition, although companies use internal audit to combat corruption by routinely conducting compliance audits, and internal audit was the top ranked means of combating corruption by Certified Fraud Examiners (Association of Certified Fraud Examiners, 2008), managers in Japan and Latin America had greater confidence in internal audit than those in Central and Eastern Europe (Ernst & Young, 2008). Perhaps training and education of internal auditors in those European regions could be improved to help them identify warning signs of fraud, understand how to preserve electronic evidence properly within a given country's legal framework, perform surprise audits when necessary, and compile a database of reported incidents. Future research is needed to identify why managers in some countries have greater confidence in their internal auditors than others.

2.6 Procedures for dealing with foreign officials

Despite measures to address corruption, management and in-house counsel may not be sufficiently knowledgeable about the FCPA, especially if they are outside the USA and the UK. Furthermore, companies often lack specific procedures for identifying which of their customers, suppliers or agents are government officials, or identifying parties related to government officials, particularly in Europe (Ernst & Young, 2008). This

suggests several important areas where multinational corporations need to improve to reduce fraud and litigations risks. Companies need to raise awareness amongst their executives and legal counsel when they are subject to the FCPA or OECD rules, and put formal procedures in place for identifying and dealing with foreign officials or parties related to foreign officials.

2.7 Code of conduct

Many Western companies simply translate their codes of conduct into Chinese, without considering what the Chinese consider ethical, often with negative consequences (Weltzein Hovik, 2007). For example, Taiwanese business people have a more favorable attitude toward a bribe than their US counterparts, and are less likely to view it as an ethical issue (Cherry, 2006). Simply providing them with a code of ethics may not influence their behavior. Instead, Cherry advocates that "in group members" are consulted in order to enhance the effectiveness of the code. Future research is needed to investigate the effectiveness of this approach. In other words, how can an enhanced understanding of the cultural context be used to craft more effective codes of conduct?

2.8 Whistleblower hotlines

Although whistleblower hotlines have been identified as perhaps the best tool for fraud detection (Wells, 2008), and more frauds are detected by tips (46 percent) than any other means (Association of Certified Fraud Examiners, 2008), differences in cultural perceptions about the effectiveness of hotlines may exist. For example, while North American executives believe whistleblower hotlines are effective for minimizing bribery or corruption, managers in Central Europe, the Far East and Japan do not believe whistleblowing is effective (Ernst & Young, 2008). This is a troubling finding, given that rates of corruption appear to be highest in some of these areas, and if someone lacks confidence in a hotline they will be less likely to use it. Consistent with the above results, Brody et al. (1998) found that Japanese accounting students felt less responsible to owners and managers than American accounting students. They attribute this finding to lower individualism in the Japanese culture, and a greater

feeling of responsibility to co-workers.

However, in contrast to the survey findings above, they found no difference in reporting tendencies between these two countries. Similarly, Schultz et al. (1993) did not fifing differences in whistleblowing between managers and staff in France, Norway or the USA. While the results of Schultz appear consistent with the findings above, future research is needed to reconcile Brody's results with the findings of the recent Ernst & Young survey. Future research is also needed to identify why executives in countries where corruption is the highest feel the most negatively about the use of hotlines, how this affects their use, and whether cultural factors are involved. For example, are hotlines truly less effective in certain countries and/or is the risk of reprisal greater?

Future research is also needed to reconcile the findings noted above with Zhuang et al. (2005), who found that Chinese employees are more likely to whistle blow than Canadian employees, but also more likely to report on one of their peers as opposed to one of their superiors. Zhuang et

al. (2005) suggest that the long-term orientation and low individualism of the Chinese led to greater whistleblowing on their peers. Therefore, cultural differences such as long-term orientation or individualism may influence how hotlines are used. In addition, cultural differences may affect managers' perceptions related to the effectiveness of whistleblowing, despite being one of the most important methods for reporting incidences of fraud. This suggests that in addition to giving employees training with the use of hotlines and awareness of fraud symptoms, and protecting the anonymity of employees who use the hotline, businesses must also be aware of cultural factors such as individualism or long-term orientation

that will affect their use. In countries such as China or Japan where individualism is low, for example, employees may be reluctant to report fraud on the part of their superiors.

In addition guanxi is an important deterrent in China against whistleblowing. Guanxi is the Chinese term for a personal relationship. Hwang and Baker (2000) also found that the Chinese government struggles to combat fraud and corruption because of guanxi, and that guanxi causes Chinese auditors to forgo their independence. Similarly, Albrecht et al. (2009) examine fraud and corruption overseas in Korean organizations known as chaebols. Although initially credited for advancing Korea's economic development, Albrecht et al. (2009) find that family prominence plays an important role in terms of opportunity and social pressure to commit fraud. Most chaebol founders that Albrecht et al. (2009) studied used fraudulent means to keep ownership within their families.

Future research is needed to identify ways of reducing the effect of cultural structures like guanxi and chaebols on whistleblowing and combating fraud in general. Little research on preventing fraud in chaebols has been conducted, and future research in this area is needed (Albrecht et al., 2009). However, Au and Wong (2000) find that the influence of guanxi on the ethical judgments of Chinese CPAs is mitigated by their ethical reasoning ability. If the ethical reasoning skills of Chinese auditors and managers can be improved, therefore, guanxi might be less of a barrier to fighting corruption. Future research could investigate whether ethical reasoning could also reduce fraud in chaebols.

Fear of retaliation, and fear of media coverage are important deterrents in China against whistleblowing. Similarly, in a recent survey of senior executives, fear of cultural and managerial hostility to whistleblowing was listed as one of the top two barriers to effective corporate governance (Verschoor, 2003). Future research is needed to investigate whether legislation such as Sarbanes-Oxley, which makes retaliation against whistleblowers a criminal offense, with a penalty of up to ten years in prison, would diminish potential whistleblowers' fear of retaliation, both in the USA and abroad.

Finally, research on the effect of incentives like monetary rewards and bonuses to encourage whistleblowing are mixed. Xu and Ziegenfuss (2003) found that exogenous incentives appeared to encourage whistleblowing. Currently, only about 5 percent of organizations offer rewards to whistleblowers (Association of Certified Fraud CCM Examiners, 2008). Future research is therefore needed to determine the conditions (including cultural variables) under which monetary incentives will lead to more whistleblowing, and if they are capable of overcoming barriers to whistleblowing such as fear of reprisal.

2.9 Stakeholders

Differences across geographic regions also appear to exist regarding perceptions about which stakeholders are harmed by bribery or corruption. For example, Japanese executives tended not to identify investors as being negatively affected as often as managers in other countries (Ernst & Young, 2008). Future research could examine why business executives have different perceptions about which stakeholders are affected by corruption, and whether cultural differences play a role in this.

3. Conclusions and recommendations

Corporate culture may be equally or more important than one's cultural heritage when it comes to guiding ethical behavior and shaping attitudes about fraud (Watson, 2003).However, companies may not put sufficient emphasis on establishing their own corporate culture and risk the local culture fulfilling the void. In addition, companies that fail to invest in anti-fraud controls appear to suffer significantly larger fraud losses than those companies that do have such controls in place, and lack of controls is the most common contributing factor in cases of corruption (Association of Certified Fraud Examiners, 2008). Therefore, it is important for management to establish controls and have third-party auditors monitor them and conduct internal investigations of fraud and intellectual property issues (Atkinson, 2004).

In order to improve efforts to combat corruption, management should conduct an assessment of specific risks facing their company based on applicable laws, the industry in which the company operates, the amount of interact with government officials they have, and their geographic location. The Board of Directors should approve an anti-corruption policy with guidelines on accepting gifts, food and travel cost reimbursement of foreign officials, charitable giving, compliance certifications, and contracts with right-to-audit clauses and anti-bribery warranties. This policy should be distributed to management and posted on the corporate website. Every professional in sales, marketing or procurement should receive periodic anti-corruption compliance training and someone in legal counsel should be available if needed for urgent advice. Internal audit should conduct rotating compliance audits. Regulators may be more lenient when corruption is discovered internally and dealt with appropriately and quickly. Members of management should be certified on anti-corruption compliance to remind them of their responsibilities and make them knowledgeable about applicable regulations (Ernst & Young, 2008).

In addition, a great deal of future research is needed to examine the effects of culture on the critical elements of management's antifraud programs and controls that may be most effective in combating corruption (Association of Certified Fraud Examiners, 2008) including the whistleblower hotline, internal audit, surprise audits, management review of internal controls, rewards for whistle-blowers, and mandatory job rotation. Although there has been some research aimed at the effect of culture on whistleblowing, the amount of research regarding many of the other areas listed above is relatively sparse. In particular, research on the effect of culture on surprise audits, management review of controls, and mandatory job rotation seems virtually non-existent.

Based on the text above answer the following questions:

1.Examine differences in managersand employees attitudes about fraud across different cultures (China and USA)?

2.Provide some theories as to why these differences exist ?

3.Give some recent examples of cultural differences in ethical perceptions from practice ?

4.Make recommendations as to how companies can address this issue and make improvements to their anti-fraud programs based on the country and culture in which they operate?

5.Suggest some opportunities for future research?