The Role of Accountants and Auditors in Fighting Corruption
Part 1 – Understanding the Nature and Impact

By Lal Balkaran, MBA, FCMA, FCIS, CGA, CIA

“The crime of corruption has always been viewed with particular distaste. It is no coincidence that the word itself is also used in the phrase ‘corruption of the flesh’, to indicate decay, death and malodor. It is often coined alongside the word bribery, the means by which the politician or official is induced to become corrupt,” wrote Peter Johnston, former Chief Executive of the Scottish Institute of Chartered Accountants.

Corruption and power are closely intertwined and their links had long been recognized. In the 4th century BC, the Greek philosopher, Plato, argued in The Republic that only politicians who gain no personal advantage from the policies they pursued would be fit to govern. This is recognized also in the aphorism that those who want to hold power are most likely those least fit to do so. In the latter half of the 18th century, William Pitt, in a speech before the House of Lords said, “Unlimited power is apt to corrupt the minds of those who possess it.” Over a hundred years later, Lord Acton wrote a letter to Bishop Creighton with a sentence set to become one of the world’s most famous quotations: “Power tends to corrupt and absolute power corrupts absolutely.”

In this 3-part series, I will focus on the role of both accountants and auditors in the fight against this scourge that has pervaded all sectors of our society. This first part will deal with the very nature and impact of corruption and current thinking from an accounting and auditing dimension. Part 2 will cover the preventive, detective and combative measures while Part 3 will address the efforts being made by international organizations and governments around the globe to eliminate corruption.

Corruption is a term with many meanings, but generally it entails misusing one’s office for a private gain or unofficial end. It involves both a monetary and non-monetary benefit. Bribery, extortion, influence peddling, nepotism, scams, fraud, ‘grease money’, and opportunism readily spring to mind. Usually, the very work environment and culture either foster or discourage corrupt practices as the following two scenarios indicate:

* You work in an organization where everybody steals. Would you join in? If you do, you will probably not be caught since investigators are busy chasing other thieves, and even, if caught, the chances of prosecution and a severe penalty for such common crime will be low. Therefore, you too steal. As everyone is now stealing, more goods to replace those stolen have to be acquired. Production costs rise and these are passed to the consumer in the form of higher prices. Also, as new recruits join the organization, they too are trained how to steal, and the cycle continues. On the other hand, if you work in an entity where theft is rare and the chances of your being caught and punished are high, you will most definitely choose not to steal.

* In another organization, where everybody is corrupt, you recently got the Chief Accountant’s job. A supplier offers you a bribe to help him get a lucrative contract with your organization even though other suppliers could have offered a lower price to supply the same service. You decline the offer. A few hours later, you receive a telephone call from the General Manager who would have liked a cut of your bribe. He suggests that if you accept the bribe, you have a far way to go in the organization. If not, you will be transferred to a remote location far from friends and family or risk being fired. You then take the bribe and share it with the General Manager. Again, costs rise and more money have to be spent on a contract which could have been obtained much cheaper. These additional costs are passed on to the ultimate end user of the product, the consumer, in the form of higher prices. When you eventually get a promotion, your new Chief Accountant becomes inducted in this infamous cycle and corruption continues. If, instead, the administration where you work is very honest, you are likely to behave with integrity and avoid the risk of being transferred or fired by not taking a bribe for a contract to be approved.

These two simple examples bring out the economic costs, social implications and other rippling effects of the evil of corruption. Once it infects an organization, it spreads uncontrollably, and economic costs rise. Corruption is not an absolute condition. It can range from acts of violence to rules being bent and a blind eye turned to acts that a completely moral society would consider offensive. The range of variations of corruption is as wide as the criminal minds that conceive them in today’s ever changing world.

A Global Problem
Corruption is now a global problem common in both developed and developing countries, and reaching epidemic proportions across borders. In democratic nations, where checks and balances deter corrupt and other unethical practices, corruption is still prevalent. For instance, in Belgium and the United Kingdom, Japan and Italy, Russia and Spain and other countries, allegations of corruption play a more central role than at any time in recent memory. In 1993, serious allegations of corruption involving varying levels of government surfaced in both developed and developing countries that include Australia, Bolivia, Brazil, Bulgaria, France, Haiti, India, Italy, Japan, Malaysia, Paraguay, South Africa, Spain and the USA. In our southern neighbor, Brazil, the allegations caused the president’s resignation and a subsequent action for impeachment. Allegations of links between the Mafia and former high-ranking Italian government officials caused several political leaders to resign, while in Japan, the prime minister was discredited and removed from office. Witness the Monica Lewinsky’s scandal that surfaced in 1998 leading to the impeachment of US President Bill Clinton and almost cost him his job. What this indicates is that, human nature being what it is, no country, and indeed, no system is immune from corrupt practices. Nations have gone to war, governments have been toppled, companies have been made bankrupt and whole kingdoms lost due to corruption scandals.

It is true that in another neighbor of ours, Venezuela, a dictionary of corruption has been published in two volumes (Diccionario de la corrupción en Venezuela, 1989). A French author did the same for his beloved France in 1991. In my native Guyana, these would be outnumbered by the sheer volumes that document the 1964-1992 naked, crude and blatant corrupt practices that were institutionalized by the previous government. Judging from all of this, everyone is duty-bound and morally obliged to fight corruption since it affects us all. As Martin Carter, the country’s national poet said: “All are involved, all are consumed.”

The most obvious effect of political corruption is a loss of public esteem for politicians and political life. The cynical view that ‘politics is a dirty business’ becomes a reality -– people enter politics not from a sense of public service but in pursuit of personal power and advancement. If left unchecked, corruption weakens the very structures of an organized society as it undermines the forces of law and order, and reduces public morale. In the long run, both economic and political developments become crippled.

The impact on business and the wider society is even greater as it diverts resources from productive to unproductive sectors, and makes a few rich at the expense of others. Corruption also undermines institutions and redistributes wealth to the undeserving.

This disease increases risks and costs to business, damages investor confidence and stifles economic growth. Corruption acts as a strong deterrent to foreign direct investment and forces investors to form joint ventures with local companies. But this may discourage high-tech firms from investing overseas, since businesses with more complex outputs tend to want to retain full control over production processes as noted in a recent study by economists from the World Bank and the Brookings Institution think-tank in Washington.

Responsibility of Accountants and Auditors
How can accountants and auditors help in this anticorruption drive? First, accountants are the first set of gatekeepers to ensure that transactions are valid, at arms-length, captured, and properly recorded according to established standards. Secondly, “as professionals with a duty to protect the public interest, they are bound by rigorous codes of professional and personal ethics calling for the highest levels of integrity and objectivity.” Thirdly, “their key strategic positions within an enterprise or organization – whether in an internal position or as an external auditor or adviser – mean that they very often have access to highly privileged and confidential information.” (Frank Harding: “Corruption: Rising to the Challenge”, IFAC, May 1999.)

Both accountants and auditors perform their respective functions on the bases of national and international standards of practice which have clear guidelines in identifying, for instance, indicators of fraud and other irregularities, and reporting these to the highest levels of authority.

The scope of internal auditing is even wider and more encompassing as it covers every aspect of a business. Even the revised definition of internal auditing (noted later), places more responsibility on internal auditors in helping to fight corruption. After all, as the eyes and ears of management, they are there year-round, understand the operations of a business, and are bound by even more in-depth standards of performance and conduct. Moreover, their work is often relied upon by the independent auditors and other outside parties and therefore subject to more stringent requirements. Consequently, they are in a very unique position to influence management and the board on risks and good corporate governance. By ensuring there are proactive, preventive, detective and combative measures, internal auditors, through their very training, have a greater role to play in the anticorruption effort.

The Accountancy Profession
The International Federation of Accountants (IFAC), a New York-based umbrella organization with 153 member bodies representing over 2 million accountants in 113 countries, last year took the lead in anticorruption and came out with a paper entitled: “The Accountancy Profession and the Fight Against Corruption.” IFAC urges accountancy bodies worldwide to unite with various professions, the business community, governments, regulators and other organizations to wipe out corruption. The document contains several proposals, one of which urges accountants to develop outlets for building relationships with legislative and regulatory authorities, the legal profession and other groups interested in improving the framework for good governance, transparency and accountability.

This is indeed a bold step for accountants as the objective of the IFAC is to develop the profession and harmonize its standards worldwide to enable accountants to provide services of consistently high quality in the public interest.

The IFAC’s document advises audit committees to consider the propriety of anti-corruption policies in place and insist that corrupt acts be reported. Auditors are advised to promote codes of conduct among practicing firms, their clients and governments that expressly prohibit corrupt activity. The paper also focuses on the accounting profession’s individual role in curbing corrupt practices by urging ‘professional skepticism’ when establishing business relationships and in reviewing transactions between related parties.

The Internal Auditing Profession
For too long, organizations have not recognized the important role of an internal audit department. Since the launching of the local chapter of the Institute of Internal Auditors earlier this year, there are positive signs that this mind-set is changing. While internal audit does not exist to judge the appropriateness of a company’s objectives or board’s strategies to achieve those objectives, it adds value in several key areas. For example, an internal auditor’s knowledge of the operations of a business is vital in helping management identify risks and control weaknesses. A more clarified role that is bound to have new dimensions in enabling an internal audit function to combat corruption is now made clear in the IIA 1999 updated definition as follows: Internal Auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. (IIA, June 1999)

This new definition lifts the focus to the organizational level rather than the previous emphasis on supporting individuals’ responsibilities. The value of internal audit comes in the assurance it gives to stakeholders on the effectiveness of both risk management processes and the ways in which risks are managed and controlled in a business. This entails assisting management and at the same time objectively assuring the board in thinking proactively and put in place anticorruption mechanisms. This is an era when more focus is being placed on good governance practices and sound risk management. It is clear that both the accounting and audit professions have an important role to play now and in the future in preventing, detecting and reporting on corruption. After all, stakeholders place a considerable amount of trust on these highly trained professionals to do so.

About the author
Lal Balkaran, a Guyanese from the West Bank Demerara, is a published author and accountant by profession, residing in Canada. He has written several books and articles published around the globe on a wide range of topics including business, philosophy, non-traditional education, third world issues, world music and globalization. Please write to him at 18 Portsmouth Drive, Scarborough, Ontario, M1C 5E1, Canada or contact him by e-mail at