Sunday, April 13, 2008

Grand Corruption in Iraq

Dear Colleagues

There has been grand corruption in Iraq, it appears, since the very early days of the American occupation. More than five years into the occupation, and the total funds that have been mis-used seems to be more than anything ever experienced in history.

And yet there is no news about it, and no outcry from either the American political or business leadership. One has to wonder what is going on.

CBS's 60 minutes has just aired a piece on the corruption in Iraq ... and it is clearly a huge issue ... and off the radar, for all practical purposes.

In my career which has always had a component of interest in accountancy and accountability ... I would not have had any toleration for this sort of financial mismanagement, and I know full well that when there is a toleration for this sort of situation, there are reasons ... and not good reasons.

The corruption that is being described in Iraq is clearly a benefit to many in the hierarchy of Iraq's leadership ... but it must also be anticipated that there are big beneficiaries on the American side as well. A lot of money available to do work, and all sorts of excuses for not achieving goals is an ideal situation for diverting fund flows.

Nobody seems to know anything ... but that it not surprising. There is a big mess, and my guess is that not many in leadership positions are able to talk about it without incurring the wrath of others in the leadership.


Peter Burgess

Wednesday, March 5, 2008

Corruption in Politics ... Violence in the Streets

Dear Colleagues

Kenya had a close election ... rather than allowing for a professional review of the results, President Kibaki was sworn in within a short space of time, in theory, at least, leaving his opponent powerless. Almost immediately there were demonstrations all over Kenya which quite quickly became violent. Some of the violence started with the demonstrators ... some with the government authorities.

But why should an election for political office cause so much violence?

Part of the answer is that in places like Kenya, political office carries with it the keys to the national treasure. This is not what is intended ... but that is what political office has become. High office has, too much, become a source of great wealth.

And of course, part of this is the place that corruption now has in modern politics ... and how corruption has become a central part of modern economics and corporate business.

I never gave much thought to this when Jomo Kenyatta was President of Kenya. During most of his Presidency I was relatively young with little international experience. I became aware of the intersection of economics and politics much more after the oil shocks of the 1970s and the start of my international consultancies.

During some of my work I helped to develop value chains to show costs, revenues and profits at each stage of a product's flow from its creation to its consumption. Coffee ... for example ... where did the money go when farmers were being paid so little and consumers were paying so much. Or tea ... or oil ... or lumber ... or minerals ... the list goes on.

It is reported that President Moi became a substantial shareholder in more than 2,000 companies operating in Kenya. It would be interesting to know how most of these shares were acquired ... and what was the raison d'etre for these transactions. By the end of President Moi's Presidency, Kenya had earned the reputation for being one of the more corrupt regimes in Africa.

The sad thing is that corruption is good for the corrupt politician and it is good for the corrupt corporation. It is bad for the people and bad for society ... but that does not matter very much as long as the people have no power.

During the last few months in Kenya, since the election ... the people have shown through violence in the streets that it is time for change, and that corrupt governance is not good enough. Hopefully this is a message that has been heard both by the leadership elite in Kenya, and equally important, by corrupt leadership in the corporate world, in international organizations and in the corridors of power around the world.

There are, no doubt, a vast majority of people around the world who have low tolerance for corruption. Sadly, the information about transactions that are deeply corrupt rarely are visible. There are reasons why economic transactions are rarely in public view ... and none of the reasons are good. People want "transparency" ... but people rarely get it.

In Kenya ... people have shown how displeased they are. It will be interesting to see how things change!


Peter Burgess
The Tr-Ac-Net Organization

Wednesday, January 16, 2008

WOW ... Government of India and World Bank going to address corruption

Dear Colleagues

My colleague in Chennai sent me the following ... and I have posted a comment on the website of iGovernment in India. My friends message first:
Hi Peter,

Food for your thought and opportunity unlimited to crticise!!

India joins WB to fight health sector corruption

January 14, 2008 New Delhi: In an effort to fight fraud, corruption and systemic deficiencies in India's health sector, the Government of India and the World Bank Group have joined forces and announced immediate steps to investigate indicators of wrongdoing and to implement further safeguards.

The government has announced its intention to re-examine all ongoing and future projects to ensure that they incorporate the lessons from a Detailed Implementation Review (DIR), which is an instrument used by the World Bank to help assess the risk of fraud and corruption.

The five projects covered by the DIR include the US $114 million Malaria Control Project, the US $82.1 million Orissa Health Systems Development Project, the ongoing US $54 million Food and Drug Capacity Building Project, the US $193.7 million Second National HIV/AIDS Control Project and the US $124.8 million Tuberculosis Control Project.

The DIR launched by the World Bank in 2006 and supported by the Government of India has found serious incidents of fraud and corruption in five health projects, which began implementation between 1997 and 2003, financed by the government and the World Bank and other donors.

The detailed review was prompted by a World Bank investigation in 2005 into a Reproductive and Child Health (RCH1) project, where it found corrupt practices by two pharmaceutical companies which were subsequently disbarred by the bank and the government.

Both of them have introduced detailed anti-corruption plans into all new health projects in view of the findings of the RCH1 investigation.

Mentioning that the probe has revealed unacceptable indicators of fraud and corruption, World Bank Group President Robert B Zoellick said that the government and the World Bank are committed to getting to the bottom of how these problems occurred.

He further added that, on the bank's side, there were weaknesses in project design, supervision and evaluation and there are also systemic flaws.

Zoellick expressed his determination in fixing these problems with the help of Volcker Report which points the way towards what has to be done.

Both the government and the bank have committed themselves to tighten oversight of the entire bank-supported health portfolio, currently nine projects.

They would also ensure that all new health sector projects include measures to counter the risks identified in the DIR such as comprehensive audits and performance reviews by independent third-party agents.

Zoellick said the Bank's governance and anti-corruption work from now on would be placed before the scrutiny of independent and external reviewers to ensure that the institution was making tangible progress in its fight against corruption.

The bank and the government have already sought to address a number of the risks identified now in the DIR through new project design over the past two years, taking guidance from the RCH1 investigation.

Some of these remedial measures already being built into new projects in health and other sectors include enhanced transparency, building on India's recent Right to Information Act, to include Web publication of all procurement processes, bidding and contract awards.

Besides implementing oversight by project beneficiaries, citizens and civil society, using community score cards and social audits, tightening oversight and recruitment of NGOs (for example the National AIDS Control Organization has terminated 163 NGO contracts out of 952) are also suggested.

Other measures includes tightening quality control to ensure the quality of pharmaceuticals procured, including independent validation of World Health Organisation (WHO) good manufacturing practice certificates and disclosing full results on government websites.

It also suggested procurement audits for 100 per cent of projects annually and aggressive tightening of procurement controls to catch collusive bidding, including designing new software detectors, besides aggressive acceleration of complaints processing and action.

In lieu of the mission to curb fraud and corruption, the Ministry of Finance said that necessary action under the relevant laws, rules and regulations would be taken against those suspected of wrongdoing and, if found guilty, they will be visited with exemplary punishment.

The World Bank will also be continuing its probe, which may lead to further sanctions such as debarment of companies and appropriate action under the rules against any bank staff if found negligent.
My friend continues:

Unless total transparency and accountability is made a way of life, all this would be yet another eye wash!! We have seen over the last 60 years, utter deterioration in the quality of life of the citizens thanks to the all pervading corruption and no one batting even eye lid to plug the loop holes in the system. We are quick to shed crocodile tears and always look at the periphery of the problem and never dare to attack the core of the problem.

My posting to the iGovernment website:

Dear Colleagues

The problem described is decades old, and it is interesting that over this time neither the Government of India nor the World Bank Group has made very much progress against corruption and poor performance in socio-economic development projects.

The root cause of corruption is that the system makes corruption relatively easy. There are systemic weaknesses in government systems and in the World Bank approaches that result in very poor accounting and virtually no timely accountability. While a good corporate accounting system will highlight financial control issues every month, if not more frequently, a government / World Bank system might perhaps do the same some years later when there is a monitoring and evaluation review, or something like the Detailed Implementation Review (DIR).

M&E and the DIR are too little and too late. What is needed is good timely responsibility accounting … and why not in 2008 use some of the techniques now available for real time management like biometric controls and web accessible relational database accounting. There needs to be accessible information about project activities at both the community level and about the project or organization. Costs need to be compared to activities, to results and to benefits arising. Ultimately it is the public that should get the accounting!

Government and the World Bank has never wanted this to be done … for years and years and years … either because they do not know how to do it, or they fear the results will not be satisfactory. Neither is a good reason.

As an interested observer and analyst of the relief and development sector and advocate for excellence in transparency and accountability I am appalled. The good news is that the modern public is learning, and will not tolerate the status quo much longer.


Peter Burgess
The Tr-Ac-Net Organization

Wednesday, January 2, 2008

Why so much political violence?

Dear Colleagues

Why is there so much political violence? Why do politicians pay so much to get elected?

There is probably a link between these two questions ... and the link is the underlying dysfunction of the political system and the opportunities for power and money making associated with high political office.

Without the benefits of corruption, there would be no point in the violence and no point in the high cost campaigning. But it is clear that being a winner in a political campaign for high office is financially very rewarding ... and presumably justifies the money spent.

When winning is so valuable ... it is not difficult to understand how "anything goes" can easily spill over into political violence as recently experience in Pakistan and now ongoing in Kenya.

The Tr-Ac-Net approach to socio-economic accountability will help to make corruption less effective as a way of making political office the dream way of accumulating personal wealth and power. Corruption thrives when it is invisible. With good public accounting, there should be correct use of resources, and less flagrant abuse.

Is this a dream? I would argue no more than being able to fly? It is just a matter of deploying the right technology and working at it.


Peter Burgess
The Tr-Ac-Net Organization

Tuesday, December 25, 2007

Is it really surprising?

Dear Colleagues

Corruption ... that is grand corruption ... seems to be a central feature of modern society, just as it seems to have been in ancient history. Powerful people trading favors seems to have been a central aspect of ancient history, and it is not very different in the modern world.

Getting this under control and keeping it in check has been a challenge. Thoughtful people have recognised from ancient times that ordinary people were a part of society and should have some role in society beyond merely being laborers. The ancient idea of democracy was based on this idea.

It is also a very long time since it was recognised that the King should not have absolute power and total control of the money in the realm. While the concept of the King taxing the people was not removed, the absolute control of these revenues was moved to the Parliament and its use controlled by Parliament. This was the origin of the Single Treasury Account and the Budget Authorization for spending control ... now several hundred years old.

Modern corruption is not much different from ancient corruption. Powerful interests trading favors ... usually ... often ... at the expense of ordinary people and the society as a whole.

Modern corruption is no easier to control than ancient corruption. The benefits of corruption are enormous. A politician who can change a law in favor of a corporation can facilitate enormous corporate profit ... so is it really surprising that the corporate world would give (substantial) favors to the politician ... and is it really very surprising that society as a whole can scream and shout as much as it wants, and nothing changes.

Most of the trading in favors goes on quietly, with nobody paying very much attention. From time to time someone will stumble on the reality and the newspapers will pick it up, write stories about it, some superficial changes will be made ... but at the end of the day, nothing very much has changed.

It is disappointing that though information technology has improved in power by a factor of thousands, if not millions ... accountancy is less effective at the beginning of the 21st century than it was in the early part of the 20th century. How can this be? The answer lies probably in the power of modern information technology that facilitates the loss of control of resources as much as it facilitates the control of these resources.

Broadly speaking ... in the corporate world there is an internal culture that supports the control of the corporate resources. This is a deep culture ... and serves the corproate organization well if not society as a whole.

Government has a different culture ... a different structure ... and the strong control of resources has never been a big part of the culture. Much more resources are a talking point in a political debate rather than being the subject of rigorous accounting. The systems of accounting are driven by disbursement control and not very much be performance accomplishment ... and audit and investigation is often too little and too late. Huge errors are found years later ... what on earth was going on so that they were not found while the errors were going on?

Corruption is so much easier when the accounting is sloppy. Corruption is much more difficult when the accounting is strong, when accountants are doing their job, and audit and accountability analysis is done on a timely basis.

It is not at all surprising that there is so much corruption when there is so little good accounting. Not surprising at all.


Peter Burgess
The Tr-Ac-Net Organization

Sunday, December 23, 2007

Conventional wisdom probably wrong

Dear Colleagues

It has been commonplace to associate corruption with doing business in "Third World" or "Developing" countries. But this is probably not entirely fair. Maybe corruption is more associated with "business" than it is with "third world" or "developing" countries.

Unless I am totally misinformed about the driving force of business ... corporate behavior is almost entirely driven by the potential for profit and the related risks.

If this is true, then the corporate world would not be involved in any bribery and corruption unless there was a profit value in getting involved ... and clearly there is. In fact, it must be argued that for every $1 invested in bribery and corruption there is an expectation that many times more profit benefit will accrue to the corporate organization.

In fact ... given the dominant role of profit in determining the value of the corporate for the stockholders, the corporate management would be derelict in their duties if they did not make use of all opportunities to improve profit performance, including being involved with (overseas) bribery and corruption.

The fact that there is in the USA a "Foreign Corrupt Practices Act" suggests that there is a potential public relations (PR) issue involved with overseas bribery and corruption ... but the act is sufficiently loosely worded so that the benefit of bribery can be achieved without actually bumping into the provisions of the law, such as by using a lawyer or a subsidiary company as an intermediary!

So while the elite leadership of "Third World" or "Developing" countries benefits from bribery and corruption, the international corporate world benefits even more.

The loser in all of this is the local community ... the local society that gets rather little from its government, and rather little from the international corporate community. The value of the natural resources in communities in "Third World" or "Developing" countries is huge ... the amount of this value that is ever used for the benefit of these host societies is puny. From the corporate perspective, this probably does not matter. These people ... these societies ... are not important in national decision making and they have no voice that can ever reach the international media so there is no potential for negative PR.

But maybe ... just maybe ... that is about to change. When there are performance metrics at the community level, and the reasons for results are on the record ... then the wrecking of local economies by international corporations might possibly start to get into the media ... and possibly, just possibly, this might encourage the international corporations to pay a little bit more attention to their global corporate behavior.

Maybe ... I am an optimist.


Peter Burgess
The Tr-Ac-Net Organization

Friday, December 21, 2007

The Ubiquity of Corruption

Dear Colleagues

Sadly ... corruption is everywhere. Human nature has a greed dimension, and this easily translates into corruption.

Corruption has two forms: (1) is where there is simple bribery and money is exchanged for favors that are of benefit to the briber ... something that is rather widespread where for profit enterprise seeks contracts from the public sector ... and something that is almost universal, and certainly not limited just to the developing countries of the global south; and (2) where an organization defrauds the public by using public funds to pay for (good) works that are not going to deliver benefit to anyone but the organization, its staff and its friends.

Some people talk about corruption as being (1) grand corruption; and (2) petty corruption. Grand corruption is where $millions are involved and petty corruption is little more than systemic "tipping". In West Africa the latter was referred to as "dash" ... and was very, very widespread in the years when I was commuting into Africa.

And how does one deal with corruption?

It is not easy, but the best tool in the fight against corruption is accountancy, and open-book accounting and reporting. For a good part of my career I was in corporate accounting and was the CFO of a fairly large international company. Our corporate accounting was uncompromising in its rigor about payments and cost analysis, and we had rather little problem with "grand corruption". We did, however, make it very clear that we delivered not only profits to our stockholders from our investments, but also social value to the communities where we operated and value to the country on a national level. We aimed to be a good citizen and a good partner, and we were not unaware that competition was interested in pushing us away, and might well have tried to influence those in authority. We tried to have friends ... but we did not "own" our friends, and our friends did not "own" us.

In my subsequent work with the international relief and development sector organizations, I have been surprised and disgusted at the low esteem of the accountancy community. The World Bank, the IMF, the UN, the bilateral agencies ... all have ignored the potential of good accounting, accountancy and accountability to help address the problem of corruption.

And as any junior audit clerk knows ... when there is resistance to the use of good accounting, you know that good accounting would show up something that needs to be addressed because it is wrong. Corruption is wrong. Accounting can help to stop it.


Peter Burgess
The Tr-Ac-Net Organization