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