Curbing corruption: Corruption is a pervasive, worldwide problem that can crop up in any organization. Internal auditors can combat this insidious threat by arming themselves with effective anticorruption strategies

Internal Auditor, Feb, 2002 by Lal Balkaran

THE TERM "CORRUPTION" IMPLIES MANY different meanings, but generally entails misusing one's position for private gain or an unauthorized end. It can involve financial and nonmonetary benefit. Bribery, extortion, influence peddling, nepotism, and fraud are all acts associated with corruption.

The impact of corruption on an organization can be devastating. Corrupt practices increase risks and costs to businesses, damage investor confidence, and stifle growth. Eventually, these activities can distort the organization's allocation of resources, undermine its legitimate business practices, and even lead to bankruptcy.

Internal auditors are uniquely qualified to help their organizations fight corruption. As the eyes and ears of management, auditors are present year-round, they have a broad understanding of business operations, and they are bound by strict standards of performance and ethical conduct. By providing assurance that effective prevention, detection, and correction measures are in place, auditors can play a significant role in the organization's anticorruption efforts.

PREVENTION

Most auditors know quite well that rather than wait for a loss to occur, it is far better to establish control mechanisms that prevent the loss from occurring in the first place. This is especially true in the fight against corruption. A proactive approach to anticorruption efforts that involves looking at areas from which the problem may stem can help reduce the potential for misdeeds.

AN ETHICAL ENVIRONMENT In the final analysis, management has the ultimate responsibility for preventing and fighting corruption. Good corporate governance, appropriate tone at the top, and sound controls are the three main tools at management's disposal for accomplishing this goal. However, their efforts will be effective only if all members of the organization recognize corruption as a problem and work toward preventing it.

To ensure that all employees are on the same page, management needs to lay the groundwork for a sound, ethical environment. Specifically, a written code of ethics and business conduct that integrates such values as honesty, trust, and integrity helps set the tone for the entire company. All employees represent the organization in their relations with others -- customers, suppliers, other employees, competitors, governments, investors, or the general public. Whatever the area of activity or degree of responsibility, employees should be expected to act in a way that maintains or enhances the company's reputation.

To ensure the code serves as an effective anticorruption tool, internal auditors can verify that it includes provisions against corrupt practices, such as bribery or extortion, and make sure it is continually maintained and enforced. In addition, all activities or transactions reviewed during an audit should be measured against the code. This could include ensuring the transparency of the activity or transaction and checking that employees in the business area under review are aware of the code and following its directives. Auditors should also determine that the code is accompanied by effective management systems designed for monitoring and compliance.

A written code of ethics is of no use if management does not "walk the talk" or set the right example. For instance, even minor falsifying of expense accounts by management or unauthorized use of company assets can send the wrong signal and undermine an organization's stated policies. Breaching the written code must be followed by adverse consequences -- commensurate with the severity of the breach. This may involve reprimand, loss of pay, transfers, or outright dismissal. The organization needs to send a dear message that failure to follow the code is unacceptable.

Again, internal auditors can play a significant role in this process. An audit of code violations could include itemizing all breaches and following up each one to ensure that escalating actions have been taken to the highest levels of management.

HIRING THE RIGHT PEOPLE Virtually any system is only as effective as the people who are employed to manage it. A corruption-proof system, therefore, can operate effectively only if those working within it are performing and behaving as required.

Because employees can make or break a system, it is essential to ensure that the organization hires suitably qualified people. Auditors should make sure their companies are performing thorough background checks on candidates for employment. In addition, auditors can verify that employers are validating information such as qualifications and work experience stated on resumes, as well as checking references. The company should hire individuals with a history of integrity and honesty and avoid putting square pegs in round holes. By hiring appropriately qualified employees, management has taken one important step toward eliminating corruption.

INCENTIVES A system in which compensation is equitable, performance appraisals are frequent and fair, and the general work environment is competitive and rewarding will provide less opportunity and motivation for corruption. Companies should maintain incentives whereby rewards are given for reaching defined goals and penalty is incurred for subverting or circumventing established controls. For example, providing bonuses for completing a project on time and imposing a fine or other disciplinary action for accepting bribes are effective means of encouraging ethical behavior. Auditors can contribute to this effort by ensuring that incentives for ethical conduct are incorporated into work processes and that these methods are effective.