Controlling Corruption

Critical steps in solving a trillion-dollar problem

By James Farrar

Executives across the globe are very aware that the costs of corruption go far beyond fines and a temporary impact to reputation. Indeed, the costs are multifaceted, long-lasting and tragic.

Some corporations, like Enron, implode under the weight of malfeasance, taking employee livelihoods and pensions with them; while other companies, such as Tyco, survive but are substantially re-organized. Governmental agencies like Fannie Mae, as well as government contractors and suppliers such as BAE and Halliburton, see years of billing and business-development activities subjected to official inquiries. Employees become reluctant to stay with or join companies implicated in corruption scandals.

One recent study by the World Bank put the costs of corruption at more than $1 trillion annually. So it’s a positive development that awareness of corruption and its impact is at an all-time high. Yet, executives also concede that their ability to deal with corruption and manage the related risks doesn’t match their awareness. This gap can be narrowed through a combination of organizational, technological, and political-social initiatives designed to institutionalize and publicize anticorruption efforts.

Executives: Don’t Balk at Anticorruption Talk

A strong message from the executive suite that corrupt practices won’t be tolerated can have a real impact. In the oil and gas industry, a sector rife with the opportunity for bribes and inside dealing, both BP and Shell Oil were at the forefront of launching anticorruption efforts. In 2004, then-CEO John Browne at BP announced a zero tolerance policy toward making “facilitating payments” (funds paid to government officials) long before most companies addressed the issue. Shell actually publishes a report card documenting the number of employees disciplined or fired, as well as contracts voided, because of bribery-related actions.

On the other hand, providing a safe harbor—an anonymous channel—for employees to report suspicious activities, and renouncing retribution on whistleblowers are clear demonstrations of leadership. If the worst happens, as it did at Siemens when officials were found liable on corruption charges, a swift change of management and a corporate reorganization help set a new direction.

Leverage Technology to Prevent and Detect Corruption

It’s a sad truth, but most corruption is a product of human frailty. Consequently, ferreting out corruption is easier when a company relies less on human willpower and memory and more on software systems and automation.

Unfortunately, many companies still lack end-to-end automation. A 2006 report, “Enterprise Systems and Revenue Recognition: The Missing Link,” conducted by RevenueRecogniton.com and IDC, estimates that more than 90 percent of public companies rely on manual processes to perform some revenue recognition and reporting activities, creating the opportunity to hide or mischaracterize payments. This risk can be mitigated by implementing automated financial controls on reporting revenue, payments or gift expenditures.

An integrated monitoring and compliance system can generate an enterprise-wide view of expenses and spot problematic activities. It can also embed more stringent controls for high-risk business processes like procure-to-pay or cross-border shipping. Likewise, it can monitor transactions in an emerging market, so if predetermined risk thresholds are breached, the system generates a record to trigger investigation, if needed.

In this way, technology can help manage risks better by providing “digital oversight” of areas where problems are more likely to occur. The key is to recognize the level of risk that each process or activity represents, and then employ technology to assist in managing that risk to achieve corporate goals.

Partner with Anticorruption Experts

Companies can and should call on experts to help develop anticorruption programs and provide guidance and tools. Nongovernmental organizations (NGOs), like Transparency International, play this role, supporting businesses around the world. Most countries and governmental units also have anticorruption divisions that are eager to partner with companies. These organizations, as well as consultants who have deep anticorruption expertise, can give companies the current view of best practices and trends, along with the necessary insight to implement effective anticorruption programs.   

Public and private collaboration is needed to combat corruption and the toll that it is taking on companies, individuals and governments. Many strategies and tools are available that increase visibility and control of processes and transactions, and secure data vital to effective operations. By employing a multidimensional approach to preventing, detecting, and treating corruption, companies can improve their decision-making, operations and risk management, and enhance their reputation within and outside of their corporate walls.