Essay in the field of Private Sector Fraud
„In the private sector corruption cannot be accurately measured, but fraud can. Critically evaluate this statement.
In contemporary times, corruption has become a major issue in both the public and private sector; numerous studies (KPMG 2010, ACFE 2010, etc.) are devoted to the causes, underlying factors and triggers of corruption in the society, despite the fact that researchers doubt the statistical validity of these studies, but they nevertheless agree that corruption is positively related to the economic growth of a nation, and therefore needs to be controlled (Webster, 2002, p. 6) however even when the corruption element has been identified, the serious obstacle still remains- the challenges posed to the measurement of corruption. This paper will focus on the two closely related phenomenons: corruption and fraud; the study is centered on the problems with the measurement of these elements in the private sector. Furthermore the assumption that fraud is measurable while corruption is not, will be explored and critically assessed in detail.
As the private sector’s importance in modern times continues to grow, it increases the opportunities of private firms of being involved in corruption activities, it also increases the likelihood of private firms bribing the public officials in order to get work done, therefore expanding the corruption element in the world. Since the public sector and the private sector are so intricately linked when corruption is being observed therefore it becomes extremely complicated to categorize it into one sector’s list. With regards to complications of this subject, the concept of fraud also needs to be explored, since fraud and corruption have been increasingly highlighted in the media. The ASOSAI Guidelines for dealing with fraud and corruption define the terms as follows (ASOSAI, 2010, p. 1-11):
“Fraud involves deliberate misrepresentation of facts and/or significant information to obtain undue or illegal financial advantage.
Corruption involves effort to influence and/or the abuse of public authority through the giving or the acceptance of inducement or illegal reward for undue personal or private advantage.”
Some researchers however classify fraud as yet another form of corruption, stating that corruption can be prevalent in four different types: bribery, embezzlement, fraud and extortion, therefore hinting that corruption is a wider category and fraud is a subset of it (Andvig et al., 2000, p. 14). If this approach is taken, then immeasurability of one would automatically make the other immeasurable as well. It is extremely crucial to keep in mind that the entire international community does not unanimously accept the definition of corruption, and therefore this ambiguity in defining the term itself has major effects on the measurement level of corruption. The gathering of objective data is very difficult, perception surveys are the leading method to attain objective results, but these rely on assumptions and statistical analysis, therefore there is always room for errors and residual factors which are unaccounted for, and hence the estimation might differ from actual, the detection and measurement of fraud and corruption takes place through procedural steps discussed below.
In the private sector, corruption is usually identified by the auditors who analyze the financial statements and accounting records of a company to detect and measure fraudulent cases. The audit team discusses the most susceptible areas to fraud and corruption by consideration of internal and external factors which would be a source of incentive for the management or others to indulge in fraud or corruption. The next step requires the audit team to obtain information which is necessary to measure fraud, such as analysis and inquiry of the management, unusual relationships between financial data and performance, the risk factors for the particular industry or business. In line with the information gathered, the auditor must then investigate the company’s efforts to mitigate any fraud and corruption risks and their susceptibility to misappropriation. Once the initial methods used by the company have been analyzed the next step is to identify the high risk areas, once the entity wide analysis has been initiated, it becomes easier for the audit team to identify the high risk areas, and therefore the emphasis is laid on these parts of the organization, this step requires experience and use of perception survey tools. Once the high risk areas have been identified, then use of red flags is made, red flags are oddities which highlight the symptoms which could be associated with fraud and corruption, an auditor must be aware of the possibility that a red flag does not necessarily indicate fraud, and while a red flag exists, it does not mean that fraud or corruption also exists, thus an auditor must know the limitations of using this tool and its reliability, hence it makes the professional judgment of the auditors extremely important (ASOSAI, 2010, p. 1-9). It is a commonly agreed point amongst researchers that fraud and corruption both are difficult to measure, there are indicators to identify the activity, but the exact measurement is almost impossible, since both activities involve the act of camouflaging in order to do away with any charges and convictions. In accordance with The World Bank Report (Kaufmann et al., 2006, p. 1):
“Since corruption usually leaves no paper trail, responses about corruption based on individuals' actual experiences are sometimes the best available, and the only, information we have”