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Auditors & Anti-corruption

By: Gholamhossein Davani

Member of High Council of Iranian Association of Certified Public Accountants (IACPA)CFE,IMA, AAA, BAA, EAA, IIA, FMA, AFA, CAAA

AACF 4th.Annual International Accounting Conference 15-17 November 2007 Istanbul 2007

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Chairman, Presidents, ladies and gentlemen. Good afternoon. It is a great pleasure to be here in Istanbul in the to address theAACF4th.Annual International Accounting Conference. Thank you for your kind invitation

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Your honor,

Just now sitting at the patio with your honorable sibling and having a bite of board with her honor, I was informed that your honor has prattled and reappointed price Movasegholdoleh, governor of Qom, formerly deposed due to bribery and buying off.

I had him sent to Tehran under guard, so that your Majesty will understand that one can not rule a country on his aunt’ prescriptions.

Forgive me for being over impertinent,

Taghi

Amir Kabir’s (Then Prime minister) letter to King Naseraldin Shah

Just as one can not let go of the taste of honey or poison on the tip of his tongue, a governmental agent dealing with governmental budget, can not avoid tasting at least a little of the King’s wealth.

Kaochila ertashsetra,

Indian edifications, first decade Annone Domini

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•Definition of CorruptionDefinition of Corruption

• The term "corruption" comes from Latin "romper" which means "to break or violate", i.e. , in corruption something breaks or violates which might be a moral or legal norm, or even administrative regulations.

• corruption as a phenomenon raised from public and private sectors' interest coincidence, is the result of profiteering behavior of those who act on behalf of public sector or enjoy the fruits of governmental powers and authorities, and take advantage of them for personal, familial or other purposes to gain whether political or economic opportunities.

• In other words, financial corruption is misusing or abusing the governmental (public) power, property, authority and post for securing the interests of a particular person, group, party, tribe or caste.

Definition 1: Violating (or breaking) the existing rules or regulations for securing personal interests

Definition 2: Illegal reward paid in order to making one to offend against his/her duty (Webster Dictionary)

Definition 3: Corruption, to abuse governmental power in order to securing personal interests (World Bank)

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Types of CorruptionTypes of Corruption

Administrative corruption (Bureaucracy)

Bribe (Main essence of financial corruption): bribe, gratuity, remuneration, fees of pandering to the evil designs of others, tip, hush money, present

Embezzlement:

To withdraw or abuse the governmental (public) properties by those who are responsible for managing and keeping them (breach of trust)

Rent seeking

Corruption in transactions and contracts (commission)

Fraud

Political comption

Political corruption of senior authorities of the government

Corruption arising from policy makings

Stranding Favoritism (a type of embezzlement)

Discrimination

Nepotism

Cronyism

Patronage

Extortion

Protection or security money

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Factors effecting on forming of corruptionFactors effecting on forming of corruption

•The role of state and governmental instruments

•The nature of society's political system

•Judiciary and supervisory system

•Special social characteristics of any country

•Governmental rules and regulations, privileges and authorities

•Special characteristics of tax system

•Policies and decisions pertaining to national and public expenditures

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Financial corruption forming basesFinancial corruption forming bases

Incorrect common law and administrative customs

The income and revenue levels of the government's employees

The weakness of judiciary and supervisory system

The weakness of intra-organizational supervisory sections

Non – transparent rules and regulations

Lack of a proper social security system

Lack of job security for government's employees

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The roots of financial corruptionThe roots of financial corruption

Shadow Economy Shadow Economy

Under ground EconomyUnder ground Economy

SmugglingSmuggling

Drug smuggling

Goods smuggling

Human Traffic

Shadow Economy consists of a set of economic activities, whether in production or service sectors, which try to gain more out of prescribed framework of official economy.

bribery – embezzlement of public properties by government organs and senior employees – tax evasion – nepotism – unauthorized production – black markets for unobtainable goods - foreign exchange transactions – fraud

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USA %10- %33 USA %10- %33

Australia %4- %12 Australia %4- %12

Russia %25 Russia %25

Germany %25Germany %25

Italy %10- %33 Italy %10- %33

Japan %4-%15 Japan %4-%15

Britain %3-%15 Britain %3-%15

Today America's foreign trade deficit is about $500b that is said without "dirty money", America's foreign accounts would be entirely disabled, the living standards would fall off, the dollar weakens, the existing or available capital would impair, and Washington wouldn't be the Emperor of the world anymore!

Today America's foreign trade deficit is about $500b that is said without "dirty money", America's foreign accounts would be entirely disabled, the living standards would fall off, the dollar weakens, the existing or available capital would impair, and Washington wouldn't be the Emperor of the world anymore!

The volume of shadow Economy in various countries per GDPThe volume of shadow Economy in various countries per GDP

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Income combination of criminal capitalism (financial corruption)Income combination of criminal capitalism (financial corruption)

Human traffic and prostitution Human traffic and prostitution

credit cards (mostly in Hong Kong cafeteria owners' activity area)credit cards (mostly in Hong Kong cafeteria owners' activity area)

Gambling den, betting and lottery (football, boxing, horse- racing and…)Gambling den, betting and lottery (football, boxing, horse- racing and…)

Illegal transaction of weaponsIllegal transaction of weapons

Drugs and alcoholic drinks sale, about $120b to $300b in a yearDrugs and alcoholic drinks sale, about $120b to $300b in a year

To attend in international tenders (brokerage commission)To attend in international tenders (brokerage commission)

produce or sale the unauthorized or illegal products such as porno movies and CDs produce or sale the unauthorized or illegal products such as porno movies and CDs

Transactions by foreign exchange Transactions by foreign exchange

Nepotism, abusing authority and office position, jobbingNepotism, abusing authority and office position, jobbing

To give or receive bribe (illegal commissions)To give or receive bribe (illegal commissions)

Other incomesOther incomes

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Main players of the underground economyMain players of the underground economy

Rent- Seeking financial – economic foundations and institutions Rent- Seeking financial – economic foundations and institutions

Big credit networks out of government control, unauthorizedfinancial and credit institutions

Big credit networks out of government control, unauthorized financial and credit institutions

Non profit and the so called charity institutions Non profit and the so called charity institutions

Frontier market places operators Frontier market places operators

Hoarders who buy rarely found goods in advance and sell them very expensive Hoarders who buy rarely found goods in advance and sell them very expensive

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Characteristics and special features of financial and administrative corruptionCharacteristics and special features of financial and administrative corruption

An organized crime, an organized group enjoying governmental powers (plurality of commissaries)

An organized crime, an organized group enjoying governmental powers (plurality of commissaries)

A long- term and permanent crime A long- term and permanent crime

The profit resulting from it, outshines the country's economy cycle too The profit resulting from it, outshines the country's economy cycle too

Financial corruption is the enemy of the meritocracies system Financial corruption is the enemy of the meritocracies system

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The choices of financial corruptionThe choices of financial corruption

Bribery, Kick back, Extortion, Protection or Security Money, BaksheeshCommercial arrangements, Gratuities, Sweeteners, Pay-offs, Hush money, Greasing palm

Bribery, Kick back, Extortion, Protection or Security Money, Baksheesh ,Commercial arrangements, Gratuities, Sweeteners, Pay-offs, Hush moneyGreasing palm

EmbezzlementEmbezzlement

Abusing administrative posts or authorities Abusing administrative posts or authorities

Rent seeking Rent seeking

Sex abuse, ProstitutionSex abuse, Prostitution

Smuggling, trafficking (Goods and services, drugs, weapons, human)Smuggling, trafficking (Goods and services, drugs, weapons, human)

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Social- economic effects of financial corruptionSocial- economic effects of financial corruption

Corruption annihilates the economic security which is the precondition for any economic activity

Corruption increases poverty and privation

Corruption eliminates creativity, initiative, the motive of working and job creation

Corruption retards or stops proceeding towards democracy and market economy

Corruption brings about lawbreaking and disorder

Corruption decreases the state's governing role or derange it (i.e., its obligations, to execute contracts,…)

Corruption eliminates the government's ability of enacting controlling and supervisory rules for improving market deficiencies

Corruption makes people pessimist toward the government (because they consider them as accessories)

Increasing underground activities (gray and black)

Deranging long term local and foreign investments

Deviating priorities

Annihilating the meritocracy

Increasing the expenses of the commercial exchanges

Corruption increases class distinctions severely

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Unofficial statistics of financial corruption in IranUnofficial statistics of financial corruption in Iran

Yearly volume of smuggling from $3b to $5Yearly volume of smuggling from $3b to $5

Yearly capital flight about $2b to $3b Yearly capital flight about $2b to $3b

Money circulation in drugs dealing, $5bMoney circulation in drugs dealing, $5b

Yearly volume of embezzlement in banking network and big public (governmental) companies, $1b

Yearly volume of embezzlement in banking network and big public (governmental) companies, $1b

The commission of government's foreign purchases is estimated about 1 to 3 percent of total imported goods

The commission of government's foreign purchases is estimated about 1 to 3 percent of total imported goods

According to a non-governmental estimation, 20 to 25 percent of agricultural sector's yearly credit is provided by market

According to a non-governmental estimation, 20 to 25 percent of agricultural sector's yearly credit is provided by market

Brain drain (as the greatest social wealth) Brain drain (as the greatest social wealth)

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Developing effects of good governance "Anti- corruptionDeveloping effects of good governance "Anti- corruption " "

Financial burden of legislation is very low

Hope for living is high and infants death rate is very low

The right of expressing opinions (liberty of speech) and full responsibility system

High rate of literacy and the rule of law

More investments (Social- economic security)

High rate of employment and low rate of joblessness

Class distinctions, and number and rate of the poor will become less

Better allocation of public expenditures and tax revenues increasing

More civil rights for citizens

Liberty of the press is the basis of responsibility system

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International background of anti- corruption act Palermo conferenceInternational background of anti- corruption act Palermo conference

Palermo ConferencePalermo Conference

1. Any contracting state will adopt legislative and other measures which are necessary to treat the following actions as felonious crimes when they are accomplished deliberately:

a) Any promise, offer or an unjust benefit giving directly or indirectly to a public services official for him/ her, or another person or institution in order to make him/her to do or avoid of doing a specific job.

b) Any request or acceptance of an unjust benefit, directly or indirectly, by a public services official or another person or institution in order to make him/her to do or avoid of doing a specific job.

2. Any of the contracting parties will consider all above – mentioned measures in order to treat financial corruption and other types and forms of it as felonious crime.

3. Any contracting state will adopt necessary measures in order to treat participation and partnership in financial corruption as a crime.

4. According to paragraph 1 of this article and article 9 of this convention, "public services official" is one who fulfils a public job or obligation.

1. Any contracting state will adopt legislative and other measures which are necessary to treat the following actions as felonious crimes when they are accomplished deliberately:

a) Any promise, offer or an unjust benefit giving directly or indirectly to a public services official for him/ her, or another person or institution in order to make him/her to do or avoid of doing a specific job.

b) Any request or acceptance of an unjust benefit, directly or indirectly, by a public services official or another person or institution in order to make him/her to do or avoid of doing a specific job.

2. Any of the contracting parties will consider all above – mentioned measures in order to treat financial corruption and other types and forms of it as felonious crime.

3. Any contracting state will adopt necessary measures in order to treat participation and partnership in financial corruption as a crime.

4. According to paragraph 1 of this article and article 9 of this convention, "public services official" is one who fulfils a public job or obligation.

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International Anti-corruption conferencesInternational Anti-corruption conferences   

 1- The United states of America 1999

2- The Netherlands (la Hague) 2001

3- South Korea (seol) 2003

4- Brazil 2005 

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Responsible persons and Institutes inResponsible persons and Institutes in Anti- corruption campaign according toAnti- corruption campaign according to

the EU Operation Program Recommendationthe EU Operation Program Recommendation

State authorities, members of parliament and people who have an influence on elections

Persons be in charge of the legal professions (Judiciary)

Auditors

Self –employed persons such as merchants

Journalists

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Corrupted financial resources basisCorrupted financial resources basis

Banking activities particularly in international banks, because it is hard to control and supervise them. Cooperation of some bankers with money laundering, easily

makes financial corruption possible.

Banking activities particularly in international banks, because it is hard to control and supervise them. Cooperation of some bankers with money laundering, easily

makes financial corruption possible.

Funds and institutes which grant interest free loans and their activities and operations are parallel to operations of regular banking system.

Funds and institutes which grant interest free loans and their activities and operations are parallel to operations of regular banking system.

Futures markets in which brokers buy-sell shares, bonds,… Futures markets in which brokers buy-sell shares, bonds,…

Artworks and antiques – attending in unofficial sectors of economy such as precious metals and oil transactions.

Artworks and antiques – attending in unofficial sectors of economy such as precious metals and oil transactions.

Free trade zones that are free of control- tax haven areas. Free trade zones that are free of control- tax haven areas.

Religious centers with economic activities, charity institutions and the like, particular foundations and cooperative funds.

Religious centers with economic activities, charity institutions and the like, particular foundations and cooperative funds.

Money changing gives a suitable chance for money laundering. Money changing gives a suitable chance for money laundering.

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The means and methods of preventing economic crimes (financial corruption)The means and methods of preventing economic crimes (financial corruption)

Government's authority should by employed in such a way that reduces the incentive of corruption agents through using proper tax and financial mechanisms

To control financial – administrative corruption in public sector

To develop auditing and financial supervision sector in order to economic transparency and preventing tax evasion

Proper mechanisms should be created for money and capital markets in order to establish high supervision

Penal and juridical rules amendment

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Fundamental obstacles of anti- corruption in IranFundamental obstacles of anti- corruption in Iran

Lack of a specific governing system in exercising the government's sovereignty

Lack of harmonious management among the three sectors of the state

To change financial corruption into a political case and to protect offenders politically

Not to pay attention to preventive solutions and limit the campaign to occasional juridical encounter

Disagreement of offenders, losers, simpletons and spiteful persons

Penetration of corrupt persons into the anti- corruption campaign, spreading of "nepotism" in administrative – financial – political system of the country

"Oiling the wheel" Idea, some believe that the corruption is needed to such an extent that prepares the means of livelihood, this idea related to the activists, inspires its concept from southern east

Asian countries

The idea that believes anti- corruption brings about insecurity and capital flight

Financial corruption occurrence in the world's big companies during past 3 years

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Auditors ResponsibilitiesAuditors Responsibilities

Legal Responsibility Professional Responsibility

Social Responsibility

Imperfect execution of contracts or agreements

Constructive fraud: To be careless in performing important tasks, to pretend doing important job and seduce the others, contrary to "fraud", one know nothing about alteration in financial statements

Errors: make mistakes in financial statements and accounting records

Irregularities: to make intentional alterations in financial statements which is often accompanied by forgery in accounting records

Science / Intention: To deceive or cheat intentionally

Negligence: To offend against duties

Gross negligence: be completely careless towards responsibilities

Fraud: To alter an important fact, mendacity, to present false information in order to cause to sustain a loss to others

- Commercial code: articles 144 to 156 & 117 to 129

- Direct Taxes Act: article 272

- General Accounts Act: article 132

- Other Related Acts

- Social welfare

- To protect shareholder's rights equally

- Imaginary or false benefits

- Feigned transactions- Since tax, as an income source for the state should be distributed fairly, in this connection an auditor has both legal and social responsibilities

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Corruption Effects from Auditors' point of viewCorruption Effects from Auditors' point of view

Any type of financial corruption will affect financial statements somehow Any type of financial corruption will affect financial statements somehow

Contrary to money laundering, financial corruption will affect one of the balancesheet or profit and loss statement items (financial auditing)

Contrary to money laundering, financial corruption will affect one of the balance sheet or profit and loss statement items (financial auditing)

Financial corruption leads to incorrect evaluation of companies activities Financial corruption leads to incorrect evaluation of companies activities

Financial corruption makes it difficult to distinguish taxable income correctly(tax auditing)

Financial corruption makes it difficult to distinguish taxable income correctly (tax auditing)

Financial corruption damages the rights of some shareholders in favor of someother shave holders

Financial corruption damages the rights of some shareholders in favor of some other shave holders

Financial corruption violates some citizens, social rights) auditor's social responsibility(

Financial corruption violates some citizens, social rights) auditor's social responsibility(

Financial corruption can alter the auditors' independency too Financial corruption can alter the auditors' independency too

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Effective factors in financial corruption from Auditors' point of Effective factors in financial corruption from Auditors' point of viewview

Excessive tendency to use cash in dealingsExcessive tendency to use cash in dealings

Not to guaranty the delivery of financial papers and statements by all commercial unitsNot to guaranty the delivery of financial papers and statements by all commercial units

Absence of experienced and truthful employees Absence of experienced and truthful employees

supervise the system in appointing state's senior officials supervise the system in appointing state's senior officials

Absence of outstanding economic inspectors to controlAbsence of outstanding economic inspectors to control

Institutionalization of corruption and embezzlement in various parts of the state

Institutionalization of corruption and embezzlement in various parts of the state

Lack of a proper auditing system guaranteed to be executed Lack of a proper auditing system guaranteed to be executed

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Methods of Fighting against financial Methods of Fighting against financial corruptioncorruption

To strengthen the political will To strengthen the political will

To concentrate on the methods of preventing financial corruptionTo concentrate on the methods of preventing financial corruption

C = M + D + A corruption = (Monopoly + Despotism + Accountability)

C = M + D + A corruption = (Monopoly + Despotism + Accountability)

Concentration on permanent training Concentration on permanent training

Participation of people and civil organizations in fighting against corruptionParticipation of people and civil organizations in fighting against corruption

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Auditors' duties in fighting against financial Auditors' duties in fighting against financial corruptioncorruption

To inspect and control the doubtful deals To inspect and control the doubtful deals

To detect and recognize the deals targeting to bribe government officials To detect and recognize the deals targeting to bribe government officials

Particular applicable trainings for fighting against financial corruption Particular applicable trainings for fighting against financial corruption

To detect unlawful payments To detect unlawful payments

To consider and check the suspicious people's employing relations who might be paid regularly but have no responsibility and duty in a company and offer no service, to check the counselors' employment contracts

To consider and check the suspicious people's employing relations who might be paid regularly but have no responsibility and duty in a company and offer no service, to check the counselors' employment contracts

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Examples of Fighting against financial corruption in financial statementsExamples of Fighting against financial corruption in financial statements

Receivable accounts unexpected decrease through claims remained unpaid and to receive claims out of financial statementsReceivable accounts unexpected decrease through claims remained unpaid and to receive claims out of financial statements

To receive unreal invoices (over invoice) and to draw money out of the company, and collusion of officials with vendors To receive unreal invoices (over invoice) and to draw money out of the company, and collusion of officials with vendors

To use trickery in tendersTo use trickery in tenders

To adjust the contract price during operating or after completing the project so much so that the new price exceeds the second bidder's priceTo adjust the contract price during operating or after completing the project so much so that the new price exceeds the second bidder's price

To buy goods in a price more expensive than market price, to sell goods and services in a price cheaper than market price, to hand company's financial resources and properties over to othersTo buy goods in a price more expensive than market price, to sell goods and services in a price cheaper than market price, to hand company's financial resources and properties over to others

To pay money to people or institutions that do not work for the company To pay money to people or institutions that do not work for the company

To buy shares in high prices and sell them in low prices or vice versaTo buy shares in high prices and sell them in low prices or vice versa

To assign the license of goods selling or sole agency to particular personsTo assign the license of goods selling or sole agency to particular persons

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Auditors' Temporary Guidebook (ICEAW Press)Auditors' Temporary Guidebook (ICEAW Press)

A criminal act is such an act that in case of occurrence in Great Britain is considered as a crime

A criminal act is such an act that in case of occurrence in Great Britain is considered as a crime

To avoid hesitation, criminal wealth includes the following: To avoid hesitation, criminal wealth includes the following:

Revenues resulting from tax evasionRevenues resulting from tax evasion

Revenues resulting from a cartel's operationsRevenues resulting from a cartel's operations

Revenues resulting from corruption and bribery Revenues resulting from corruption and bribery

Revenues resulting from negligenceRevenues resulting from negligence

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Enron (Arthur Anderson- AA)Enron (Arthur Anderson- AA)

WorldCom (AA) 2002WorldCom (AA) 2002

Xerox (PWC)Xerox (PWC)

Parmalat (Grant Thornton- GT)- DeloitteParmalat (Grant Thornton- GT)- Deloitte

Financial corruption in big companies of the world during last three yearsFinancial corruption in big companies of the world during last three years

US Tax Shelters (KPMG)US Tax Shelters (KPMG)

Equitable (E&Y)Equitable (E&Y)

Shell Oil Co. (KPMG & PWC)Shell Oil Co. (KPMG & PWC)

Refco. (KPMG)Refco. (KPMG)

AIG Group. (PWC)AIG Group. (PWC)

EOL Times Warner White collar crime

EOL Times Warner White collar crime

TycoTyco

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Arj corporation listed Co. Arj corporation listed Co.

Big financial corruption in IranBig financial corruption in Iran

Manna constructive company Manna constructive company

Shaharam Jazziery case Shaharam Jazziery case

Non profitable (interest free) funds Non profitable (interest free) funds

Gilan Pocket Listed Co.Gilan Pocket Listed Co.

Saderat Bank (Hadad & Rafighdost Case) (1.2 b$)Saderat Bank (Hadad & Rafighdost Case) (1.2 b$)

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SourcesSources

•The recognition of financial corruption event (2nd volume), Nashr-e Jahad press

•Good Governance and Development, Islamic consultative Assembly's Research center

•Auditors' social Responsibilities, Economy finance & Magazine, Gholamhossein Davani

•The collection of "Tarjoman- e Eghtesadi" Magazines

•Internet Data center on "corruption"; Independent commission against corruption

•site: www.icac.new.gov.an

•The International Transparency site

•Miscellaneous Articles about financial – political corruption published in Iranian Magazine

•International organized crimes in Palermo convention and its Effects, Legal Magazine, No.29, Autumn 2003

•The recognition of financial corruption event (2nd volume), Nashr-e Jahad press

•Good Governance and Development, Islamic consultative Assembly's Research center

•Auditors' social Responsibilities, Economy finance & Magazine, Gholamhossein Davani

•The collection of "Tarjoman- e Eghtesadi" Magazines

•Internet Data center on "corruption"; Independent commission against corruption

•site: www.icac.new.gov.an

•The International Transparency site

•Miscellaneous Articles about financial – political corruption published in Iranian Magazine

•International organized crimes in Palermo convention and its Effects, Legal Magazine, No.29, Autumn 2003

IMA= American Institute of Management Accountants AFA= American Finance Association

AAA= American Accounting Association CAAA= Canadian Academic Accounting Association

BAA= British Accounting Association AAFM= American Academy of Financial Management

EAA= European Accounting Association IICA= Iranian Institute of Certified Accountants

IIA= Institute of Internal Auditors IACPA= Iranian Association of Certified Public Accountants

FMA= Financial Management Association