On Corruption and Accounting: No Panacea for a Modern Disease

By Bert J. Zarb

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The tentacles of corruption have touched several sectors of society. Accounting, on both the national and international level, has not escaped unscathed. Although corruption is a social malaise that engulfs development and ravishes the fabric of society, steps can be taken to curb it. Adopting a set of universally accepted financial accounting standards, striving toward a high level of economic development, observing the cultural construct of uncertainty avoidance, operating within a country’s legal system, and mandating the use of audit committees could be ways to fight corruption. The recent accounting scandals show how businesses of all sizes, in any location, are vulnerable to the malevolent intentions of corrupt individuals who create chaos and seek personal enrichment at great cost to others, leaving a legacy of financial ruin.

Corruption takes many forms, including bribery, fraud, illegal payments, money laundering, smuggling, extortion, and nepotism. Although fighting corruption covers an array of issues and occurs on many fronts, there is no panacea; the struggle to stop it entirely—or at least curb it—is one of Sisyphean proportions.

Defining and Justifying Corruption

Perhaps one of the first problems of corruption is defining what it really is. Some of the definitions found in the literature focus on the abuse of public roles and resources for private gain. Others suggest that distinguishing between public and private corruption is difficult, and that the reasons for engaging in corrupt activities have become so ingrained in the system that nobody talks about them. While corruption’s effect on the economic performance of a country varies with that country’s individual conditions, its negative effects either force governments to intervene where they should not, or impede governments from promulgating laws and implementing policies.

Scholars have defined corruption based on rules and laws because of the stability, universal application, and relative precision that formal laws and rules offer. At times, however, laws are broken and lose their legitimacy. Consequently, the issue becomes whether corruption should be described in terms of its social significance rather than its nominal meaning. The literature is replete with studies showing that classifying specific actions alone ignores the place of morality and justice in a society. Corruption can also be seen as “the abuse of public roles or resources for private benefit” by appreciating that the terms “abuse,” “public,” “private,” and “benefit” are subject to considerable dispute and interpretation.

An interesting strand of literature purports that corruption enhances economic efficiency. The argument goes that this is because corruption might not affect the short-run efficiency of an economy if all it does is transfer economic rent from a private party to a government official. In the long run, however, expectations of bribery clearly wreak havoc on the number and types of contracts put up for bid, how contracts are awarded, and the speed or efficiency with which public officials perform their work in the absence of bribes.

Corruption can also be seen to increase economic efficiency when enterprises are allowed to avoid restrictive regulations or confiscatory taxes. Some proponents of this line of reasoning claim that, ethical considerations aside, corruption actually reduces costs by cutting bureaucratic red tape and making public officials more flexible. Other scholars have shown that corruption could play an efficiency-enhancing role, the suggestion being that the size of bribes paid by different economic agents could reflect their different opportunity costs and also achieve “Pareto-optimal” allocation. This has led to the coining of the term “efficient grease.” Other studies have suggested that if bribes “grease the wheels of commerce,” then initiatives by governments and other organizations to combat corruption in international trade would be counterproductive.

Weapons to Fight Corruption

The impact of corruption on business in particular and society in general is such that it diverts resources from productive to nonproductive sectors, and enriches a few of the rich at the expense of everyone else. Apart from increasing risk and the cost of doing business, corruption damages investor confidence, stifles economic growth, and deters foreign direct investment. International financial reporting standards, an increased economic development, the cultural construct of uncertainty avoidance, an effective legal system, and active audit committees are among the weapons that can be used in the fight against corruption.