A model for preventing corruption
| Date | 08 May 2018 |
| DOI | https://doi.org/10.1108/JFC-11-2014-0048 |
| Pages | 545-561 |
| Published date | 08 May 2018 |
| Author | Dominic Peltier-Rivest |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
A model for preventing corruption
Dominic Peltier-Rivest
John Molson School of Business, Concordia University, Montreal, Canada
Abstract
Purpose –This paper aimsto investigate the extent of corruption globally, explainsits social and economic
consequences and introducesa model, composed of corporate governance mechanisms, internalcontrols and
red flag analyses,which organizations can apply to prevent corruption.
Design/methodology/approach –This study uses criminology theories to analyze corruption and its
prevention.
Findings –The global cost of bribery aloneis estimated at US$1tn annually, not including costs resulting
from non-completion and deficient completion of development projects (World Bank Institute, 2004). This
paper shows that an effective prevention model should include a positive work environment and ethical
governance; the implementationof a compliance risk management program with fraud riskassessments; an
accessible psychological assistance program for employees; regular employee anti-fraud training; the
implementationof targeted internal controls such as proper segregation of organizationalduties; the adoption
of fair compensation levels and realistic individual performance goals; a user-friendly and anonymous
reportingmechanism; and independent and regular analyses of abnormalpatterns (red flags).
Research limitations/implications –This paper extends previous research by tying together
disparatefactors into a cohesive model for the prevention of corruption.
Practical implications –The prevention model developed in this paper assistsin deterring corruption,
improving internal controls, improving thelikelihood of detection and reducing opportunities to perpetrate
corruption. By reducing the risk of corruption, thismodel also helps organizations and governments reduce
project costs(public spending) and improve project quality, thus promotingeconomic competitiveness.
Originality/value –A comprehensive prevention model is developed to help curtail corruption and its
devastatingeffects.
Keywords Governance, Compliance, Bribery, Corruption, Prevention, Fraud
Paper type Research paper
Introduction
What is the extent of corruption in the world? Can we prevent it or slow down its progress
and damages?
Corruption can be defined as the use of personal influence in exchange for illicit gains.
Globally, the median loss suffered by victim firms is equivalent to US$250,000 per case
(ACFE, 2012). According to the Association of Certified Fraud Examiners (ACFE) (2012),
corruption represents 25.1 per cent of all cases of occupational fraud in the USA (with a
median loss of US$239,000 per case), 29.3per cent of all cases in Canada (with a median loss
equivalent to US$200,000) and 44 per cent of all fraud cases in Europe (with a median loss
equivalent to US$250,000). According to the public corruption perception index, out of a
total of 176 countries, Canada ranks ninth in the world among countries perceived as less
The author thanks the participants of the 2014 American Accounting Association (AAA) Forensic &
Investigative Accounting (FIA) Conference, the 2014 European Accounting Association (EAA)
Annual Conference and the 2014 Irish Accounting & Finance Association (IAFA) Annual Conference
for their helpful comments.
Model for
preventing
corruption
545
Journalof Financial Crime
Vol.25 No. 2, 2018
pp. 545-561
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-11-2014-0048
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
corrupt, the UK ranks 17
th
, the USA 19
th
and Ireland 25
th
, while Denmark, Finland and New
Zealand are tied for first place (TransparencyInternational, 2012).
In the last few years, Canada, Europe and the USA have all reported corruption cases
that have drawn considerable media attention. In the USA, in October 2013, the former
mayor of Detroit was sentenced to 28 years in prison for corruption and racketeering.
According to prosecutors, Kwame Kilpatrickextorted bribes from contractors, estimated at
US$840,000, in exchange for awarding them up to US$127 million in Detroit city contracts
(Neavling, 2013). In Canada, in 2013-2014, the Charbonneau Inquiry Commission heard
testimony on several corruptionschemes involving the construction industry and provincial
and municipal politicians. This commission worked concurrently with formal police
investigations. Legal charges have been made and others are yet to come. For example, in
May 2013, Quebec’s Permanent Anti-Corruption Squad (UPAC) issued formal charges of
corruption, money laundering and “gangsterism”against the former mayor of the third
largest city in the province of Quebec.If found guilty, Gilles Vaillancourt faces penalties up
to life imprisonment for the “gangsterism”charges (Patriquin, 2013). In Europe, in 2008,
Siemens agreed to pay US$1.6 billion to German and the US authoritiesto settle charges of
corruption for bribing Argentinian government officials (The Local Germany News, 2011).
The US Department of Justice also charged eight former Siemens’senior executives who
allegedly paid an estimated US$100 million in bribes to Argentinian officials to secure a
US$1 billion nationalidentity cards contract (Transparency International,2012a).
The above examples and statistics represent only the tip of the iceberg because many
organizations choosenot to disclose their cases of corruption to law enforcement authorities,
not counting other cases that are never uncovered.In fact, more than one third (34.8 per cent)
of all detected cases of occupational fraud are never reported to the authorities by
organizations (ACFE, 2012). The most cited reasons are fear of the bad publicity, which
usually comes with fraud cases, and the belief of some organizations that internal
disciplinary mechanismsand confidential settlements are sufficient.
The purpose of this paper is to investigatethe extent of corruption globally and explain
its social and economic consequences, using data from recent surveys. We introduce a
prevention model, derived from criminology theories (such as Cressey’s fraudtriangle), and
composed of corporate governance mechanisms, internal controls and red flag analyses. It
extends previous research by tying together disparate factors into a cohesive model for the
prevention of corruption. Our findings contribute to help deter corruption, improve
organizations’internal controls, reduce opportunities for corruption and increase the
probability of detectingcorruption. By reducing the risk of corruption for organizationsand
governments, this paperhelps to reduce project costs (public spending) and improveproject
quality, thus promotingeconomic competitiveness.
Corruption has enormous social and economic consequences. It increases the market
value of goods (contracts) because the cost of bribes is usually added to prices by corrupt
contractors. The price inflation that results from bribery tends to reduce economic
consumption in the affected sector, especially by poorer consumers. For governmental
contracts, price inflation createsdistortions in the allocation of governmental resources and
generates budget deficits that result in reduced allocations to other competing social needs,
such as health care and education (Pacini et al., 2002). Corruption may also result in
inadequate or dangerous projects because of the lower quality of materials and labor
provided by corrupt vendors (contractors) who obtained contracts fraudulently (GIACC,
2008).
An effective prevention model, we believe, consists of a positive work environment and
ethical governance; the implementation of a compliance risk (corruption) management
JFC
25,2
546
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