Memorandum submitted by PricewaterhouseCoopers
THE IMPACT OF CORRUPTION ON FORENSIC ASSIGNMENTS
1. PricewaterhouseCoopers is a leading provider
of forensic services, supporting our international clients both
within the developed markets and, perhaps more crucially in the
emerging markets. The range of services demanded by our clients
to meet their operational objectives and in support of corporate
governance issues has expanded dramatically in recent years, particularly
in Central and Eastern Europe and the CIS.
2. A wide range of experience is needed
to meet this demand and as such our staff not only include experienced
forensic accountants but also former practising lawyers, regulators
and police officers. This range of experience is required in order
to resolve the many and varied problems faced by our clients,
including cases of fraud and corruption. We have acted on behalf
of most of the UK prosecution agencies, including the SFO, the
police and the CPS, the DTI and the FSA as well many overseas
3. Much of our work involves investigating
allegations of procurement fraud and associated corruption both
in the UK and overseas. This work is almost entirely in reaction
to client needs, often in response to a crisis. However, we are
finding that those companies with well developed risk management
and corporate governance procedures are taking a more proactive
approach to the management of fraud. We do get involved, therefore,
in risk assessment programmes and training to raise fraud awareness.
Of necessity we need to be familiar with the associated law, including
what constitutes criminal offences, civil recovery processes and
legislation that affects investigation activities, such as the
Data Protection Act and the Human Rights Act. Such laws are not
harmonious across all territories which makes our work more complex.
The OECD Convention
4. PwC actively support organisations with
an interest in combating fraud. For example, we have supported
Transparency International (UK) since their inception and continue
to take an active role with the Fraud Advisory Panel, chaired
by George Staple. We support the underlying principles of the
OECD Convention and the proposals of the Law Commission to improve
the corruption laws in the UK. We have experienced some of the
frustrations in trying to persuade the authorities in the UK to
investigate cases of alleged corruption involving UK residents
bribing overseas officials. We recognise both the legal and the
practical difficulties outlined to the Select Committee by other
witnesses which compound the difficulty of bringing prosecutions
in the UK. We leave it to the legal profession to comment on the
detail of the Law Commission's recommendations but we do believe
that greater clarity of the law which recognises the international
nature of business which exists today can only benefit the drive
to combat corruption.
5. We do not expect that any new corruption
laws in the UK will result in a large increase in criminal prosecutions.
The experience in the USA following the Foreign Corrupt Practices
Act supports this view. We consider that the main effect is likely
to be an increased awareness of the risk of prosecution at senior
management level and that this will have an impact on the corporate
behaviour of UK business. This is not to suggest that corruption
is presently condoned by UK business but greater clarity of the
law and the risk of prosecution may help to ensure that the issue
of corruption features on the boardroom agenda and not left to
the judgement, perhaps sometimes inconsistent, of middle management.
6. The work of the Law Commission is largely
concerned with criminal law. Most of our work on behalf of our
clients is carried out recognising that their main recourse to
the law is through the Civil Courts. Many of the witnesses to
the Select Committee have commented upon the difficulties of bringing
prosecutions because of jurisdictional issues or lack of active
co-operation between the UK and overseas authorities. Such difficulties
are compounded when trying to investigate allegations of fraud
within the private sector when civil remedies are the only practical
course of action. Obtaining evidence is far more difficult because
of a lack of investigative powers and it is usually the case that
the police will not disclose information for any purpose unless
it is the support of the criminal prosecution. The division of
the criminal and civil processes, whilst understandable to a degree,
undermines effective joint action and co-operation between business
and prosecuting agencies. We believe that further thought may
need to be given to those circumstances in which it may be more
appropriate for civil law remedies to be used to combat against
bribes and corruption.
7. Much of our work at present is carried
out in Central and Eastern Europe where the legislative framework
and corporate governance procedures have yet to be developed to
a standard which provides our clients with the necessary climate
in which to conduct their business in accordance with their policies
and having proper and effective recourse to the law. This view
is supported by the Economic Transition Report in Central and
Eastern Europe, the Balkan States and CIS published by the EBRD.
In that report it is clear that there has been good progress in
the transition by enterprises in both large scale and small scale
privatisation but this is greatly outstripping progress with the
development of governance and enterprise restructuring.
Given this climate, many of the problems faced by our clients
concern managing change which involves trying to impose higher
standards of corporate conduct.
8. This drive to manage change is often
dictated by events, such as poorly performing investments or allegations
of fraud. However, we believe that much can be done in both raising
awareness of fraud issues, driving through corporate policies
on such matters as corruption, instigating appropriate control
and monitoring processes and carrying out appropriate due diligence
prior to entering into business arrangements. We believe the same
is true of monies paid through aid programmes, where much of the
work still appears to be reactive rather than proactive. It is
difficult to measure the effectiveness of some proactive fraud
and corruption preventative measures but, nevertheless if corruption
is to be combated it is necessary to attain change to attitudes
at the highest level of management.
The role of the auditor
9. The statutory role of the auditor of
UK-based companies can be summarised as follows. The principal
statutory duty under the Companies Act is to report to the shareholders
that the company's accounts show a true and fair view of its financial
position and otherwise comply with the law. The auditor is also
required by law to report to the shareholders if the company has
inadequate accounting records.
10. Under Auditing Standards set by the
Auditing Practices Board, the auditor should report to the board
any weaknesses in internal control which are revealed by the audit.
For all listed companies (and nearly all UK-based large multi-national
companies are listed) the auditor must also review the board's
annual statement to shareholders that the company maintains a
system of internal control in accordance with the "Turnbull
The audit role in relation to fraud and corruption
11. Against that background, the auditor's
role in relation to fraud and corruption might best be summarised
as follows. For listed companies, the auditor is required to review
the directors' statement in compliance with the "Turnbull"
guidance, as above. That guidance requires an internal control
system which, inter alia, should "help ensure compliance
with applicable laws and regulations".
12. The directors' statement will, inter
alia, in turn take account of the findings of the internal and
external audit. The auditor is required by Auditing Standards
to give "reasonable assurance that the annual financial statements
are not materially affected by fraud, or non-compliance with laws
and regulations central to the company's business". The word
"material" means a quite high threshold; in a major
international company the effect of fraud or corruption might
be several £ million before it was disclosable as a material
distortion to the company's financial position and performance.
The words " reasonable assurance" convey that there
cannot be absolute assurance of an audit finding material fraud,
particularly where senior management are involved and have colluded
to conceal it.
13. In practice the auditor will usually
be asked by the board to be alert to any irregular activity which
would damage the company's reputation. It must be remembered,
however, the auditors only test check transactions; and indeed
some corruption may not result in a money payment at all: for
example, some kind of personal blackmail of the company's officials.
14. Apart from certain duties in relation
to money laundering, the auditor is not required to, indeed by
Auditing Standards is usually prohibited from, reporting matters
to the authorities, except where it is in the public interest
(a subjective definition). Rather the auditor is required to inform
the board and ensure they report matters to the authorities. If
the board refuses to do so, the auditor would take legal advice
and might well resign from the position of auditor.
Developing the audit role
15. We suggest that audit might develop
in future along the following lines. We expect, and PricewaterhouseCoopers
encourages, companies' own reporting under the broad topic of
"corporate social responsibility" to develop. For example,
the present company law review being undertaken by the Department
of Trade and Industry is pointing in this direction. We would
also expect the auditor's involvement in this field to increase.
However, because primary responsibility for corporate accountability
must rest with the directors, it would usually be inappropriate
to extend the auditor's role in advance of an extension of that
of directors. There is also heightened awareness within British
boardrooms of the need to tighten ethical policies and to seek
the auditor's advice and assurance in this respect. We expect
this trend to continue.
16. The auditing profession is keen to take
a lead in developing the debate about the unacceptability of fraud
and corruption in society. For example, the Audit Faculty of the
Institute of Chartered Accountants in England & Wales initiated
the "Fraud Advisory Panel" which aims to establish the
essential facts about the nature and extent of fraud and to improve
awareness of its risk on the part of management and promotes more
effective measures by business, regulators and government.
17. The primary answer to reducing the scale
of corruption lies in improving and developing corporate governance.
18. Within UK-based multi-national companies,
corporate governance has developed substantially over the last
10 years and ethical policies have been progressively tightened.
It is within this framework that the audit role can best develop.
The Companies Commission proposed by the DTI's company law review
would provide a continuing focus on governance and, inter alia,
"social" reporting by companies.
19. Within the developing world it is building
the institutional structures necessary for good corporate governance
which is key, including company regulation and codes of good practice
along the lines of the developed world.
2 Transition Report 2000 by the EBRD, Table 2.1, page