Friday, 21 October 2011

The KPMG Survey – Exploring the depths of corporate corruption | I PAID A BRIBE

In the early part of this year, KPMG (India ) conducted a survey with leading Indian corporates in order to understand and evaluate their perception of how corruption impacts the economy as well as the corporate environment.

A majority of the respondents believed that India could achieve a higher growth rate if corruption could be contained. 50 per cent of the participants believed that despite certain measures such as the Central Vigilance Commission’s (CVC) proposed National Anti-Corruption Strategy and the Right to Information Act, 2005 corruption is expected to remain at the same level in the next two to three years. Interestingly, a large number of the respondents believed that corruption is a two-way street and people who pay bribes are as much to blame for the current environment as those accepting such payments.

The survey then went on to build a symptomatic study of the causes of corruption. The results were surprising. It discovered that one of the main causes arose from 'a desire to NOT pay tax'. This indicates that corruption is directly proportional to a high tax rate. High tax rates deter compliance and therefore increase corruption. Looking back at the early seventies, when the marginal tax rate in India reached 98 per cent, it is difficult to believe that the policy would have led to an increase in tax revenue. A large percentage of potential tax payers defaulted and added to the corruption in flow via black money generation.

The survey also found that 'discretion on the part of government' was another guarantor of corruption. While discretion and a distinct lack of transparency makes space for both the 'demand' and the  'suppliers'in cases of corruption,  India is slowly awakening to the fact that the empowered in the country are often the generators of large scale incidents of corruption.

So, if we simplify it, the answer is fairly obvious ; lower tax rates and increase transparency. Eliminate discretion. In reality, the task is far more daunting.

So what is the fall out according to the respondents in the survey ?

The first thing corruption does is to skew the level playing field and increase the possibility of attracting organisations with lesser capabilities to execute projects. This results in a dramatic fall in quality and accountability. Interestingly, almost 68 per cent of respondents believed that 'corruption is induced by the private sector' ! A 2010KPMG India Fraud Survey indicated that organisations pay bribes to win and retain business. This not an unknown fact, but what is important to note is that when organisations resort to these practises and look at only the short term benefits, they also tend to overlook the implications of encouraging these practises and its long term impact on both the organisation and society in general. 

Business can also be impacted in the area of mergers and acquisitions. Nearly 37 per cent of respondents were of the opinion that corruption could impact the valuation of a company, thereby denying shareholders a fair price. Moreover, it could also make it difficult for them to find a suitable business partner, thereby seriously influencing the growth prospects of the business. It also increases the overall cost of conducting business in terms of accessing capital as well as paying higher interest rates on account of operating in corrupt environments. Needless to say, a market reputation is also often laid down on the sacrificial altar.

But what holds us back from enforcing existing anti-bribery and corruption legislations?

  •  Little or no incentive or protection for individuals reporting alleged instances of bribery and corruption. How many of us have looked the other way or succumbed to the system under duress ? Historic incidents indicate that this is an area of concern which discourages honest citizens from informing the regulators/ authorities of cases of corruption.
  •  Multiple issues around the investigation process such as insufficient manpower to carry out investigation and inadequate technology leading to delays and errors in fact finding. This invariably leads to delayed, and at times lax prosecution. Who wants to get stuck in a situation  that eventually takes a toll on our time ?
  •  Lack of adequate prosecution powers for nodal organisations like CVC and a need for prior sanction from the Central/ State governments for action to be taken against public servants, leads to increased road blocks in anti-corruption enforcement. Further, limitations of the powers of the State Lokayukta to act suo moto,  limits their ability to effectively initiate action against public officials.

So what can we employ as preventive mechanisms to help curb corruption?

  • Draw up a comprehensive code of conduct and ensure strict enforcement of the code communicating zero tolerance towards corruption.
  • A structured whistle blowing mechanism to report potential bribery / corruption issues.
  • A comprehensive and periodic risk assessment mechanism, including third party audits with specific  reference to corruption related risks.
  • A regular monitoring mechanism to address issues arising out of bribery/ corruption.

Additionally, social control like building an ethical culture in the organisation is one of the best ways to prevent any form of unethical practice including bribery and corruption.

Social controls would primarily include the following:

  • Adequate training for employees giving illustrations of unacceptable practices.
  • Strong communication mechanisms enabling bottom to top feedback/ concerns
  • Promoting an ethical culture within the organisation.

Against the backdrop of dramatic economic growth, an awakening democracy and strong civil society campaigns are helping people sit up and take note of the winds of change. Now that momentum has been achieved, it is critical that we maintain it and speak out against practises that stand in the way of true progress. Unless we take the issue of corruption head on and address it locally in our spheres of influence, freedom from corruption will stay just a beautiful, distant pipe dream.


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