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Paper on Nature and Magnitude of corruption prepared jointly by the Royal Audit Auth

  1/26/2014

Detection of Fraud and Corruption

Most audits are conducted on a test basis using audit sampling and other techniques. To carry out 100% checking of all transactions would be an  expensive proposition and meaningless as it would still not be possible to  derive  complete assurance and satisfaction on the existence and detection of fraud and corruption. Most corruption cases that are serious  in nature often take place out side the records e.g. Bribery, commission, kickbacks,  etc. It is also difficult to detect systematic frauds. Authorities normally succeed in detecting some of the fraud and corruption cases through in-depth investigations that would require;
•            Detailed scrutiny of accounts, records  and operations
•            Unrestricted access to information
•            Unrestricted scope of examination
•            Investigations and interviews and obtaining written statements
•            Analysis and comparisons
•            Individuals wealth assessment and inquiring as to the sources
•            Gathering information from out side sources
Since both the Royal Audit Authority and the Division of Revenue and Custom primarily depend on the accounting records for their audit exercise, the cases of corruption noted do not give indication of extent and magnitude of corruption. Thus it would not be appropriate to draw conclusion from the observed cases. It is, however, evident that corruption in some form or other do exist in our society.
 

Areas prone to Fraud and Corruption

It is generally understood that certain areas are more prone to corruption than others. The following areas are considered to be more prone to fraud and corruption:
•                  Procurements
•                  Construction works
•                  Stores / equipment
•                  Revenue receipts and cash collections / handling
•                  Filing of tax returns i.e., incidence of under declaration of income, inflated expenditure etc.
•                  Assessment of taxes and duties
•                  Commission on Sales : Usually documentation is not adequate
 

Environment Conductive to corruption  -  A Global Overview 

There is no doubt that the single most important reason for perpetrating fraud and corruption is the presence of greed. This also encourages unhealthy and unethical competition particularly amongst those conscious of gaining status. International Organization of Supreme Audit institutions (INTOSAI) and Other Auditing bodies generally agree that one or more of the following factors provide favourable environment for perpetrating fraud and corruption:      
•            In adequate/ non existent  rules and regulations
•            Weak systems and procedures
•            Non enforcement of rules and regulations
•            Weak administration
•            Narrow tax base -  Not covering income from many sources under scope of taxation
•            Too low salaries and wages and higher inflation
•            Rapid developmental activities and changing habits of people (Becoming Materialistic)
•            loop  holes in the rules
•            Nepotism and discrimination
•            Lack of incentives/ recognition
•            Heavy taxes and duties
•            Wrong / inappropriate policies and directives
•            Wrong incentives to enforcing authorities
•            Over concentration of power
•            Protective environment for those involved in corruption
•            Weak and corrupt judiciary system
•            Rapid computerization without establishing appropriate controls
•            Privatization of industries without establishing appropriate legal frame work
•            Weak media
•            Inefficient / unqualified human resource
•            Retention of employees in the same place and post for too long
•            Inaction on the reported cases
•            Ineffective/untimely auditing
•            Lack of due vigilance and public awareness
 

Magnitude of Fraud and Corruption

As already mentioned it is not possible to quantify the magnitude of corruption. Cases of fraud and corruption often reported, including those providing indication there of, includes:

I.  Bribery and Extortion

•            Extending/availing  undue favours
•            Presentation of Gifts of large amounts
                        

II.  Fraud, Embezzlement and Irregular payments

•            Forgery of documents
•            Misuse of funds and properties
•            Pilferage of stores
•            Inclusion of dummy workers in Muster Rolls
•            Double claims
•            Intentional Irregular claims and payments
•            Concealment of information
          

III.      Procurement and construction works related corruption

•            Direct procurements/ award of works from/ to some preferred suppliers/contractors
•            Preferring a bidder without valid justification(s)
•            Accepting a non responsive bid
•            Non enforcing contractual terms
•            Accepting defective, inferior and unspecified items
•            Paying at higher rates than the agreed rates
•            Incorporating terms and conditions prejudicial to the interest of procuring agencies
•            Payment of unjustified escalation, freight, insurance claims etc.
•            Extending undue favour to suppliers/ contractors i.e. unauthorized advances, non recovery of security money, non recovery of advances in time etc.
•            Non  processing and passing of bills in time without any reasons
•            Indication of undue harassment to contractors for insignificant issues
•            Disparities in enforcing contract terms
•            Payments made for works not executed/ materials not received   
•            Procurements at exorbitant rates from private/ unauthorizedsources
•            Payments made without any valid documents
•            Additional payments by showing excess measurements
•            Deliberately under estimating quantities of works and paying at higher rates for quantities beyond deviation limit
•            Non/short accountal of items procured
•            Procurement of excessive materials/supplies
•            Not inquiring into rates to be charged by the sub vendors and
•            paying at higher rates to the main vendors
•            Unjustified payment of compensation/recommending such payments
                       

IV       Misappropriation of public resources

•            Unauthorized diversion of funds
•            Payment/withdrawal of unauthorized /excessive advances
•            Retention of excessive cash in hand
•            Non/short accountal of revenue
•            Non/short deposit/remittances of revenue
•            Abnormal delays in accountal/deposit of revenue
•            Unauthorized issue of stores for private purposes
•            Non raising of bills for supplies/hiring charges to favour individuals
•            Non deduction of house rent from employees occupying Government accommodation

V        Abuse of Public Office and Nepotism

•            Use of facilities for personal purposes
•            Requiring public office to pay expenses of private nature
•            Awarding supply orders / contracts to relatives
•            Paying for self and relatives in preference to others
•            Granting discounts/write off to favoured ones
•            Using daily wages workers etc. for domestic purposes/personal works
•            Sanctioning loans without proper scrutiny and appraisal
                                   

VI       Over/Under invoicing

•            Over invoicing sales to inflate sales to depict better results
•            Over invoicing to share the difference
•            Under invoicing to share the difference
 

Recommendations

Existence of a proper system of check and balance reduces the risks of wrong doings and chances of indulging in fraud and corruption. Strong internal controls, proper rules and regulations, motivated employees, a rational taxation structure etc. tend to act as deterrent against perpetuating fraud and corruption. We are offering some suggestions and recommendations in controlling fraud and corruption for deliberations with the hope that more realistic recommendations will emerge from it.
•            Establishment of Adequate Regulatory Framework
•            Formulation of appropriate rules and regulations clearly stipulating punitive measures      
•            Professional development programmers for accountants, auditors, tax-officials and administrators
•            Establishment of anti corruption Agency
•            Further strengthening legal System
•            Widening Tax Base
•            Power of Back Duty Investigations
•            Index linked Salaries of civil servants and others
•            Protection of salaries at least in monetary terms
•            Periodic transfers of employees
•            Rotation of duties
•            Appropriate representations on the Boards/ Committees avoiding conflicting decisions
•            Appropriate reward and incentive schemes- not necessarily directly linked to individual act of performance
•            Establishment of appropriate bodies to review reports on fraud and corruption
•            Rules and regulations to be developed with positive frame of mind. They should be perceived to be facilitating and not be seen as too prohibitive and restrictive.
•            A progressive and liberalized economic policy
•            Promoting self regulations of enterprises and greater accountability
•            Dissemination of information and creating awareness
•            Commissioning independent inquiries on large procurements and construction contracts by appropriate authorities
•            Establishment of independent quality control units to inspect quality of works, materials and equipment
•            Strengthening BCCI to look into grievances of business communities and offer business counseling / advise
•            A definitive and clear policy guidelines on privatization including post privatization commitments of corporations and role of government
•            Formulation of Unfair Trade Practices Act
•            Strengthening internal controls in the organizations
•            Introducing internal audits
•            Rules / laws with wider implication to be discussed and scrutinized at different levels before approval for their general acceptance and removing inconsistencies
•            Publicity and greater transparency
•            Adequate enforcement and monitoring by law enforcing bodies
•            Establishment of Consumer Protection and Advisory board
•            Announcements of adequate reward schemes to informers
•            Formulation of Essential commodities Act
•            Establishment of Bhutan Standards for manufactured and imported items
•            Development of Safety regulations
•            Strengthening Tax Administration and Audit System and other Regulatory Bodies
 

Conclusions

Corruption undermines the entire administrative system and functioning of the public offices. It adversely effects the integrity and morale of the employees of the public offices including those who are responsible to enforce laws, rules and regulations. It encourages those responsible to deliberately keep loopholes in the rules. Corruption may be prevalent at any level and any where thus effecting day to day activities and causing harassment and inconveniences to the general public.
    
Detection of fraud and corruption alone is not sufficient. We must take preventive measures to control it. A proper study of causes of corruption and environment favouring it would help initiate effective remedial measures. 
     
Existence of adequate regulatory and legal framework as well as a clean and efficient civil service with high morale reduces the risk of rampant corruption in the society. A sound fiscal and monetary policy with due encouragement and incentives for investment will certainly act as deterrent against corruption.
       
Corruption weakens the economy, efficiency and effectiveness of the government systems. Rampant corruption should not be allowed to occur at any cost.


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