Corruption is a cousin to fraud but includes conflict of interest, bribery, kickbacks, nepotism, trading in influence and bid–rigging. Nostalgically we see how way back in 2000, the global community faced a string of scandals – starting with Enron and later on the dot-com collapse which dwarfed the gravity of the sub-prime banking crisis and the notorious Madoff Ponzi scheme scandals. At this juncture, it is opportune to discuss how and why fraud and corruption persists, why it happens and how it manifests itself in various scenarios.
By definition fraud can be better described as deception or misrepresentation committed by an individual or entity in the knowledge that such misrepresentation could result in some unauthorised benefit to the individual or to the entity or some other third party. This definition therefore excludes errors or misconceptions on accounting estimates. Corruption is a cousin to fraud but takes a broader perspective and includes conflict of interest, bribery, kickbacks, nepotism, trading in influence and bid–rigging.
At this stage one could cite the famous fraud triangle depicted by the late Donald R Cressey, a criminologist who specialised in this fraud deduction. Dr Cressey said three factors are typically present when a fraud occurs: rationalisation, opportunity and pressure. To start with rationalisation as one of the three attributes, the fraud triangle is the intention to cover one’s abusive attitudes by wilful justification. Secondly we have “pressure” a symptom closely tied to today’s deep recessionary environment which can easily influence management. Finally, we have “opportunity” which simply explained can be attributed to such situations where fraud can be perpetrated due to lack of organisational controls and security.
In business this is usually associated with a domineering manager who over-rides internal controls to boost profits manipulates inventory balances at year-end simply by allowing a lax control over those responsible in conducting physical counts. Rationalisation means that a common attitude persists in the entity that no one will miss the embezzled funds, particularly in larger environments. Then there’s Japan’s biggest corporate scandal that centres around the stark revelation of a huge accounting scam in Toshiba – the effect of which has led to the restatement of earnings plus a board overhaul and potentially hefty fines from Japan’ s regulatory bodies.
Toshiba enjoys an excellent reputation being one of the world’s top computers-to-nuclear conglomerate and recently reported that its boss has resigned over a staggering £780m accounting scandal. The news of the improper accounting, stretching back to 2008, apparently was intentional and in the opinion of experts it would have been difficult for auditors to detect. It may come as a surprise to many that Toshiba has not been able to close its books for that year, and as a result was forced to cancel its annual dividend.
A shocking report drawn by the Tokyo Stock Exchange reveals how Toshiba president and chief executive Hisao Tanaka and his predecessor, vice chairman Norio Sasaki, were aware of the overstatement of profits and associated move to delay reporting losses in a perverse corporate culture. Observers comment that the discovery of an overstatement in profits marked roughly three times Toshiba ‘s own initial estimate. Both Tanaka and Sasaki had set operating superlative profit targets that the heads of divisions were required to meet, applying pressure by hinting at withdrawing from areas that underperformed.
As can be expected in a company where a dominant boss cannot be questioned the surprise revelation about cooked books of accounts came as a bolt in the blue. The revelations have shaken confidence on Toshiba – one of the stalwarts of industry and Japan’s 10th biggest company by assets and market value. Regrettably, its stock price cascaded by 26% since the scandal surfaced. Readers may feel snug saying that such massive scandals sound sensational in foreign media yet placate themselves that our own squeakily clean business community is immune from acute scandals. In other words, it does not happen in our backyard. Perhaps this is true given the limitations in size and the modest complexities of our business sector lead to closer surveillance by the financial regulator.
Be that as it may, we are not immune from financial peccadilloes lurking under the surface, for example stop and reflect how the incidence of financial fraud/corruption has been uncovered after a disclosure in 2012 by Malta Today which alleged kickbacks paid in Enemalta since 2004 in the oil procurement division. A well known businessman (who happens to be the cousin of the ex-Energy minister) resigned as president of the Malta Chamber of Commerce, after having been called in for questioning by police to answer for his previous role as Chairman of Enemalta while seven other individuals are currently under investigation on alleged kickbacks and their assets frozen pending the outcome of their indictment.
A rogue trader – the local agent of Trafigura – involved in oil procurement was granted a Presidential pardon by the previous administration on condition he reveals details of the scam. Inter alia, he revealed deficiencies in the way selection was carried out on bids (these amount to around €400 million annually) and how no written minutes were kept. The story of alleged sleaze proceeded with more revelations discovered during an investigation ordered to be conducted by NAO by the Public Accounts Committee during the years 2008 to 2011. Furthermore, one recalls how a journalist at the Times of Malta commented about Island Oil Bunkers Ltd, a local company providing oil storage facilities which has been reporting massive losses between 2003 and 2011 in spite of its staggering turnover of US$1,300 million.
Strangely all audit reports are clean and unqualified. Ironically, beyond partisan politics, there has been an urge by the public to know more about effective regulation after MP Kristy Debono – shadow minister for financial services accused a major bank in Parliament of malpractices in its banking procedures. Panama Papers has revealed over 700 cases of local names tarred with potential tax avoidance sporting bank accounts opened and maintained in tax havens by principals of top law firms and senior partners of Big Four audit firms.
The Opposition ruffled no feathers as such intermediaries happen to be members of a coterie which guided the financial services authorities since its infancy. To conclude fraud and its cousin corruption is contagious and the onus falls squarely on managers/political masters to detect and eradicate it. On the local scene, it is good to hear that MFSA as the sole financial regulator has appointed a German consultant to investigate its internal operations and conduct a business process re-engineering exercise. This is not a moment too soon recalling the collapse of LaVallette Property fund, the sudden news of Nemea bank going under administration and failure of a number of fund operators leaving many unpaid investors.
The fight against fraud/corruption continues unabated … it is a journey that never ends – just ask Caravaggio the Renaissance artist who painted the famous picture of three poker players, one of whom sports hidden Ace cards up his sleeve ready to cheat his peers.