Auditors & Anti-corruptionBy: Gholamhossein DavaniMember of High Council of Iranian Association of Certified(Public Accoun...
Chairman, Presidents, ladies andgentlemen. Good afternoon. It is agreat pleasure to be here in Istanbulin the to address t...
Your honor,  Just now sitting at the patio with your honorable sibling and having a bite of board with  her honor, I was i...
Definition of Corruption •• The term "corruption" comes from Latin "romper" which means "to breakor violate", i.e. , in co...
Types of Corruption Administrative corruption (Bureaucracy) Bribe (Main essence of financial corruption): bribe, gratuity,...
Factors effecting on forming of corruption•The role of state and governmental instruments•The nature of societys political...
Financial corruption forming basesIncorrect common law and administrative customsThe income and revenue levels of the gove...
The roots of financial corruption                                        Shadow Economy                                   ...
The volume of shadow Economy in various countries per GDP                               USA %10- %33                      ...
)Income combination of criminal capitalism (financial corruptionHuman traffic and prostitution)credit cards (mostly in Hon...
Main players of the underground economy    Rent- Seeking financial – economic foundations and institutions    Big credit n...
Characteristics and special features of financial and administrative corruption                    A long- term and perman...
The choices of financial corruptionBribery, Kick back, Extortion, Protection or Security Money, BaksheeshCommercial arrang...
Social- economic effects of financial corruptionCorruption annihilates the economic security which is the precondition for...
Unofficial statistics of financial corruption in Iran            Yearly volume of smuggling from $3b to $5               Y...
" Developing effects of good governance "Anti- corruption                  Financial burden of legislation is very low    ...
International background of anti- corruption act Palermo conference                                 Palermo Conference1. A...
International Anti-corruption conferences1- The United states of America 19992- The Netherlands (la Hague) 20013- South Ko...
Responsible persons and Institutes in                      Anti- corruption campaign according to                   the EU...
Corrupted financial resources basisBanking activities particularly in international banks, because it is hard to control a...
)The means and methods of preventing economic crimes (financial corruption                      Penal and juridical rules ...
Fundamental obstacles of anti- corruption in Iran         Lack of a specific governing system in exercising the government...
Auditors Responsibilities                                                                                                 ...
Corruption Effects from Auditors point of view   Any type of financial corruption will affect financial statements somehow...
Effective factors in financial corruption from Auditors point of                                view                Absenc...
Methods of Fighting against financial                         corruption                     To strengthen the political w...
Auditors duties in fighting against financial                                        corruptionTo inspect and control the ...
Examples of Fighting against financial corruption in financial statementsReceivable accounts unexpected decrease through c...
)Auditors Temporary Guidebook (ICEAW Press    A criminal act is such an act that in case of occurrence in Great Britain is...
Financial corruption in big companies of the world during last three years                Enron (Arthur Anderson- AA)     ...
Big financial corruption in Iran$)Saderat Bank (Hadad & Rafighdost Case) (1.2 b            .Gilan Pocket Listed Co        ...
Sources•The recognition of financial corruption event (2nd volume), Nashr-e Jahad press•Good Governance and Development, I...
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Auditors againest corruption english

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Auditors againest corruption english

  1. 1. Auditors & Anti-corruptionBy: Gholamhossein DavaniMember of High Council of Iranian Association of Certified(Public Accountants (IACPACFE,IMA, AAA, BAA, EAA, IIA, FMA, AFA, CAAAAACF 4th.Annual International Accounting ConferenceNovember 2007 Istanbul 2007 15-17 1
  2. 2. Chairman, Presidents, ladies andgentlemen. Good afternoon. It is agreat pleasure to be here in Istanbulin the to address theAACF4th.Annual InternationalAccounting Conference.Thank you for your kind invitation 2
  3. 3. Your honor, Just now sitting at the patio with your honorable sibling and having a bite of board with her honor, I was informed that your honor has prattled and reappointed price Movasegholdoleh, governor of Qom, formerly deposed due to bribery and buying off. I had him sent to Tehran under guard, so that your Majesty will understand that one can not rule a country on his aunt’ prescriptions. Forgive me for being over impertinent, Taghi Amir Kabir’s (Then Prime minister) letter to King Naseraldin ShahJust as one can not let go of the taste of honey or poison on the tip of his tongue, agovernmental agent dealing with governmental budget, can not avoid tasting atleast a little of the King’s wealth.Kaochila ertashsetra,Indian edifications, first decade Annone Domini 3
  4. 4. Definition of Corruption •• The term "corruption" comes from Latin "romper" which means "to breakor violate", i.e. , in corruption something breaks or violates which might be amoral or legal norm, or even administrative regulations.• corruption as a phenomenon raised from public and private sectors interestcoincidence, is the result of profiteering behavior of those who act on behalf ofpublic sector or enjoy the fruits of governmental powers and authorities, andtake advantage of them for personal, familial or other purposes to gain whetherpolitical or economic opportunities.• In other words, financial corruption is misusing or abusing the governmental(public) power, property, authority and post for securing the interests of aparticular person, group, party, tribe or caste.Definition 1: Violating (or breaking) the existing rules or regulations for securingpersonal interestsDefinition 2: Illegal reward paid in order to making one to offend against his/her duty(Webster Dictionary)Definition 3: Corruption, to abuse governmental power in order to securing personalinterests (World Bank) 4
  5. 5. Types of Corruption Administrative corruption (Bureaucracy) Bribe (Main essence of financial corruption): bribe, gratuity, remuneration,fees of pandering to the evil designs of others, tip, hush money, present Embezzlement:To withdraw or abuse the governmental (public) properties by those who areresponsible for managing and keeping them (breach of trust)Rent seekingCorruption in transactions and contracts (commission)FraudPolitical comptionPolitical corruption of senior authorities of the governmentCorruption arising from policy makingsStranding Favoritism (a type of embezzlement)DiscriminationNepotismCronyismPatronageExtortion 5Protection or security money
  6. 6. Factors effecting on forming of corruption•The role of state and governmental instruments•The nature of societys political system•Judiciary and supervisory system•Special social characteristics of any country•Governmental rules and regulations, privileges and authorities•Special characteristics of tax system•Policies and decisions pertaining to national and public expenditures 6
  7. 7. Financial corruption forming basesIncorrect common law and administrative customsThe income and revenue levels of the governments employeesThe weakness of judiciary and supervisory systemThe weakness of intra-organizational supervisory sectionsNon – transparent rules and regulationsLack of a proper social security systemLack of job security for governments employees 7
  8. 8. The roots of financial corruption Shadow Economy Under ground Economy Smuggling Drug smuggling Goods smuggling Human TrafficShadow Economy consists of a set of economic activities, whether in production or servicesectors, which try to gain more out of prescribed framework of official economy.bribery – embezzlement of public properties by government organs and senior employees – taxevasion – nepotism – unauthorized production – black markets for unobtainable goods - foreignexchange transactions – fraud 8
  9. 9. The volume of shadow Economy in various countries per GDP USA %10- %33 Australia %4- %12 Russia %25 Germany %25 Italy %10- %33 Japan %4-%15 Britain %3-%15Today Americas foreign trade deficit is about $500b that is said without "dirtymoney", Americas foreign accounts would be entirely disabled, the livingstandards would fall off, the dollar weakens, the existing or available capitalwould impair, and Washington wouldnt be the Emperor of the world anymore! 9
  10. 10. )Income combination of criminal capitalism (financial corruptionHuman traffic and prostitution)credit cards (mostly in Hong Kong cafeteria owners activity area…)Gambling den, betting and lottery (football, boxing, horse- racing andIllegal transaction of weaponsDrugs and alcoholic drinks sale, about $120b to $300b in a year)To attend in international tenders (brokerage commissionproduce or sale the unauthorized or illegal products such as porno movies and CDsTransactions by foreign exchangeNepotism, abusing authority and office position, jobbing)To give or receive bribe (illegal commissionsOther incomes 10
  11. 11. Main players of the underground economy Rent- Seeking financial – economic foundations and institutions Big credit networks out of government control, unauthorized financial and credit institutions Non profit and the so called charity institutions Frontier market places operatorsHoarders who buy rarely found goods in advance and sell them very expensive 11
  12. 12. Characteristics and special features of financial and administrative corruption A long- term and permanent crime The profit resulting from it, outshines the countrys economy cycle too An organized crime, an organized group enjoying governmental powers )(plurality of commissaries Financial corruption is the enemy of the meritocracies system 12
  13. 13. The choices of financial corruptionBribery, Kick back, Extortion, Protection or Security Money, BaksheeshCommercial arrangements, Gratuities, Sweeteners, Pay-offs, Hush money,Greasing palmEmbezzlementAbusing administrative posts or authoritiesRent seekingSex abuse, Prostitution)Smuggling, trafficking (Goods and services, drugs, weapons, human 13
  14. 14. Social- economic effects of financial corruptionCorruption annihilates the economic security which is the precondition for any economic activityCorruption increases poverty and privationCorruption eliminates creativity, initiative, the motive of working and job creationCorruption retards or stops proceeding towards democracy and market economyCorruption brings about lawbreaking and disorderCorruption decreases the states governing role or derange it (i.e., its obligations, to execute contracts,…)Corruption eliminates the governments ability of enacting controlling and supervisory rules for improvingmarket deficienciesCorruption makes people pessimist toward the government (because they consider them as accessories)Increasing underground activities (gray and black)Deranging long term local and foreign investmentsDeviating prioritiesAnnihilating the meritocracyIncreasing the expenses of the commercial exchangesCorruption increases class distinctions severely 14
  15. 15. Unofficial statistics of financial corruption in Iran Yearly volume of smuggling from $3b to $5 Yearly capital flight about $2b to $3b Money circulation in drugs dealing, $5b Yearly volume of embezzlement in banking network and big public (governmental) companies, $1bThe commission of governments foreign purchases is estimated about 1 to 3 percent of total imported goods According to a non-governmental estimation, 20 to 25 percent of agricultural sectors yearly credit is provided by market Brain drain (as the greatest social wealth) 15
  16. 16. " Developing effects of good governance "Anti- corruption Financial burden of legislation is very low Hope for living is high and infants death rate is very lowThe right of expressing opinions (liberty of speech) and full responsibility system High rate of literacy and the rule of law More investments (Social- economic security) High rate of employment and low rate of joblessness Class distinctions, and number and rate of the poor will become less Better allocation of public expenditures and tax revenues increasing More civil rights for citizens Liberty of the press is the basis of responsibility system 16
  17. 17. International background of anti- corruption act Palermo conference Palermo Conference1. Any contracting state will adopt legislative and other measures which are necessary to treat the following actions as felonious crimes when they are accomplished deliberately:a) Any promise, offer or an unjust benefit giving directly or indirectly to a public services official for him/ her, or another person or institution in order to make him/her to do or avoid of doing a specific job.b) Any request or acceptance of an unjust benefit, directly or indirectly, by a public services official or another person or institution in order to make him/her to do or avoid of doing a specific job.2. Any of the contracting parties will consider all above – mentioned measures in order to treat financial corruption and other types and forms of it as felonious crime.3. Any contracting state will adopt necessary measures in order to treat participation and partnership in financial corruption as a crime.4. According to paragraph 1 of this article and article 9 of this convention, "public services official" is one who fulfils a public job or obligation. 17
  18. 18. International Anti-corruption conferences1- The United states of America 19992- The Netherlands (la Hague) 20013- South Korea (seol) 20034- Brazil 2005 18
  19. 19. Responsible persons and Institutes in Anti- corruption campaign according to the EU Operation Program RecommendationState authorities, members of parliament and people who have an influence on elections )Persons be in charge of the legal professions (Judiciary Self –employed persons such as merchants Journalists Auditors 19
  20. 20. Corrupted financial resources basisBanking activities particularly in international banks, because it is hard to control and supervise them. Cooperation of some bankers with money laundering, easily makes financial corruption possible. Funds and institutes which grant interest free loans and their activities and operations are parallel to operations of regular banking system. Futures markets in which brokers buy-sell shares, bonds,… Artworks and antiques – attending in unofficial sectors of economy such as precious metals and oil transactions. Free trade zones that are free of control- tax haven areas. Religious centers with economic activities, charity institutions and the like, particular foundations and cooperative funds. Money changing gives a suitable chance for money laundering. 20
  21. 21. )The means and methods of preventing economic crimes (financial corruption Penal and juridical rules amendmentGovernments authority should by employed in such a way that reduces the incentive of corruption agents through using proper tax and financial mechanisms Proper mechanisms should be created for money and capital markets in order to establish high supervision To control financial – administrative corruption in public sector To develop auditing and financial supervision sector in order to economic transparency and preventing tax evasion 21
  22. 22. Fundamental obstacles of anti- corruption in Iran Lack of a specific governing system in exercising the governments sovereignty Lack of harmonious management among the three sectors of the state To change financial corruption into a political case and to protect offenders politically Not to pay attention to preventive solutions and limit the campaign to occasional juridical encounter Financial corruption occurrence in the worlds big companies during past 3 years Disagreement of offenders, losers, simpletons and spiteful persons Penetration of corrupt persons into the anti- corruption campaign, spreading of "nepotism" in administrative – financial – political system of the country"Oiling the wheel" Idea, some believe that the corruption is needed to such an extent that prepares the means of livelihood, this idea related to the activists, inspires its concept from southern east Asian countries The idea that believes anti- corruption brings about insecurity and capital flight 22
  23. 23. Auditors Responsibilities Professional Social Responsibility Legal Responsibility Responsibility Imperfect execution of- Social welfare - Commercial code: articles 144 to contracts or agreements 156 & 117 to 129- To protect shareholders rights equally Errors: make mistakes in financial - Direct Taxes Act: article 272 statements and accounting records- Imaginary or false benefits - General Accounts Act: article 132 Irregularities: to make intentional- Feigned transactions alterations in financial statements- Since tax, as an income source for the state - Other Related Acts which is often accompanied byshould be distributed fairly, in this connection an forgery in accounting recordsauditor has both legal and social responsibilities Science / Intention: To deceive or cheat intentionally Negligence: To offend against duties Gross negligence: be completely careless towards responsibilities Fraud: To alter an important fact, mendacity, to present false information in order to cause to sustain a loss to others Constructive fraud: To be careless in performing important tasks, to pretend doing important job and seduce the others, contrary to "fraud", one know nothing about alteration in financial statements 23
  24. 24. Corruption Effects from Auditors point of view Any type of financial corruption will affect financial statements somehowContrary to money laundering, financial corruption will affect one of the balance ) sheet or profit and loss statement items (financial auditing Financial corruption leads to incorrect evaluation of companies activities Financial corruption makes it difficult to distinguish taxable income correctly )(tax auditing Financial corruption damages the rights of some shareholders in favor of some other shave holders Financial corruption violates some citizens, social rights )auditors social responsibility ( Financial corruption can alter the auditors independency too 24
  25. 25. Effective factors in financial corruption from Auditors point of view Absence of experienced and truthful employees Excessive tendency to use cash in dealings Institutionalization of corruption and embezzlement in various parts of the state Lack of a proper auditing system guaranteed to be executed Absence of outstanding economic inspectors to control supervise the system in appointing states senior officialsNot to guaranty the delivery of financial papers and statements by all commercial units 25
  26. 26. Methods of Fighting against financial corruption To strengthen the political will To concentrate on the methods of preventing financial corruptionParticipation of people and civil organizations in fighting against corruption Concentration on permanent trainingC = M + D + A corruption = (Monopoly + Despotism +Accountability) 26
  27. 27. Auditors duties in fighting against financial corruptionTo inspect and control the doubtful dealsTo detect and recognize the deals targeting to bribe government officialsParticular applicable trainings for fighting against financial corruptionTo detect unlawful payments To consider and check the suspicious peoples employing relations who might be paidregularly but have no responsibility and duty in a company and offer no service, to checkthe counselors employment contracts 27
  28. 28. Examples of Fighting against financial corruption in financial statementsReceivable accounts unexpected decrease through claims remained unpaid and to receive claims out of financial statementsTo receive unreal invoices (over invoice) and to draw money out of the company, and collusion of officials with vendors To use trickery in tendersTo adjust the contract price during operating or after completing the project so much so that the new price exceeds thesecond bidders priceTo buy goods in a price more expensive than market price, to sell goods and services in a price cheaper than marketprice, to hand companys financial resources and properties over to othersTo pay money to people or institutions that do not work for the company To buy shares in high prices and sell them in low prices or vice versaTo assign the license of goods selling or sole agency to particular persons 28
  29. 29. )Auditors Temporary Guidebook (ICEAW Press A criminal act is such an act that in case of occurrence in Great Britain is considered as a crimeTo avoid hesitation, criminal wealth includes the following:Revenues resulting from tax evasionRevenues resulting from a cartels operationsRevenues resulting from corruption and briberyRevenues resulting from negligence 29
  30. 30. Financial corruption in big companies of the world during last three years Enron (Arthur Anderson- AA) WorldCom (AA) 2002 Parmalat (Grant Thornton- GT)- Deloitte US Tax Shelters (KPMG) Equitable (E&Y) Shell Oil Co. (KPMG & PWC) Refco. (KPMG) Xerox (PWC) AIG Group. (PWC) EOL Times Warner White collar crime Tyco 30
  31. 31. Big financial corruption in Iran$)Saderat Bank (Hadad & Rafighdost Case) (1.2 b .Gilan Pocket Listed Co .Arj corporation listed Co Manna constructive company Shaharam Jazziery case Non profitable (interest free) funds 31
  32. 32. Sources•The recognition of financial corruption event (2nd volume), Nashr-e Jahad press•Good Governance and Development, Islamic consultative Assemblys Research center•Auditors social Responsibilities, Economy finance & Magazine, Gholamhossein Davani•The collection of "Tarjoman- e Eghtesadi" Magazines•Internet Data center on "corruption"; Independent commission against corruption•site: www.icac.new.gov.an•The International Transparency site•Miscellaneous Articles about financial – political corruption published in Iranian Magazine•International organized crimes in Palermo convention and its Effects, Legal Magazine, No.29, Autumn 2003IMA= American Institute of Management Accountants AFA= American Finance AssociationAAA= American Accounting Association CAAA= Canadian Academic Accounting AssociationBAA= British Accounting Association AAFM= American Academy of Financial ManagementEAA= European Accounting Association IICA= Iranian Institute of Certified AccountantsIIA= Institute of Internal Auditors IACPA= Iranian Association of Certified Public AccountantsFMA= Financial Management Association 32

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