Archive for December, 2010

Corruption and NGOs

Wednesday, December 1st, 2010

The Chief Accountant of one of our clients encouraged us to think a bit about corruption and NGOs, and what can be done against corruption in this field. In particular, he asked whether personal rotation would be a good tool to prevent corruption. This was a very good suggestion, and we would like to take this opportunity to explore this idea a bit further.

If we talk about NGOs and corruption, I would like to make one thing clear: I do not think that it makes a lot of sense to talk about bribes given by NGOs, and I have no experience with NGOs taking bribes. However, I think it makes sense to talk about a thing that I would call “creeping collective corruption.”

If you look at this pair of words “Corruption and NGOs”, you have a problem with the definitions: there are so many different kinds of NGOs: Churches, political parties, trade unions, football clubs, national Olympic committees, universities, hospitals, charities, country clubs, lobbying groups. They are all “non governmental” – but will they all be “non-corruptive”? Of course not. Probably, some of them are even founded to influence the decisions of officials or to be influenced in the one way or another.

Case A: Bribe given by an NGO

Imagine that you are the director of an NGO and you would like to have a work permit for a volunteer from another country: let´s say, young Ms. Frisby wants to work in your country as a nurse. And let´s imagine that she pays for the travel and for living. The immigration office of your country makes trouble: Does Ms. Frisby occupy a work place that would otherwise be granted to a local? Of course, this is all rubbish. In order to make the process easier, the immigration officer receives every year a box of chocolates. Is this a bribe? Yes. Is it bad for the organisation? No. Is this a reportable condition in the audit report? Okay, you can blame me for that, but I would say: no, it isn’t.

Case B: Kick-back

Some people tried to define corruption as “taking an advantage for yourself, which is of disadvantage for the organization”. In this definition, all kick-backs would be included. In German, there is the nice word “Vorteilsnahme” for this – well, you take an advantage! There are examples galore: the director of an NGO paid high amounts of “banking fees” to an influential bank director who in turn financed the NGOs director´s individual political career. The director of another NGO managed to pay extraordinarily high amounts for a “special software”. In fact, the software could be bought for USD 50. The director of yet another NGO managed to buy several cars, which were then written off. The cars were used by his relatives. Were these deals good deals for the directors? Yes. Were they good for the organsation? No.

Case C: Creeping collective corruption

But, wait! Many social organisations develop a style of work over the years that could be called “full social services to our employees”. These organisations start very modest, but over the years they become fat. Let us take a child care institution. The employees may eat in the corporative public kitchen: they receive free food. The employees can use the summer camp of the corporation: free holidays. They can live in the corporation’s own houses: free housing. In connection with their service they receive free mobile phones, free transport, daycare for their children, an additional medical insurance, an additional pension programme, tax consultations by the corporative lawyer, visa support for international travel, and even new teeth. It goes without saying that these “fat” workplaces are passed on from parents to their children as a kind of inheritance. If the organisation is already in this stage of fattening, it does now not only look after the intended beneficiaries, but even more after its own employees. Is this good for the individual employee? Yes. Is it good for the organisation? No.

Thus, in our first case, we have incorrect behavior for the benefit of the organisation. In the second case we have a fraud to the disadvantage of the organisation. In the third case we have a collective attitude that causes economic damage. I would say that the third case should be in the center of our corruption issue, when we talk about NGOs. By experience, creeping collective corruption is much more common than bribes to officials and the individual kick-back with suppliers.

For auditors, it is much more difficult to keep an open and fair mind on the creeping collective corruption. Why? Because, when auditors discover an individual fraudulent act, they are heroes. But when auditors disclose fringe benefits to the board, they are the ugly guys. I think you understand this. Think for a moment that you are an auditor, and you enter a room where twenty employees are waiting for you, and they know that you have taken away from them the nice villa at the seaside that they have used for the last ten years. Now, you can imagine them staring and baring their teeth…

What can be done against creeping collective corruption?

Okay, we are auditors, and that is why we probably believe that the best measure against corruption is to order an annual audit. But here is a tricky thing: Who is ordering the audit? In cases where management is the ordering party, there will be difficulties to disclose excessive fringe benefits to them. To make this clear: my problem here is not a fraudulently received fringe benefit. The fraudulently received fringe benefit is, of course, a reportable condition in the audit report. And this must be reported, even if management would threaten to withhold the audit fee payment. My problem is more the hidden and accumulated excessive fringe benefits. Usually, it works like this : in 1992, there was an earthquake in country X, and some of the employees lost their relatives. There was a decision to pay an additional bonus to earthquake victims. The decision was filed – and then forgotten about. Even 18 years later, the victims still receive this emergency help. Other employees do not bring this to the top management’s attention, because they want to show “solidarity” .

Sad to say, these kind of hidden fringe benefits are more common in the non-profit world than in the profit world. Why? Because, in profit organisations, you have always the x-ray view of the owner, who does not like that others eat his profit. And this effect is unfortunately missing in NGOs.

What could be done? You can introduce a lot of sophisticated internal control tools in order to compensate this disadvantage. However, these tools only work, if there is at least one person or better a group of persons who want to use these internal control tools in the sense of the mission. If these persons are missing, you can forget all technical tools.

Because of this, a board or audit committee is so important. The best thing is, if these persons in the board or audit committee have financial skills and have enough private resources in order to serve without financial compensation. I would recommend that auditors should report to these persons directly. Lynda M. Dennis recommended in her lecture “Fraud in the Governmental and Not-For-Profit Environments – what a Steal!” (AICPA 2007) that audit committees would be an excellent tool against fraud.

In fact, the reality is far away from this ideal. Board members who work as volunteers rarely show an interest in financial figures. If they showed an interest, then they would need auditors that could explain complex problems in plain language, that do not exaggerate and that have experience with NGO-typical problems. This is also rare.

Is job rotation a good tool against creeping collective fraud? Yes and no. Of course, there is this effect that an old practice is checked in case a new employee shows up. Also, these “fattening” effects are eased when employees are sometimes fired, and new employees are hired. However, a rotation inside the organisation can make the CCC-problem more serious. For organisation-wide rotations, regulations are necessary. There must be incentives to rotate – and these incentives automatically add up to additional fringe benefits. Let me just mention daily allowances and travel regulations of international organisations, and I think you know what I mean. I think no auditor of the world can stop the metastatic growth of regulation in the field of travel allowances for rotating staff.

And now I would like to tell you a secret. You already know my opinion, what would be the best tool against “CCC” – creeping collective corruption. This is – of course – the auditor. But what is the best tool of managers against auditors? Here it is: the best thing that management could do is to email the confidential draft management letter of the auditors to each and every employee in the organisation. You can be sure: Auditors will never return. Nice thing, isn´t it? This is a nice thing to think about: how “transparency” can be used to make things opaque. But this would already be the subject of another article