Corruption Indicators in Internal Audit

Corruption Indicators in Internal Audit

Purpose

Corruption is often a significant risk to organisations in the public and private sectors and non-government organisations (NGOs). It is a threat not just to revenue, assets and resources, but may be a substantial threat to brand or reputation and additionally result in significant penalties and political consequences.

Background

The negative consequences of corruption have been well documented. For example: “Corruption is an insidious plague that has a wide range of corrosive effects on societies. It undermines democracy and the rule of law, leads to violations of human rights, distorts markets, erodes the quality of life and allows organized crime, terrorism and other threats to human security to flourish.(1)”

The perception of corruption is significant in Australia, for example more than a third of respondents said they were discouraged from seeking a government contract because of corruption.

Internal auditors may be involved in many activities where corruption is an issue, including detecting corruption, evaluating systems where corruption a threat, recommending enhancements in internal controls to protect against corruption and investigating instances of suspected corruption. In all of these activities it is useful to be aware of indicators of corrupt activity.

Most definitions of corruption focus on the abuse of office for personal gain. This paper uses this definition. However it is not used purely for public sector agency or activities as many private sector organisations and NGOs are subject to similar corruption. Examples of corruption include misuse of position in the issue of loans or debt forgiveness in banks, the payment of claims in insurance companies, the level of discounts in retail companies, procurement decisions in all entities and granting of licences or permits by all levels of government.

There are many kinds of corruption. This paper focuses only on indicators of corruption involving the official1 granting something to the entity2 concerned. This could include a contract, an approval, the disposal of valuable resources or assets, a purchase, or the exercise of a discretion to favour the entity

Corruption is inherently difficult to detect because it is invariably intentionally hidden. It is, unfortunately, often not detected by internal control processes or audits

This paper is presented to better enable those working with internal controls, probity activities and auditing to detect instances of corruption involving officials improperly granting something to an entity.

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