Directors have key role to play in reducing fraud and corruption

Based on recent research, Association of Certified Fraud Examiners (ACFE) estimates that the typical organisation loses 5 percent of its revenue to fraud each year. In South Africa, this equates to around R160 billion. The three main categories of fraud are asset theft, corruption and misstatement of financial statements.

"Corruption and other sorts of fraud are all different aspects of the same problem—the improper use of an official position for personal gain. The direct costs are very high, as these figures show, but when one takes into account the indirect costs such as reputational damage, investigation costs, loss of business opportunities and lost efficiencies, they are even higher,” says Parmi Natesan, Executive: Centre for Corporate Governance at the Institute of Directors in Southern Africa (IoDSA). "The best defence against fraud of all kinds is corporate governance that really works, and that is the responsibility of the directors.”

Principle 1.1 of King III states that the "board should provide effective leadership based on an ethical foundation” and Principle 2.1 that the "board should act as the focal point for and custodian of corporate governance”.

Speaking at an IoDSA Corporate Governance Network (CGN)[1] event on the board’s role in combatting corruption, Chairman of the CGN and Director at PwC, Anton van Wyk reiterates that corporate governance is critical because it seeks to create a climate that is inhospitable to fraud of all types. "It’s important to acknowledge that these things feed off each other, making a company that acts corruptly more vulnerable to other sorts of fraud. For example, when employees see that the company is willing to act illegally by bribing officials, they can begin to feel it’s OK to steal equipment,” he says. "The ethics of the company have to be consistent and pervade every aspect of its business.”

This is particularly important because many companies argue that they have to participate in corrupt activities in order to do business in certain countries. But the rot cannot be contained, and such companies soon find themselves suffering from other types of fraud and also potentially losing business as their reputations are tarnished.

For that reason, one of the most important contributions that directors can make is setting the right "tone at the top”, showing in the way they conduct board meetings, and the way in which they reward or censure the executive team, that the corporate leaders stand for ethical behaviour. This is the first step in actively managing the organisation’s ethics as required by King III.

This active management means that boards have to ensure that the right structures are in place to combat fraud and corruption, and that they know who the company’s customers and suppliers are—as well as how the industry operates. Such knowledge will help boards not only understand the risks the company faces but also what is average in terms of performance. The board is then in a much better position to spot tell-tale signs of fraud or corruption. Signs might be a higher-than-average propensity to win government tenders, or a lower margin than comparable companies.

"There’s no fixed checklist of things that directors should look out for, but the better informed they are, the more likely they are to understand what the red flags are,” says van Wyk. "But the best defence, in the end, is a clear and widely accepted moral or ethical corporate identity.”