Civil society worldwide calls for transparency and accountability from companies on their actions against, or lack of action for, social concerns, economic variables, and environmental issues. Also included are matters on fraud and corruption. This has become even more urgent as the Covid-19 pandemic increased the opportunities for fraud around the world. Unscrupulous groups take advantage of the crisis that makes it easier to bypass and subvert the usual safeguards and risk management controls.
Trends in Corporate Governance
A paper published in March 2021 on the Forum on Corporate Governance of Harvard Law School states that global corporate governance is at a turning point, with companies evaluating their role in society. With the pandemic, companies are taking the safety of their workers and communities more seriously.
They must also take responsibility for managing climate change long-term as part of their corporate plans, complying with the U.S. government’s commitment to carbon net-zero by 2050. BlackRock CEO Larry Fink wrote to other CEOs this year, expecting them to reveal how their business plans include net-zero by 2050 and how their boards review these plans. The paper stated that all boards must be more accountable for the sustainability disclosures of their stakeholders.
There is now a proliferation of sustainability reporting and disclosure standards. Their authors intend to collaborate to come up with a comprehensive corporate reporting system. This will enable investors to compare corporate risks more easily.
According to Global Witness, it has been reporting for years on the interrelationship between corruption, human rights abuses, and environmental destruction. Corruption enables the diversion of resources, approval of destructive projects, and granting of illegal concessions that lead to the displacement of communities and human rights and environmental abuses. It benefits the rich and powerful while leaving communities to suffer the consequences.
Country Snapshots on Fraud and Corruption
Financier World states that in The United States, people expect the administration of President Joseph Biden, with the assistance of Attorney General Merrick Garland, to approach financial and corporate fraud more aggressively than the Trump administration did, and more in line with the Obama administration. This includes pandemic-related fraud. According to the Corporate Research and Investigations (CRI) Group, the Sarbanes-Oxley Act in the US sets a fine of up to five million dollars and up to 20 years in prison for falsely certifying corporate financial statements.
In South Africa, law enforcement agencies are investigating many cases of personal protective equipment (PPE) procurement fraud. Opportunistic companies and individuals took advantage of the concerted efforts of the government and the private sector to provide healthcare and lead the country in battling Covid-19.
A Case Study: The United Kingdom
The CRI Group reports that Transparency International’s (TI) 2020 Corruption Perceptions Index (CPI) scores the United Kingdom (UK) 77 out of 100 and lists it among the 25 least corrupt countries worldwide. Despite this, fraud is the most common crime in the UK, according to the Royal United Services Institute (RUSI), resulting in annual costs of £190 billion. In the past year, there has been an increase in corporate fraud and corruption cases in various industries across the country, with up to 77 percent of companies affected, as shown in an August 2020 study by the Association of Certified Fraud Examiners (ACFE).
The Department of Business, Energy, and Industrial Strategy proposes legislation to increase accountability among corporations producing falsified financial statements. It will require company directors to sign their corporation’s financial statements and to face steep fines and possible prison time if the statements are false. This has the support of the secretary of state. Also, in the next two to three years, an audit, reporting, and governance authority (ARGA) will be formed.
The CRI advises companies under investigation for corporate fraud to fully cooperate in good faith with prosecutors and regulators. They can mitigate their prosecution and penalties if they show a track record of compliance with requirements and have proper internal controls at the time of the fraud. They must, however, engage the services of corporate fraud solicitors.
The CRI further advises companies to have employees sign an ethical code of conduct and do regular and surprise audits. Companies must train employees to recognize the red flags of fraud. They must set up an anonymous whistleblower hotline or online reporting system available. The ACFE states that tips from employees are the best detection method for fraud, even better than audits. The company must conduct a full investigation on tips that they receive to show that it is a corporate priority.
Communities now insist that corporations be answerable to the global population. Corporations can no longer prioritize profit over social, economic, and environmental matters. If they do, they risk losing the support, and the business, of their markets.