Issues Facing the Profession: The Role of Accountancy in Promoting Accountability
Institute of Certified Public Accountants of Kenya Annual Seminar, 24-26th May, 2000, Mombasa
ISSUES FACING THE PROFESSION:
THE ROLE OF ACCOUNTANCY IN
PROMOTING ACCOUNTABILITY
Presentation by John Githongo1
Capital will demand better corporate governance, with globalisation it will go to
countries with greater transparency2
ALLOW ME IF you will to start my presentation today with a short story that
you as accountants and auditors I’m sure will recognise…
IN 1958 A man called Agha Hasan Abedi registered the United Bank in
Pakistan and within 10 years, with considerable political patronage, it had become the
second largest bank in the country. In 1972 the Bank of America became a 25 percent
shareholder in United and in September that year the Bank of Credit and Commerce
International (BCCI) was launched. By 1973 BCCI operated from 19 branches in five
countries and in 1976 it moved its head office to London although it remained
incorporated in Luxembourg. By 1977, BCCI had become the world’s fastest growing
bank, operating from 146 branches in 43 countries, including 45 in the United
Kingdom. Its assets for the same period increased from US$200 million to US$2.2
billion. In the late 1970s, BCCI expanded into Africa, the far east and the Americas.
In the 1982, to manage the US$10 billion pool of cash that lay in its international
network, BCCI decided to centralize its treasury operations. However, the bank’s
excursions into the money markets were spectacularly unsuccessful and its officials
resorted to manipulations to cover trading losses. One of these techniques was to sell
large quantities of ‘options’ to purchase currency or securities at a set price at a later
date. The proceeds of these sales were shown in the books as profits. As liabilities
materialized, BCCI was forced to sell even more contracts to keep the cash flow and
profits running. The value of its outstanding contacts in 1985 was estimated to be
US$11 billion compared to US$3 billion of a leading London merchant bank which
specialized in the activity. As BCCI’s internal operations were split, it was also
possible for executives to move the accounts around and cover-up their losses3.
Director, Transparency International – Berlin, Executive Director, Transparency International –
Kenya, PO Box 23111, Lower Kabete, Nairobi, Tel/Fax/Voice: 254-2-583130, Tel: 254-2-582841, email: asri@africaonline.co.ke
1
2
Economic crime in a globalized world - Mainstream or Parasite?, Jermyn P. Brooks, Global
Managing Partner, PricewaterhouseCoopers, RIIA Conference, 14 March 2000
“Globalization” and the State-Profession Relationship: The Case of the Bank of Credit and
Commerce International, Patricia J. Arnold, University of Wisconsin-Milwaukee, USA and Prem
Sikka, University of Essex, UK.
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Issues Facing the Profession: The Role of Accountancy in Promoting Accountability
In 1987, concerned by BCCI’s extensive treasury losses, whispers of
irregularities, and the inability to find a single regulator willing to act as lender of last
resort, the Basel Committee established a “College of Regulators” from eight
countries to scrutinize BCCI’s operations. Price Waterhouse, BCCI auditors,
acknowledged that “given the banks vulnerability as a result of the absence of a lender
of last resort, and its relationship with the rest of the banking community, (BCCI
officials) believed that profitability was essential and it could not show a weak
balance sheet or poor operating results” The auditors’ perception, therefore, continued
to play a critical role in assuring the international community of the bank’s financial
integrity and solvency. External audits play a crucial role in international banking
regulation within the framework of consolidated home country supervision and all
regulators, to some extent, depend on the audit reports issued by private sector
accountancy firms auditing the financial statements issued by transnational banks.
BCCI had to submit to external financial audits. Regulators placed considerable
reliance upon audited financial statements even though they had no direct say in
auditor appointment and the auditors did not owe them any ‘duty of care’.
Patricia J. Arnold and Prem Sikka who have analysed the collapse of BCCI
and the role of auditors in the whole saga have written:
“Regulators’ reliance on external auditors is premised on the belief that the
auditors are public spirited and will act on behalf of either the public or the
state, and that auditors are independent of the management. Such propositions
are problematic (because) within auditing firms the emphasis is very firmly on
being commercial and on performing a service for the customer rather than on
being public spirited on behalf of either the public or the state. In addition,
auditors often sell non-auditing services to their audit clients and serve their
clients as counsellors and advisors whilst the state looks to them to perform
the more adversarial, quasi-regulatory function of independent auditor. In
BCCI’s case, the bank hired the Consultancy Division of its auditors Price
Waterhouse (London) to assist them in tackling losses from its treasury
operations. The consultants completed their work in 1986 and the auditors
[Price Waterhouse] reported that they were satisfied and that their
recommendations for improving Treasury controls had been implemented.”
In July 1991 BCCI was eventually shut down by the Bank of England with the
loss of billions of dollars to some 1.4 million depositors around the world. It was
discovered to have engaged in all manner of fraudulent and corrupt activities. Even
for the Coopers & Lybrand team that was brought in to untangle the whole complex
of the bank’s transactions the process required an approach that involved a team
which had qualities in forensic accounting and policing4. The whole BCCI saga
served to focus attention on the role of auditors where issues of corporate
transparency and accountability are concerned. It also served to highlight some of the
challenges facing auditing firms in this era of globalisation. It is some of these
challenges I shall dwell on and the responses that are increasingly being adopted in
regard to them internationally.
4
How accountancy sleuths cracked the BCCI code, by Jon Ashworth, Financial Times, 31/10/1994
Institute of Certified Public Accountants of Kenya Annual Seminar, 24 th-26th May, 2000,
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Issues Facing the Profession: The Role of Accountancy in Promoting Accountability
As international awareness about the pervasiveness and implications of
corruption has grown exponentially over the last decade, many groups in society have
started to indicate that they expect more of an auditor than only an opinion on the
financial statements of a company. This raises the essential problem of “auditing in its
social function. The auditor’s profession owes its existence to confidence groups have
in the contribution of auditing in the process of accountability. The signals from
society, however, show a crisis of confidence regarding the auditor’s function.” There
is clearly a developing expectation gap here5.
As an issue, globalisation presents one of the most if not the most potent
challenge to the modern accounting profession. Globalisation means that today money
has been rendered effectively stateless, it is fungible and has lost its identity. Gigantic
volumes of money can move across national borders in split seconds at the press of a
button using paperless technologies. The all vital ‘audit trail’ has almost become a
ghost. Finance is the most quickly globalising sector in the world and the regulatory
implications of this are profound. Business processes have become more complicated
and corporate structures have as well, when this is combined with the growing volume
of world trade it makes businesses inherently more difficult to control. Generally
speaking increased transaction volume and complexity makes corruption easier and
more difficult to detect. Paperless new technologies exacerbate this problem.
Many governments place considerable reliance upon regulation of major sectors
through accounting technologies. The role and influence of accounting surveillance
techniques even to manage previously non-commercialised sectors, such as health and
education, ostensibly to manage the fiscal crisis of the state has increased. The role of
the auditor, therefore, in helping increase transparency and combat corruption is more
in focus today than ever before and in an environment that is more challenging than it
has ever been. Certain realities that are sometimes overlooked present themselves:
First, auditors cannot prevent crime. They act as a deterrent in supporting the
control system. However, as the role and extent of corporate governance is evolving
and expanding, so is the role of auditing. It is evolving from the vouching of financial
transactions, to reviews of internal control, risk management, governance systems and
continuous auditing.
Second, the new environment and cases like BCCI’s have exposed the limits of
external auditing that has been so important in assessing the transparency and
accountability with which businesses are managed. Here it must be remembered that
the role of auditors in providing assurance is crucial but auditors rely heavily on the
cooperation of their clients. It is sometimes forgotten that the ultimate responsibility
for preventing, detecting and reporting things like corruption lies primarily with the
management of a company. Some argue that there is the danger of a ‘sue the auditor’
mentality as if the responsibility for ensuring transparency, integrity, compliance and
ethical behaviour rests on the shoulders of the auditors alone.
Thirdly, an aspect that is sometimes forgotten by the critics of auditors is that
they are not able to deal with the black economy and do not possess investigative
powers. In the increasingly complex environment of today’s globalised economy the
5
Dr. A.J.E. Jansman, Partner at Coopers & Lybrand Dijker Van Dien; Assistant Professor in Auditing at the
Rijksuniversiteit Groningen in his paper, The Integrity of the Profession: Questions, Doubts, Solutions
Institute of Certified Public Accountants of Kenya Annual Seminar, 24 th-26th May, 2000,
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Issues Facing the Profession: The Role of Accountancy in Promoting Accountability
potential exposure to corruption has actually increased. In 1997 alone, for example,
US firms are estimated to have lost at least US$15bn of overseas contracts to foreign
firms paying bribes. Companies need reliable data to assess those they do business
with, especially those that trade in goods and services. They need to assess not only
the financial strength of their trading partners, but also the ethics of their business
practices and strength of corporate controls. There is a recognised need for
governments, international organisations and professions like auditing to work
together to provide internationally recognised frameworks for this exchange of data to
take place. In October 1998, the G7 group of Finance Ministers issued a communiqué
calling for improved transparency, quality, consistency and comparability of
information reported to the capital markets. In particular, they lent their weight to
efforts of the International Accounting Standards Committee to establish a single set
of financial reporting rules which could be applied in markets worldwide.
The G7 Ministers also called on the OECD, in consultation with the World
Bank and other regulatory bodies, to complete its work on a code of “global”
corporate governance principles. The latest draft of the OECD’s principles emphasises
that the prime responsibility falls on company boards of directors to maintain
appropriate systems of internal control, ensure compliance with the law, and to
prevent misuse of corporate assets.
In addition to this the International Federation of Accountants (IFAC), which is
the representative organisation for accountancy and auditor professional bodies
around the world, has proposed an International Forum on Accountancy
Development. This is targeted at raising standards of accountability and reporting in
emerging economies and one of its aims is to address the level of fraud. IFAC
envisages bringing together in the Forum the development agencies; national
governments; international bodies such as OECD and IMF; and the accounting
profession, particularly the biggest firms, to see what can be done6. In December
1991, IFAC had released an International Auditing Standard dealing with Illegal
Acts7.
Companies interested in preserving their reputations are increasingly focusing
on their compliance process – those management practices and systems designed to
motivate, measure and monitor the organisation’s legal and ethical performance.
PricewaterhouseCoopers, for example, have developed a management tool – the
Compliance Process Diagnostic - to help companies identify, measure and evaluate
the effectiveness of their compliance programmes. The Diagnostic tool works by
prompting management to assess the company’s own processes against performance
criteria or indicators in five key areas. Companies which fulfil the relevant criteria are
less likely to have corporate environments which encourage or tolerate corrupt
activity.
Other organisations like the New Economics Institute, for example, have been
active in developing practical tools to enable organisations to systematically assess
Corruption As A Threat To World Trade And Investment, The Auditors’ Role And Corporate
Compliance by Jermyn Brooks, Global Managing Partner, PricewaterhouseCoopers
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7
Ibid. Dr. A.J.E. Jansman
Institute of Certified Public Accountants of Kenya Annual Seminar, 24 th-26th May, 2000,
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Issues Facing the Profession: The Role of Accountancy in Promoting Accountability
their social impact and ethical behaviour8. Since 19929, for example, the social audit
field has expanded enormously. The financial transparency and accountability
initiative of the Organisation for Economic Cooperation and Development’s (OECD)
Convention On Combating Bribery Of Foreign Public Officials and the related OECD
1997 Revised Recommendations articulates a rigorous position with regard to
financial statement disclosures and requirements for audited financial statements10.
Codes of Conduct and mission statements dedicating to transparency and
accountable business practices are al well and good but the challenge lies in putting in
place processes that convert the rhetoric into practical reportable measures that are
relevant even to managers and clerks. There are also economic incentives for
companies to implement compliance processes which address the potential for graft
to take place. As we have seen, the scale of the cost to industry of bribery and
corruption is enormous. The penalties imposed by the authorities, especially in the
USA, are also large. However a company can reduce these substantially under the
Federal Sentencing laws if it can demonstrate that compliance processes are in place.
The US Federal Sentencing Guidelines of 1991 state that the hallmark of an effective
program to prevent and detect violations of law is that the organization exercised due
diligence in seeking to prevent and detect criminal conduct by its employees and other
agents. The concept of due diligence comprises seven distinct steps and there is
considerable interest in these Guidelines and the ways in which they are fostering
ethical behaviour and self-policing in the corporate sector in the U.S. There is every
likelihood that they will also find favour elsewhere - especially as the criminal
responsibility of companies is a difficult question in most systems of jurisprudence
and the trend is increasingly towards self-regulation11.
The new standards proposed by the American Institute of Certified Public
Accountants (AICPA) in 1997 set out to mandate auditors to aggressively seek out,
detect and report cases of fraud using a detailed set of guidelines. For the first time in
the 60-year history of the AICPA’s Auditing Standard’s Board the word fraud was
used in the title of a standard. In the past euphemistic terms like irregularities were
preferred12. The use of powerful computer software to conduct forensic auditing has
also become important. The sophistication of this type of software has increased
dramatically over the last five years. “Software that allows accountants to
‘interrogate’ information using so-called data-mining tools that search huge amounts
of electronic data for signs of fraudulent activity, whether it is bogus loans, stolen
shipments or shady transfers.13”
The New Economics Foundation’s Social Audit: Auditing the Auditors?, Peter Raynard, New Economics
Foundation, March 1995
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9
Traidcraft Social Audit 1993/4, Traidcraft, Gateshead, 1994
OECD, report of the Transparency International Working Group on Bribery in International Business
Transactions, overall observations on Financial Transparency and Accountability Initiative, 27/04/2000
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11
Transparency International Source Book, Chapter 13, The Private Corporate Sector
12
CFO Magazine, November 1997, article titled Under Suspicion by Lauren John
13
Far Eastern Economic Review, October 1999, article titled Super Sleuths by Joanna Slater
Institute of Certified Public Accountants of Kenya Annual Seminar, 24 th-26th May, 2000,
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Issues Facing the Profession: The Role of Accountancy in Promoting Accountability
Another suggestion with regard to promoting accountability and transparency in
auditing has to do with businesses undertaking an audit of how ethical problems are
currently being dealt with, to test its behaviour both against external standards and
against its own declared values. These audits can comprise an important measure even
for auditors before taking on a particular client. Auditors can in special cases even
assist businesses in conducting these audits. A major study is presently being
undertaken by the European Institute of Business Ethics with the aim of developing
the tools needed to undertake such ethical self-audits.
The weakness of auditing in preventing fraud and corruption is largely due to
the fact that it deals mainly with past events, past transactions. However, in recent
years the profession has been moving towards taking auditing closer to, or at the time
when, transactions occur – real time auditing with the help of software tools is the
direction in which auditors are moving, though progress is still slow. The statutory
audit will, however never provide a guarantee that companies are free from fraud and
corrupt activities.
When the Kenya Television Network revealed in September 1998 that huge
swathes of Karura Forest had been allocated to what we now euphemistically refer to
private developers in Kenya it set of a chain of events that had an unique impact on
the professional community14. The intensity of public interest with regard to events in
Karura was such that the professional community quickly sought to distance itself
from the controversial allocations. The Architectural Association of Kenya for
example, warned its members to shun the developments planned for Karura Forest or
face disciplinary action15. Bankers, accountants, lawyers, architects and other
professionals are often important players, or at least are perceived to be important
players, in many of the serious cases of fraud and corruption that we have in Kenya.
Fortunately for them the media has always focussed public opinion on the politicians
and other public figures involved in these activities. The Karura saga could be
indicative of a change in this respect. You will remember that one of the country’s
most prominent indigenous law firms lost a key partner over the whole matter. It is
not unlikely that in the coming years, especially as a result of the usual controversies
attendant to the privatisation process and the regular collapse of banks in this country,
that the accounting profession will increasingly find itself the focus of attention when
fraud and corruption are suspected to have happened. Questions will be asked by the
press to what the auditor knew and when they knew it. In this respect the tools the
profession adopts to ensure transparency and accountability with be critical, be they
concepts of social auditing, compliance diagnostic tools, real time auditing using new
sophisticated software or the like.
Thank-you…
Acknowledgments
The Sunday Standard of January 31st, 1999, report titled ‘Chronology of events in long saga’, compiled by
Rose Nzioka
14
15
The Daily Nation, October 1st 1998
Institute of Certified Public Accountants of Kenya Annual Seminar, 24 th-26th May, 2000,
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Issues Facing the Profession: The Role of Accountancy in Promoting Accountability
Most of the central ideas contained in this paper were articulated by Mr. Jermyn P.
Brooks, Global Managing Partner, PricewaterhouseCoopers (PWC), who kindly
made them available to me as I set about preparing it. I would also like to thank Mr.
John Deary of Transparency International – Zimbabwe who read this paper and
added comments to it. Final preparation would not have been possible without the
usual efficiency of Ms. Kristina Spaar and Mr. Martin Issa of Transparency
International – Berlin in availing material from the TI database.
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