Technical Articles

International Journal of Auditing – Julyl 2007

The SAI’s Role in Combating Corruption

For many years, INTOSAI has championed the fight against corruption. In 1998, the role of supreme audit institutions (SAI) in preventing and detecting corruption was the theme at the INTOSAI congress in Montevideo. INTOSAI’s current strategic plan for 2005–2010 states that SAIs should assist governments in fighting corruption.

As part of their audit work, SAIs are in fact committed to preventing—or rather containing—corruption. In accordance with the recommendations of the Montevideo congress, SAIs should encourage governments to strengthen their internal control systems, enhance staff resistance to attempts at bribery, and closely monitor areas prone to corruption. In many countries, SAIs can rely on anticorruption laws and regulations and audit compliance therewith. Among other things, SAIs verify whether at least two persons are authorizing payments; whether there is a strict separation of needs specification, planning, contracting, and accounting and settlement in government procurement; and whether staff in areas prone to corruption (such as procurement, construction, and licensing) are being rotated. If anticorruption provisions have not yet been enacted or are being insufficiently implemented, SAIs can point out the losses that governments may incur because of legislative gaps and call for the adoption of anticorruption measures.

Detecting corruption, however, is a more difficult endeavor. For this reason, a number of SAIs are reluctant to fight corruption at this level, an issue that was also raised by the Montevideo congress. Some SAIs even sounded a word of caution against becoming too active in this area.

At a recent seminar on the role and responsibilities of SAIs, it was openly stated that the fight against corruption is not inherently a task of government audit institutions. Auditing for corruption, it was argued, would undermine the trust between the SAI and the auditee. Merely knowing that the audit might be geared to detecting corruption could prompt the auditee to adopt a defensive stance and jeopardize the cooperation based on mutual trust that is an essential prerequisite of successful audits.

At the seminar, it was also pointed out that the SAI’s right to inspect files is limited to documents and records of government agencies subject to its audit mandate. In general, SAIs are not allowed to carry out audit investigations of private persons or companies. Some of the seminar participants felt that the involvement of SAIs in such activities might actually hinder rather than help the implementation of measures to effectively detect corruption. It was argued that public prosecutors that have the authority to investigate both the public and private sectors are better equipped to fight against corruption and are therefore in a better position to carry out this task. Reference was also made to agencies such as OLAF, the European Union’s Anti-Fraud Office, and the Malaysian Anti-Corruption Agency, which were set up specifically to counteract corruption in some countries and were better placed to detect it.

This position, however, is inconsistent with the guiding principles INTOSAI previously set out and is untenable to the public. Taxpayers would certainly not understand why SAIs, which operate on taxpayers’ money, do not orient their audits toward detecting corruption, no matter what the reason. Corruption, after all, is much more harmful and dangerous to public finance than other infringements of the law or violations of the principle of economy that SAIs usually highlight in their audit reports. Taxpayers expect SAIs to become active wherever there is an imminent danger or risk to taxpayers’ money.

This position is equally harmful to SAIs. If they choose to distance themselves from such a vital and high-profile field of audit, they run the risk of being relegated to the sidelines. Setting up specialized agencies to fight corruption should be only the first step in effectively fighting against corruption.

This view is fueled by the fear that SAIs may fail to deliver when auditing for corruption. Audits to detect corruption that do not produce tangible results may tarnish an SAI’s good standing.

It is true that auditing to detect corruption is not an easy task and often doomed to fail without in-depth preparation of the auditors. Perpetrators of corruption tend to be intelligent and know how to cover the evidence of their acts. This is why it is so difficult to identify and interpret signs and clues that may point to corruption.

Audits can be successful only if auditors understand the nature of corruption, recognize circumstances suggestive of corruption, and know how to proceed if clues are identified. The possibility of corruption must always be kept in the back of the auditor’s mind even if deviations from standard procedures are only minor; it is then important to validate those clues step by step or to discard suspicions as soon as they are cleared.

The following example illustrates this point.

  • In a procurement audit at a government department, the auditor looked at a long-term contract with a paper manufacturer to supply paper to subordinate agencies and found that the quantities agreed upon were lower than the amounts actually invoiced and paid. Moreover, the number of agencies to be supplied had dropped significantly compared to the contractually specified number in the wake of an administrative reorganization that was implemented shortly after the contract had been concluded. Both circumstances added to
    the paper manufacturer’s profits because the contractually agreed-upon price
    had been calculated based on lower quantities and on a larger number of agen-
    cies to be supplied.

Further enquiries by the auditor revealed that the higher demand for paper
and the upcoming reorganization must have been known at the time the con-
tract was concluded.

Additional investigation and interviews with the staff members responsible for
drafting the contract brought the following to light: One of the staff members
preparing the bid had informed a paper manufacturer he knew that he would
state the quantities and the number of agencies to be supplied in the specification
favorably in return for 1 percent of sales. Anticipating higher returns, the
manufacturer accepted this proposal.

Aware that “nothing succeeds like success,” the auditor then looked into the
conduct of that staff member on earlier occasions and detected similar instances
of corruption.

No public prosecutor or special investigation unit would have been able to uncover
this case of corruption. Only a vigilant auditor who examined the accounts and was
aware of what the contractual impropriety could actually mean could detect a hint of
the irregularity. Because SAIs are intimately familiar with accounts and other records
and because they audit the invoicing and settlement of transactions closely, they are
ideally positioned to play a key role in the fight against corruption.

Sometimes, the facts in a case are more complex. A particular degree of vigilance and
expertise is required to frustrate attempts to cover up evidence of criminal action. The
following example illustrates this point:

An SAI audited the construction of a large, special-purpose sea vessel. A call
for bids to supply the ship’s diesel engine was sent out. Leading worldwide
suppliers of ship diesel engines submitted their bids. A national supplier won
the contract, which was worth several million euros.

The construction documentation contained a letter from an unsuccessful bidder
complaining that the plans had been tailor-made for the successful bidder.
Comparing the construction plans of similar ships, the auditor found that the
design of the ship’s power room was, indeed, not standard. The planner could
not offer a reasonable explanation for the deviations.

The SAI then asked a naval engineer to give an expert opinion on the plans.
He confirmed that the engine room design was unusual, unwarranted, and
even uneconomical.

The SAI notified the public prosecutor of these findings. The prosecutor had
the accounts of the engine supplier seized; further investigations revealed that
a payment related to the contract had been made to the designer of the vessel.

Eventually, it was found that the engine supplier had promised to pay U.S.
$100,000 to the planner if he won the bid and was chosen to supply the diesel
engine. The planner had designed the power room in a way that favored the
standard diesel engine supplied by that vendor.

In most corruption cases, graft money comes from state coffers in the guise of extra
profits. In these cases, supplies or services are overpriced or are not delivered at all.
To recognize this, SAIs and auditors must be able to judge whether there is a disparity
between performance and consideration. This requires particular expertise. SAIs
without the required in-house skills may have to resort to contracting external experts.
However, at least in those areas most susceptible to corruption, SAIs should be able to
draw on their own qualified audit staff.

While SAIs have fewer investigative powers than public prosecutors, this disadvantage
is more than offset by the SAIs’ closer familiarity with auditee accounts and the expert
knowledge of their staff. In their audits, SAIs scrutinize government accounts, analyze
them from different angles, and acquire a more in-depth, insider’s view than that of the
Ministry of Finance. By taking a close look at the financial management process, SAIs
and their auditors are thus in a position to detect anomalies and deviations from standard
procedures and identify irregularities such as corruption. The public prosecutor is
just an outsider; for him, the government accounts may be nothing but a black box.

Obviously, the best results in the fight against corruption can be achieved if SAIs and
public prosecutors work together, as can be seen from the second case study. The SAI’s
specialized know-how, linked with the public prosecutor’s sweeping powers of investigation,
is the most powerful weapon against corruption. In the common interest, both
should be used, especially in high-risk countries and areas.

Given the urgent need to address the problem of corruption, the time has come for
INTOSAI to take practical actions to flesh out the guiding principles laid down in its
strategic plan. SAIs should not only be supported in the prevention of corruption but
also be empowered to play a successful role in detecting past corruption. An anticorruption
working group, modeled on the working group to fight money laundering,
could be a first step. This group could first collect information on past SAI activities
and then work out best practices as well as a strategy for government audit to fight
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