The World Economic Forum Estimates show that the cost of corruption equals more than 5 per cent of the global Gross Domestic Product (GDP) which is approximated at $2.6 trillion.
The report further shows that over $1 trillion is paid in bribes annually hence contributing to about 10 per cent of the total cost of doing business globally, and up to 25 per cent to the cost of procurement contracts in developing countries, Kenya included.
Although most anti graft crusaders including the Transparency International (TI) pay much attention on government agencies, private firms which offer significant number of employment opportunities to the global population are dying silently, thanks to corrupt deals perpetuated by both senior and junior staff.
A recent study by the (PWC) which investigated the trends in global economic crimes with more focus on Kenya identified accounting fraud and bribery as major crimes perpetuated by companies’ staff. In Kenya, the two vices accounted for 38 and 22 percent of economic crimes reported respectively.
Corporate corruption has seen many respected global firms crumble to bankruptcy. A case in point is the Enron Cooperation, an American energy, commodities and Services Company which was driven to bankruptcy in 2001 curtsey of systematic internal theft and creatively planned accounting fraud that is now known in economic cycles as Enron scandal.
Enron which had employed close to 20,000 staff with claimed revenues of about $111 billion was named by the Fortune magazine as America’s Most Innovative Company for six consecutive times up to year 2000, only for it to collapse a year late.
In a top economic deceive, the company’s management for instance would build an asset such as a power plant and immediately claim the projected profit on its books, even though it hadn’t made one dime from it.
If the revenue from the power plant was less than the projected amount, instead of taking the loss, the company would then transfer these assets to off-the-books, where the loss would go unreported. The company did this ostensibly to attract bookers since its shares were listed on the Wall Street. Key management officials including the cooperation’s CEO Jeffrey Skilling continued with this deceiving tactic formulated by a Chief Finance Officer Andrew Fastow in 1998 to woe unsuspecting investors hence profiting themselves.
Overwhelmed by guilt of the con game, Fastow resigned from the company and few months later, the Security Exchange Commission (SEC) noticed a discrepancy in the cooperation’s finance books hence investigation ensured. It was finally revealed that the company had accumulated $591 million and $628 million losses and debts respectively.
The Barclays Bank Libor scandal, where staff at the bank repeatedly made false financial submissions to manipulate the London Interbank Offered Rate (Libor) is another perfect example of how corruption can be cultivated into a corporate entity, trusted by millions of clients across the globe
Since Libor rate is used as the benchmark for trillions of loans, mortgages and financial products traded around the world, Barclays hatched a plan with other banks in Europe and America to inflate the rates in order to pass the heat to consumers. The bank management later told its staff to cheat clients that they could borrow at lower interest rates than they could, in order to show the bank in a better light than it actually was in a bid to edge its competitors hence creating profits. This plot was however revealed when other banks complained of a sky rocketing base lending rates by Libor prompting an investigation.
A part from being fined $450 million by Financial Services Authority (FSA), Britain’s banking regulator, and the bank’s integrity was put at stake, lowering investors and clients confidence. The bank’s top management including the CEO Bob Diamond, Chief Operating Officer Jerry del Missier and Marcus Agius, the Chairman were forced to resign.
In Kenya, several companies have suffered the wrath of corruption mainly perpetuated by top management. According to International audit firm Ernst and Young’s report released late last year, more than a quarter or 27 per cent of the chief executives, financial controllers and internal auditors surveyed in Kenya cited high levels of fraud in their companies only lower than 44 per cent in Egypt, 30 per cent in Nigeria and 28 per cent in Namibia.
The survey did not reveal the amount of money paid out as bribes to win contracts or lost in fraud but auditors said it was futile to ask because of rampant understating. They however estimated that companies lose between seven and eight per cent of their revenues to corruption, translating to loss of millions of jobs every year. Recently, an audit by KPMG revealed how top managers embezzled funds at Mumias Sugar, leaving the company on financial knees.
A PwC 2014 study on impacts of economic crime to private entities revealed that corruption mainly hurts employees’ morale, business relations, brand reputation, relations with regulators and share prices
At least 36 percent of firm executives sampled during the study blamed corruption for poor production by employees, while 38 percent said it stains company’s relation with other stakeholders. 16 per cent claimed that corruption erodes brand’s reputation while 15 and 3 per cent said that the vice stain the company’s relations with regulator and affect the market shares of the products produced by the company respectively.