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A Holistic Model of Corruption and Corporate Fraud Prevention

Introduction

We have seen in the preceding chapters that no consensus exists on the questions of what caused the 2008 financial crisis, who will perpetrate fraud against a corporation, and when and how fraud will be committed on behalf of a corporation. Similarly, there is no consensus on the best explanation for the phenomenon of corruption. Consequently, there is no general agreement about how best to prevent it. This state of knowledge, however, does not mean we must stop the search for effective ways to reduce the risk of another financial crisis by investing in the prevention of corporate fraud and corruption. One thing is certain: unethical behavior lies at the root of fraud by or against a corporation, corruption, and financial crisis. Already, we have seen that a lot of good work has been done at the legislative level pertaining to banks and other financial institutions in the United States, the United Kingdom, and within the European Union (EU) to reduce the risk of a financial crisis. We have also seen that when a firm commits itself to sustainability and invests in it, it not only does better financially but can even be saved from bankruptcy.

The 2015 Ernst and Young international fraud and corruption survey found that the cost of unethical behavior has never been higher. More specifically, the survey revealed that more than half of all respondents believed that bribery and corruption are widespread in their country. It is alarming that 42 percent of the respondents stated in the same survey that their company did not have an anti-bribery policy in place. Furthermore, 37 percent believed that the financial performance of businesses in their markets is often overstated. It is a cause for concern that in the view of the respondents, the

“commitment of senior leadership remains the most critical factor in changing an organization’s culture” (p. 1) with people wishing to “do business with people they trust” (p. 9). It is evident, therefore, that trust, ethics, and leadership are integral parts of a proposed model to prevent corruption and corporate fraud. Such a corruption and corporate fraud prevention (CCFP) model is proposed below.

In Chapters 3 and 4, the significance of ethics, corporate governance, and sustainability was discussed within the context of preventing corruption and corporate fraud. However, companies do not exist in a vacuum but are part of a large ecosystem that includes the individuals (the person) that form part of the corporation and the society that it operates in.

It becomes clear that the search for the best way to represent knowledge, whether about fraud, corruption, financial crisis, and/or their interconnectedness and prevention, is a continuing process. We have seen in the preceding chapters that when Cressey proposed (1953, 1971) what came to be known as a “fraud triangle,” the interest was in profitability and shareholders. The idea of teaching ethics to business students had only started being discussed, concern for the environment was at an embryonic stage, corporate social responsibility was an almost unknown concept to most, regulation of the financial world was rather limited, and the idea of accountable politicians fell more within the rhetoric of revolutionaries. Today, all this has changed. The reality is that we live in a constantly changing and evolving world. The available bibliography on corruption and corporate fraud today dwarfs what existed in 1971. A real challenge today is to synthesize and integrate knowledge and to provide adequate answers to questions posed.

Having been inspired by the Sierpinski triangle1 and the words of the Greek philosopher Democritus2 that “та notVTa pei” (i.e., “everything is in constant motion”), the present author has developed and proposes the holistic CCFP model, which consists of three pillars. As illustrated in Figure 5.2, each pillar is conceived of as being interrelated with the others and all pillars must coexist in order to minimize the risk of corruption and corporate fraud. If one of the domains is deficient, corruption and corporate fraud will very likely be manifested. It is not claimed that the model is a panacea for eliminating fraud, corruption, and the risk of corporate collapse. What is argued is that the holistic approach presented in this chapter is an improvement on what has been proposed in the past, and it suggests concrete and effective measures to prevent corporate fraud and corruption simultaneously and at different levels of analysis. Both fraud and corruption addressed in this book relate to a dishonest act for personal gain, are criminal offenses in most countries, and are interrelated to a large extent. Consequently, measures proposed to address one would be relevant for combating the other as well. Before discussing the

CCFP model, several approaches to fraud and corruption prevention that could be used alone or in combination will be considered first in an effort to highlight the uniqueness and completeness of the CCFP model. As the CCFP emphasizes, it is the simultaneous implementation of different approaches at different levels of analysis (person, corporation, and society) that is proposed in order to significantly impact the three phenomena and reduce the risk ofa corporation collapsing and another financial crisis.

 
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