Accounting and records keeping

Potential scenario

Close to the financial closing of your company, a project manager deliberately overstates the profitability of her projects in order to enhance her performance bonus.

I. Understanding the risk

 
 
  • Accurate documentation of financial transactions and records, including contracts and delivery receipts, is of utmost importance in an anti-corruption programme.
  • These “books and records” are the basis for checks and balances to detect irregularities. They also provide evidence in case of weaknesses or irregularities.
  • Employees seeking to bribe a client or business partner must have the financial resources to do so, whether paying for an expensive gift, providing excessive hospitality or supplying other in-kind benefits. In cases where such advantages cannot be disguised as legitimate business expenditure, the employee will need bank accounts or cash reserves that are not documented in a company’s financial books and records.
  • Such off-the-books accounts are often referred to as “slush funds”.
  • Various tactics may be used to support such off-the books accounts, including recording of non-existent expenditure, or overpricing of services such as commissions.
  • Establishment and use of slush funds may not only breach anti-bribery provisions in relevant laws, but also constitute breach of applicable accounting provisions in relevant laws such as tax and accounting laws. For example, the US Foreign Corruption Practices Act (FCPA) has two main provisions: (i) the anti-bribery provisions; and (ii) the books and records and internal control provisions.

II. Recognizing practical challenges

 
 
  • By their secretive nature, fraudulent activities, such as inflating earnings by simply overstating or misclassifying revenue, or the establishment of a slush funds are difficult to detect, often relying on accounting crimes to hide their existence, and to disguise the means of supporting them.
  • Identifying such funds and their related acts requires detailed knowledge of a business, as well as accounting expertise, for example to benchmark commission requests against market values, and determine whether these are proportionate to services provided.

III. Mitigating the risk

 
 

Companies must address accounting and records keeping in their anti-corruption programme, in the context of their particular risk exposure.
Additional, practical safeguards should be considered to mitigate the risk of financial accounting and records keeping being misused for corruption, including:

  • All transactions, assets and liabilities should be accurately and fairly reflected in the company’s books and records, in reasonable detail, and supported by original documentation.
  • All transactions should be recorded only in the official books of the company.
  • Off-the-books accounts, such as “slush funds”, should be prohibited.
  • Transactions, assets and liabilities should be recorded on time and in chronological order.
  • Books and records must be protected to prevent intentional or unintentional destruction, improper or unauthorized alterations, or disclosures.
  • Books and records should not be destroyed prior to the expiry of any time limit imposed by legal regulations.
  • Every transaction should be consistently recorded, from origin to completion.
  • Transactions should have a genuine, legitimate purpose.
  • Electronic records should be kept in a form that is non-erasable and non-rewriteable, be organized and immediately produced or reproduced.

In addition, duties should be separated to ensure that no one employee has responsibility for more than one step in a transaction.

Training cases

Inflated invoices: bribes paid by intermediaries masked as payments for unspecified services
[TI UK HTB, Page 24]

Bribery through an off-shore registered company
[TI UK HTB, Page 31]

Bribery using an off-shore bank account
[TI UK HTB, Page 32]

False invoicing: supply of less equipment
[GIACC, Example 16]

Suggested reading

"How To Bribe – A Typology Of Bribe-Paying And How To Stop It”, Section 2.3

“The 2010 UK Bribery Act Adequate Procedures – Guidance on good practice procedures for corporate anti-bribery programmes”, Chapter 6.9

“An Anti-Corruption Ethics and Compliance Programme for Business: A Practical Guide”, Chapter G