Corporate Governance in South Africa: Weak Links that Allow Fraud and Corruption to be Rampant

Saturday, May 5, 2012 - 12:09

One has now lost count of the number of fraud and corruption incidents that get reported in the media - almost daily.  Most would agree that this indicates our corporate governance is collapsing, has completely collapsed or that it needs some serious re-vamp. The fact that fraud and corruption incidents do get reported, confirms that corporate governance still works – but mainly on the detective side. What about the preventative side?  Until a balance is struck between preventative and detective controls, combating fraud and corruption will remain as elusive as ever or may even escalate. I have noted three key weak links in our corporate governance structure here in South Africa:

  • We do not have minimum governance structure expectation from organisations. Until we do that, we will forever be chasing possible fraud and corruption perpetrators only after the action has been done;
  • Organisations are not legally required to have internal audit departments. Those that have internal audit departments make such to suffocate within the organisations – adding very minimal value if any, to what they could potentially do to their organisations;
  • The fact that organisations have an option to follow King III guidelines or not is a waste of resources - taking into account time and money invested in the research. What is the use if only say 10 percent of organisations follow the King guidelines? It simply means there are no corporate governance guidelines in South Africa.
To come out of the quagmire of rampant fraud and corruption, South Africans need to agree on the following recommended minimum governance structure:


Organisations should be expected to have the above structure as a minimum requirement - where internal auditors will be concerned with the future, external auditors with the past, board of directors very much concerned with the present, the audit committee with continuous risk assessment and monitoring and the shareholder with the overall performance and results of the organisation. (Governance structures are by no means precluded from interacting). All these governance bodies have direct access to the shareholder. How wonderful? Where can fraud and corruption get a chance with such tight governance? Admitted, it will never be airtight, but fraudsters will have to sweat to achieve what they want.
 
By allowing fraud and corruption cases to be reported at this rate without strategic countering, governance bodies such as the Institute of Internal Auditors and the Institute of Directors are partly to blame for the high incidents of fraud – not as active participants, but as passive participants. Most internal auditors are not comfortable with the position of internal audit in their organisation organograms, but are afraid to say it because it may have career limiting consequences. The institute of directors is quite aware that until King III guidelines are made legally enforceable, governance will remain poor - but they do not push for King Guidelines to be enforced. Why?
 
Internal audit is one function that could be relegated to the heap of history if it does not re-invent itself and position itself as a catalyst in the fight against fraud and corruption – through proactive systems and controls. Whenever fraud and corruption incidents are reported, one hears very little or nothing from internal auditors. Their role has become that of a lame duck or a toothless bull dog – bucking loudly, but unfortunately not able to bite.

To re-invent itself, internal audit has to fight for legal recognition. The current status is that organisations may opt to have or not to have internal auditors in their structures. We need legalised internal audit for these reasons:
  • Once given a legal standing, internal auditors should be elevated to report not to management but to the shareholder. This will give internal auditors the necessary muscle to do their work without fear of reprisal from management;
  • Preventative controls will be entrenched in all organisations. The likelihood of fraud and corruption being reported once it has occurred will be significantly reduced;
  • Inefficient, ineffective and uneconomical control environment will be discovered and reported sooner rather than later;
  • On-the-job training for inexperienced youths could be housed in this department. With a well run internal audit department, managers have a pleasure to recruit from the internal audit department because recruitees would have had some exposure to business processes and procedures within the organisation;
  • Like external auditors, internal auditors should have their reports included in the annual reports;
  • If legalised, so many new quality job opportunities will be created for youths entering the market – this is where the job fund could come in handy.
In conclusion, the re-vamping of both the Institute of Internal Auditors as well as the Institute of Directors as effective governance structures will help achieve three goals at once; prevent fraud and corruption before it happens; help with continuous training; help create quality employment for the youth especially.

- Kgosiemang Esau Moloko, Mobile: 084 700 4784

Comments

I think you need to be profiled in such a way that you attract possible emplyers instead of you looking for a job. please contact www.sighmagazine.co.za for profiling. for me the public protector's office should not be as busy as they are. internal auditors should be the ones who are busy putting in place preventative controls.
thanks for your positive comments Mfundo. My stance though is that the public protectors should not get more staff. instead more staff should be channelled to internal auditing - those charged with the pro-active side of governance controls. we should hear or see the public protectors very rarely. Her job should be on exceptions. it should not be standard. This will allow her to focus on areas that the internal auditors missed. There will always be exceptions. My advise therefore, start on the preventative side and end-up on the detective side if you so wish. What happened in marikana today or yesterday, should have been high-lighted by internal auditors long ago what happened with the book saga in Limpopo should have been high-lighted by internal auditors long ago What happend with e-tolling should have been fore-seen by internal auditors, etc Kgosiemang Esau Moloko
Great article Sir, also enjoyed your interview on SA fm last night. Sadly as a 2nd year student at Unisa doing a diploma in Security Risk Management, everytime one tries to apply at some advertised positions they always looking for experience. I just wish they'd make chances for us who are still at school to provide us with training or something. Am hopeful however that maybe things will get better next year coz I heard on the news that the office of the Public Protetor is understuffed. So I'm hopeful that they'll provide prospective investigators with training.