Select Committee on International Development Minutes of Evidence

Memorandum submitted by PricewaterhouseCoopers



  1.  PricewaterhouseCoopers is a leading provider of forensic services, supporting our international clients both within the developed markets and, perhaps more crucially in the emerging markets. The range of services demanded by our clients to meet their operational objectives and in support of corporate governance issues has expanded dramatically in recent years, particularly in Central and Eastern Europe and the CIS.

  2.  A wide range of experience is needed to meet this demand and as such our staff not only include experienced forensic accountants but also former practising lawyers, regulators and police officers. This range of experience is required in order to resolve the many and varied problems faced by our clients, including cases of fraud and corruption. We have acted on behalf of most of the UK prosecution agencies, including the SFO, the police and the CPS, the DTI and the FSA as well many overseas agencies.

  3.  Much of our work involves investigating allegations of procurement fraud and associated corruption both in the UK and overseas. This work is almost entirely in reaction to client needs, often in response to a crisis. However, we are finding that those companies with well developed risk management and corporate governance procedures are taking a more proactive approach to the management of fraud. We do get involved, therefore, in risk assessment programmes and training to raise fraud awareness. Of necessity we need to be familiar with the associated law, including what constitutes criminal offences, civil recovery processes and legislation that affects investigation activities, such as the Data Protection Act and the Human Rights Act. Such laws are not harmonious across all territories which makes our work more complex.

The OECD Convention

  4.  PwC actively support organisations with an interest in combating fraud. For example, we have supported Transparency International (UK) since their inception and continue to take an active role with the Fraud Advisory Panel, chaired by George Staple. We support the underlying principles of the OECD Convention and the proposals of the Law Commission to improve the corruption laws in the UK. We have experienced some of the frustrations in trying to persuade the authorities in the UK to investigate cases of alleged corruption involving UK residents bribing overseas officials. We recognise both the legal and the practical difficulties outlined to the Select Committee by other witnesses which compound the difficulty of bringing prosecutions in the UK. We leave it to the legal profession to comment on the detail of the Law Commission's recommendations but we do believe that greater clarity of the law which recognises the international nature of business which exists today can only benefit the drive to combat corruption.

  5.  We do not expect that any new corruption laws in the UK will result in a large increase in criminal prosecutions. The experience in the USA following the Foreign Corrupt Practices Act supports this view. We consider that the main effect is likely to be an increased awareness of the risk of prosecution at senior management level and that this will have an impact on the corporate behaviour of UK business. This is not to suggest that corruption is presently condoned by UK business but greater clarity of the law and the risk of prosecution may help to ensure that the issue of corruption features on the boardroom agenda and not left to the judgement, perhaps sometimes inconsistent, of middle management.

Civil law

  6.  The work of the Law Commission is largely concerned with criminal law. Most of our work on behalf of our clients is carried out recognising that their main recourse to the law is through the Civil Courts. Many of the witnesses to the Select Committee have commented upon the difficulties of bringing prosecutions because of jurisdictional issues or lack of active co-operation between the UK and overseas authorities. Such difficulties are compounded when trying to investigate allegations of fraud within the private sector when civil remedies are the only practical course of action. Obtaining evidence is far more difficult because of a lack of investigative powers and it is usually the case that the police will not disclose information for any purpose unless it is the support of the criminal prosecution. The division of the criminal and civil processes, whilst understandable to a degree, undermines effective joint action and co-operation between business and prosecuting agencies. We believe that further thought may need to be given to those circumstances in which it may be more appropriate for civil law remedies to be used to combat against bribes and corruption.

Corporate governance

  7.  Much of our work at present is carried out in Central and Eastern Europe where the legislative framework and corporate governance procedures have yet to be developed to a standard which provides our clients with the necessary climate in which to conduct their business in accordance with their policies and having proper and effective recourse to the law. This view is supported by the Economic Transition Report in Central and Eastern Europe, the Balkan States and CIS published by the EBRD. In that report it is clear that there has been good progress in the transition by enterprises in both large scale and small scale privatisation but this is greatly outstripping progress with the development of governance and enterprise restructuring.[2] Given this climate, many of the problems faced by our clients concern managing change which involves trying to impose higher standards of corporate conduct.

  8.  This drive to manage change is often dictated by events, such as poorly performing investments or allegations of fraud. However, we believe that much can be done in both raising awareness of fraud issues, driving through corporate policies on such matters as corruption, instigating appropriate control and monitoring processes and carrying out appropriate due diligence prior to entering into business arrangements. We believe the same is true of monies paid through aid programmes, where much of the work still appears to be reactive rather than proactive. It is difficult to measure the effectiveness of some proactive fraud and corruption preventative measures but, nevertheless if corruption is to be combated it is necessary to attain change to attitudes at the highest level of management.

The role of the auditor

  9.  The statutory role of the auditor of UK-based companies can be summarised as follows. The principal statutory duty under the Companies Act is to report to the shareholders that the company's accounts show a true and fair view of its financial position and otherwise comply with the law. The auditor is also required by law to report to the shareholders if the company has inadequate accounting records.

  10.  Under Auditing Standards set by the Auditing Practices Board, the auditor should report to the board any weaknesses in internal control which are revealed by the audit. For all listed companies (and nearly all UK-based large multi-national companies are listed) the auditor must also review the board's annual statement to shareholders that the company maintains a system of internal control in accordance with the "Turnbull guidance".

The audit role in relation to fraud and corruption

  11.  Against that background, the auditor's role in relation to fraud and corruption might best be summarised as follows. For listed companies, the auditor is required to review the directors' statement in compliance with the "Turnbull" guidance, as above. That guidance requires an internal control system which, inter alia, should "help ensure compliance with applicable laws and regulations".

  12.  The directors' statement will, inter alia, in turn take account of the findings of the internal and external audit. The auditor is required by Auditing Standards to give "reasonable assurance that the annual financial statements are not materially affected by fraud, or non-compliance with laws and regulations central to the company's business". The word "material" means a quite high threshold; in a major international company the effect of fraud or corruption might be several £ million before it was disclosable as a material distortion to the company's financial position and performance. The words " reasonable assurance" convey that there cannot be absolute assurance of an audit finding material fraud, particularly where senior management are involved and have colluded to conceal it.

  13.  In practice the auditor will usually be asked by the board to be alert to any irregular activity which would damage the company's reputation. It must be remembered, however, the auditors only test check transactions; and indeed some corruption may not result in a money payment at all: for example, some kind of personal blackmail of the company's officials.

  14.  Apart from certain duties in relation to money laundering, the auditor is not required to, indeed by Auditing Standards is usually prohibited from, reporting matters to the authorities, except where it is in the public interest (a subjective definition). Rather the auditor is required to inform the board and ensure they report matters to the authorities. If the board refuses to do so, the auditor would take legal advice and might well resign from the position of auditor.

Developing the audit role

  15.  We suggest that audit might develop in future along the following lines. We expect, and PricewaterhouseCoopers encourages, companies' own reporting under the broad topic of "corporate social responsibility" to develop. For example, the present company law review being undertaken by the Department of Trade and Industry is pointing in this direction. We would also expect the auditor's involvement in this field to increase. However, because primary responsibility for corporate accountability must rest with the directors, it would usually be inappropriate to extend the auditor's role in advance of an extension of that of directors. There is also heightened awareness within British boardrooms of the need to tighten ethical policies and to seek the auditor's advice and assurance in this respect. We expect this trend to continue.

  16.  The auditing profession is keen to take a lead in developing the debate about the unacceptability of fraud and corruption in society. For example, the Audit Faculty of the Institute of Chartered Accountants in England & Wales initiated the "Fraud Advisory Panel" which aims to establish the essential facts about the nature and extent of fraud and to improve awareness of its risk on the part of management and promotes more effective measures by business, regulators and government.


  17.  The primary answer to reducing the scale of corruption lies in improving and developing corporate governance.

  18.  Within UK-based multi-national companies, corporate governance has developed substantially over the last 10 years and ethical policies have been progressively tightened. It is within this framework that the audit role can best develop. The Companies Commission proposed by the DTI's company law review would provide a continuing focus on governance and, inter alia, "social" reporting by companies.

  19.  Within the developing world it is building the institutional structures necessary for good corporate governance which is key, including company regulation and codes of good practice along the lines of the developed world.


March 2001

2   Transition Report 2000 by the EBRD, Table 2.1, page 14. Back

previous page contents

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 5 April 2001