Fighting fraud: Gardner’s World

4 Nov 14
Accountants live dangerously when they challenge official corruption around the globe. Caroline Gardner, Scotland’s auditor general, is leading a clean-up campaign, writes Peter Hetherington

By Peter Hetherington | 4 November 2014

Accountants live dangerously when they challenge official corruption around the globe. Caroline Gardner, Scotland’s auditor general, is leading a clean-up campaign, writes Peter Hetherington

Keeping an official, independent eye on the finances of governments and state enterprises can seriously damage your health. At worst, in parts of the world, rigorous scrutiny of officialdom for the public good can mean a knock on the door late at night, an overt threat to an accountant and their family – and, perhaps, the auditors paying the ultimate price for their probity.

While in much of Europe, North America and Australasia the public auditor is a widely respected pillar of democracy, Caroline Gardner knows that in some countries the spending watchdog can be reduced to pariah status by fraudulent and corrupt regimes.

As chair of an International Ethics Standards Board for Accountants (IESBA) task force examining how accountants cope with the challenge of corruption – she boils it down to how the profession should react to ‘basically illegal acts’ – Scotland’s auditor general is at the sharp end of a global campaign to clean up unsavoury governments and, thus, enhance democracy and financial accountability.

‘The starting point is serving the public interest ... how to pursue a suspected illegal act if they come across one and, at the end of the process, if they should override their normal duty of confidentiality because the public interest would be better served in doing that,’ Gardner says.

This, she explains, is ‘a very sensitive issue because of the complexities of knowing when the public interest would be served in breaching confidentiality. More importantly, are safeguards in place to protect the interests (of accountants) professionally and personally when they do that?’

She answers that question in the negative, knowing that blowing the whistle can have life-threatening implications in parts of the world. ‘In developing economies they, and their families, might find themselves facing personal harm. What we know is that in some parts of Asia, and post-Soviet republics, where the rule of law doesn’t work very much, there are real concerns that placing a requirement on professional accountants to speak up – entirely understandable in the public interest – may not be practical.’

So for someone doing the job in an unnamed ex-Soviet republic, Asia or elsewhere, could you say that being an accountant might not only damage your health but also prove life-threatening? ‘Absolutely,’ replies Gardner, without hesitation. ‘And we’ve heard some very strong evidence that this is the case from countries in that part of the world – Asia, for example – and we’ve had to take it seriously and say “what is reasonable for an ethics code for professional accountants and how does it fit in with the responsibilities of legislators, regulators, the OECD, which has done some great work on bribery and money-laundering? Can we play our part in that?”’

At worst, then, could that mean an accountant being told to lay off a particular government or state agency – or, more alarmingly, face a knock on the door and armed men threatening the auditor's personal safety? ‘Absolutely,’ replies Gardner. ‘Very much so.’

As part of the anti-corruption task force she’s leading, Gardner tells of round-tables held around the globe – in Washington, Brussels and Hong Kong, for instance – to hear on-the-ground experiences. The latter location was particularly revealing. ‘We heard from attendees from around that part of the world very strong concerns about the personal consequences for accountants of breaking confidentiality (in the wider public interest) ... where there isn’t a strong judicial system and there isn’t proper protection for individuals in place,’ she says. ‘Mainland China was one of the places where concerns have been raised – but not the only (East Asian) country.’

Gardner's day job is perhaps less dramatic, but nonetheless challenging. She has been in charge of Audit Scotland for over two years and, thus, scrutinises the Scottish Government’s block grant of about £33bn – and she has a long record of public service. Moving to Scotland in 1995 to set up new National Health Service responsibilities for the local spending body, the Accounts Commission, she took a 12-month secondment in 2010 to become chief financial officer of the Turks and Caicos Islands, a British Overseas Territory, after direct government was suspended in 2009 following a financial crisis compounded by corruption.

‘I was asked to go there because the public finances had broken down as a result of serious corruption as well as the global financial crisis,’ she says.

‘I guess what I learned from it is how critical public confidence in the good management of money is for a decent society – that we had reached the stage where tax collection was crumbling, people didn’t feel they needed to pay their taxes, because other people weren’t – and that meant there wasn’t enough money to pay for vital public services like education, policing and so on.

‘There was a real risk of a spiral down into huge social problems and a longer-term economic collapse. The priority really was to put some of the basics back in place.’

So, a new tax collection system was introduced, debts were refinanced and accountability restored.

Nearer to home, while much of mainland Europe is relatively free of fraud and corruption in local and national government, Caroline Gardner points to other concerns which have exercised both the European Union and the European Central Bank, which services the euro currency zone (of which the UK is not a member). As a member of the International Federation of Accountants (IFAC), which has membership in about 160 countries, she thinks Scotland – and the rest of the UK – fares pretty well ‘partly because we’ve got good governance in place’.

But she cautions: ‘That’s not to say things can’t go wrong, and audit plays an important part in making sure the frameworks are in place and responding when they come across something that’s not right.’

While Scotland has had a strong element of self-government since 1999 (when Audit Scotland was created) and a Scottish National Party government for seven years, the country is being given new tax-raising powers under legislation approved in 2012. By 2016, that will see the Scottish Government being allowed to raise or lower income tax by 10p in the pound. A new tax authority, Revenue Scotland, will be created next year to prepare for the change.

Audit Scotland, Garner says, will have to be vigilant. ‘What I would say is that the changes we’re seeing in Scotland at the moment, both pressures on spending and the greater powers that will come, we can’t take for granted and that [means the] need for good financial management, good governance, good transparency in the public finances if we want to make proper use of the new financial powers.’

Further devolution of powers from the UK government – promised by the three main UK parties before Scotland rejected independence on September 18 by a 10% margin – could place greater pressure on Audit Scotland; indeed the SNP government will, assuredly, press for full fiscal autonomy within the UK over the coming years.

Gardner, a former CIPFA president, is nevertheless keen to put the international problems of financial mismanagement, fraud and corruption into context. What about, for instance, some Mediterranean countries, not to mention the odd city in the US? ‘We do see significant fraud in the developed world both in government and the corporate sector. In Spain and Greece there’s clearly an element of fraud – but there’s also an element of people just not being transparent,’ she says.

There follows a cautionary tale of how devolution can go wrong – namely, in regionalised Spain. ‘The history of the financial crisis demonstrated first of all that places like Spain got into real trouble not because of the Spanish government mismanaging its finances, but because

it didn’t have a clear picture of the commitments the regional governments had entered into,’ she warns. ‘There’s an important lesson there for countries like Scotland in making sure they have got the whole picture of public finances as they take on new taxation and borrowing powers. We’ve also had pretty good evidence from Greece that the tax collection system wasn’t as robust as it needed to be.’

And, of course, across the Atlantic there’s bankrupt, partly-abandoned Detroit, the ultimate municipal basketcase which went bust in 2012 owing about $18.5bn (£11.4bn) to its creditors (the largest US city to file for Chapter 9 bankruptcy). ‘Some of that was mismanagement and some was clearly corruption,’ says Gardner as she rattles off the impact: local pensions cut dramatically, public services at breaking point, and law and order similarly at risk of breaking down. From parts of Europe to the US, she laments: ‘They’re all examples of countries within the developed world, where you might have expected the basis of good governance and financing to be in place, where things have gone badly wrong.’

At the WCOA conference in Rome, she hopes they will at least create a framework to guide professionals ‘on how best to serve the public when they encounter illegal acts. When is it reasonable for accountants to break confidentiality in the wider public interest without putting themselves at risk?’

Answers, please.

This article appears in the Winter 2014 issue of Public Finance International magazine

For details of CIPFA's new Counter Fraud Centre and global initiatives on fraud go to www.cipfa.org/services/counter-fraud-centre

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