Page 30 - CMA Journal (May-June 2025)

CORRUPTION:
Focus Section

An Invisible Cost

to Business Operations

Corruption is a global issue affecting both governments “cost of doing
and the private sector. This article explores the business.”
consequences of corruption on operating costs through
According to estimates
embezzlement, fraud, bribery, nepotism, favoritism, and
by the World Economic
related practices. Corruption inflates an organization’s
Forum and the United
operating expenses by introducing undue, illegal, and
Nations, corruption
unethical costs.
accounts for approxi-
These expenses cannot be directly declared in financial mately 5% of the
statements due to their unlawful nature. Instead, they are global GDP. Given that
often disguised under headings such as commissions, the world’s total GDP
entertainment, donations, consultation fees, marketing was estimated at $100
expenses, or through fake invoices and dummy vendors trillion in 2024, this Muhammad Tanveer
or suppliers. In this article, we will examine the types of implies a staggering $5 Ul Qamar, ACMA
corruption, its direct and indirect effects, real-world trillion lost annually to CEO, Allied Financials
examples, strategies to mitigate it, and case studies. corruption.
What is Corruption? There are many types of corruption, including bribery,
nepotism, embezzlement, extortion, abuse of power by
Corruption is the abuse of power for illegal or unethical regulators, influence peddling, favoritism, selective
personal gain. It occurs when individuals in positions of enforcement of laws, cronyism, and fraud. Each type
authority—such as government officials or corporate results in financial loss or causes inefficiencies in
executives—use their influence to obtain benefits that operations, which ultimately inflate operational costs.
are neither ethically nor legally justified.
Each type results in financial loss or causes operational
The World Bank defines corruption as “the abuse of inefficiency, which ultimately inflates operational costs.
public power for private benefit.” However, this definition
does not imply that corruption exists only in the public Direct Impact of Corruption on Operating Costs
sector. In large private organizations, corruption is also 1) Transactional Costs – Where corruption is a normal
prevalent—particularly in procurement and human part of doing business, operating costs increase due
resource departments. to undue payments made to achieve business
In Pakistan, corruption is widespread at all levels of both objectives such as securing contracts, licenses, work
public and private organizations. It ranges from petty permits, etc.
issues like daily cash disbursements to large-scale 2) Compliance or Legal Costs – In a corrupt economy,
corruption involving major government projects or it is impossible to fulfill 100% legal compliance. To
capital expenditures in the corporate sector. According to avoid legal hurdles, businesses often make undue
a global ranking released in February 2025, Pakistan was payments to illegally attain the appearance of
placed 135th out of 180 countries. The key factors compliance.
contributing to corruption in Pakistan include poor 3) Procurement Costs – The procurement department
governance, lack of accountability, a predominantly accommodates corruption by inflating purchase
cash-based economy, and weak enforcement of laws. costs through kickbacks or commissions offered to
Corruption as an Operational Cost vendors or suppliers by business executives. When
corruption affects procurement, the quality of
Corruption acts as a hidden cost that increases opera- materials, products, or services is compromised,
tional expenses. A business that is forced to pay bribes or leading to increased operating costs.
engage in unethical practices incurs extra costs that
reduce profitability. In environments where it becomes 4) Financing Costs – Corruption increases the risk
impossible to operate without engaging in corrupt factor for lenders, ultimately leading to higher
practices, business owners often choose to pay these interest rates for borrowers. As a result, business
costs to keep their operations running — viewing it as a operating costs rise.

28 ICMA’s Chartered Management Accountant, May-June 2025