Page 31 - CMA Journal (May-June 2025)

Focus Section

Indirect Impact of Corruption on Operating Costs

1) Damage to Goodwill – When a business engages in
corrupt practices, it affects its goodwill and
reputation in the eyes of consumers and the market.
This leads to slow or negative growth and declining
revenues, as consumers avoid dealing with such
businesses.

2) Damage to Productivity – When corruption is
prevalent in an organization, employee morale is
negatively affected, particularly due to nepotistic
appointments. This results in lower productivity,
which ultimately increases operating costs.
compliance are often affected by corruption. When a
3) Penalties by Law Enforcement Agencies – When business fails to meet legal requirements or misses
an organization is caught engaging in corruption, deadlines, it may resort to bribery to settle issues.
government agencies may impose fines and Such practices lead to higher operating costs.
penalties, contributing to higher operating costs.
5) Energy Sector (Electricity, Gas, Fuel, Water) -
4) Operational Disruptions – Corruption can adversely Corruption in the energy sector is widespread. For
affect an organization’s supply chain, especially when example, setting up a new electricity connection for
managers accept commissions or kickbacks in a factory often requires unofficial payments,
exchange for purchasing low-quality materials or increasing setup costs. If an organization is involved
dealing with inefficient vendors, suppliers, or in electricity theft or exceeds its legal load limits,
contractors. Consequently, operating costs increase. kickbacks are often paid to avoid penalties. In the
case of petrol pumps, significant unofficial payments
Sector-wise Examples of Corruption are made to obtain licenses, and ongoing corruption
includes government officials using fuel for
1) Healthcare Sector - In the healthcare sector,
corruption plays a significant role—especially in free—further increasing operational expenses.
getting medicines approved by the Drug Regulatory 6) Food Sector - Each province in Pakistan has a food
Authority. Due to lengthy and complex approval authority responsible for licensing food businesses.
procedures, businesses often resort to unofficial Compliance requirements include hygienic food
payments to expedite the process. These payments preparation, clean premises, and staff medical
increase operating costs.
checks. If these are not met, businesses may face
2) Construction and Infrastructure Development fines. In some cases, corruption is used to avoid
Sector - Private organizations seeking contracts for compliance or penalties, which increases operating
roads, bridges, sewerage systems, or buildings often costs.
pay undue amounts to the approving authorities.
This not only raises their operating costs but also 7) Cross-Border Trade Sector - In cross-border trade,
inflates government expenditures due to the use of customs and border security departments are often
substandard materials, which require frequent involved in corrupt practices. Even for fully
repairs and maintenance. compliant legal imports, officials may demand
commissions or kickbacks for clearance. These delays
3) Tax Departments - Corruption is prevalent in tax and extra costs increase operating expenses for
departments, where businesses attempt to reduce importers and exporters and may result in additional
their tax liabilities through unofficial means. Illegal storage fees due to delayed clearance.
tax avoidance practices may lead to legal notices and
penalties. During the resolution process, corruption Strategies to Reduce Corruption
between tax officials and the business may occur.
This results in increased legal expenses and 1) Capacity Building of Institutions – The capacity of
operating costs. anti-corruption institutions, including the National
Accountability Bureau (NAB), needs to be enhanced
4) Legal Compliance Departments - Departments to deliver meaningful results in reducing corruption
involved in company registration and regulatory in Pakistan.

ICMA’s Chartered Management Accountant, May-June 2025 29