Page 46 - CMA Journal (May-June 2025)

Focus Section

This can result in the misallocation of resources, Skipping deserving companies increases project
leading to an increase in the actual operational costs costs due to low-quality purchases.
since merit and fair practice are not considered.
d) Salaries of Non-Existing (Ghost) Employees:
c) Misappropriation or Pilfering of Funds: This is the Sometimes government officials create false payrolls
act of stealing or misappropriating funds or assets for employees who do not actually exist. Their
entrusted to someone's authority or disposal. salaries are collected by the corrupt officials who
Various government departments have the created this arrangement. These unlawful salary
responsibility to perform certain functions for public payments increase the country's operational budget,
service and benefit. In order to perform these as there is no actual work done in exchange for the
functions, they have some allocated funds. If funds paid.
government officials start misusing these funds or
steal them for their personal use or benefit, it Private Sector
increases the operational cost of actually running The private sector can be affected by corruption either
these unavoidable functions for the country. independently or in coordination with the public sector,
We can explain the effect of corruption on operational creating additional costs—some of which are even
costs in two ways: unknown or hidden.

• Effects on Public Sector Below are a few examples of how corruption in the
private sector increases operational costs:
• Effects on Private Sector
a) Payments for Customs Clearance: Unlawful pay-
Public Sector ments are demanded from private companies by
customs officials for the quick clearance of imported
Corruption affects the public sector run by the
goods, in order to avoid demurrage charges or
Government in many ways. It can include the illegal
production delays. These payments may seem minor
transfer of public funds, use of authority to influence
at first but often increase over time, making it
decisions against the public interest, and the unjustified
increasingly difficult to clear consignments without
allocation of public resources. Below are a few examples
paying these growing unofficial charges.
of public sector corruption:
b) Payments to Obtain Permits or Contracts: Private
a) Kickbacks in Construction Projects: When a
businesses often pay bribes to government officials
construction company pays kickbacks to get a
to win bids for profitable contracts. They may also
government contract to build a road or bridge, it
have to make additional payments to obtain certain
ultimately increases the cost of completing the
permits or licenses, simply to avoid unnecessary
project. This additional cost comes out of taxpayers'
delays created by a corrupt system. These payments
money and is an undue increase in the cost of
significantly add to the total project cost.
materials or labor. To cover this cost, the government
Furthermore, if such a payment is made by an
contractor may also compromise the quality of work,
incompetent bidder and the contract is awarded to
resulting in frequent and costly repairs due to the
them over more qualified companies, it can lead to
use of substandard materials. Eventually, the
poor performance and costly rework, further raising
project’s lifetime is reduced, leading to early
project costs.
replacement costs.
c) Compliance with Complex Legal Procedures: In
b) Delay in Grant of Approvals: Corrupt government
environments where corruption is prevalent,
officials in various key departments often seek
governments may introduce extensive legal
under-the-table payments to grant approvals,
compliance requirements. Companies then have to
permits, or licenses for projects. If they do not receive
hire staff to handle these procedures and invest in
such payments, they create unnecessary procedural
training. They also incur extra fees to meet various
delays. These delays ultimately pause the project,
legal obligations, all of which add to overhead costs
leading to increased material and labor costs due to
and reduce profit margins.
the passage of time. This can also result in penalties
for not completing the project on time. d) Fraudulent Activities by Company Staff:
Sometimes corruption becomes part of the
c) Uneconomical Procurement: Government depart-
workplace culture, where individuals begin to view
ment officials may approve bids based on personal
unethical behavior as acceptable. This happens
connections, ignoring other bids that offer lower
within companies when employees engage in
prices and higher quality service. This results in
fraudulent acts such as creating fake invoices or
taxpayers paying more for poor-quality services.
embezzling funds.
44 ICMA’s Chartered Management Accountant, May-June 2025