Edited by Susan Rose-Ackerman and Tina Søreide
Chapter 18: ‘Red Flags of Corruption’ in World Bank Projects: An Analysis of Infrastructure Contracts
Charles Kenny and Maria Musatova1 1. Introduction The concept of ‘red flags of corruption’ is not novel and is widely applied across various areas. One of the most prominent examples of a published list of red flags originates in accounting sphere. In October 2002, the American Institute of Certified Public Accountants published a Statement on Auditing Standards, ‘Consideration of Fraud in a Financial Statement Audit’, which provided examples of fraud risk factors for each of the conditions that the Institute felt are generally present when fraud occurs. For example, risk factors relating to opportunities to commit fraud include deficiency of internal control components as a result of (i) inadequate monitoring of controls over interim financial reporting; (ii) high turnover rates or employment of ineffective accounting, internal audit, or information technology (IT) staff; (iii) ineffective accounting and information systems. Within the procurement process as outside, the logic of the red flag methodology is that corrupt or fraudulent activities require certain behaviors that create observable symptoms. For example, corruption requires limiting the ability of honest firms to compete fairly in the bid process, negotiating side-payments and making ‘space’ within the transaction for the extraction of rents. Related symptoms – red flags – might be a low number of bids or many excluded bidders, long contract negotiations or high prices. Red flags of corruption are also being utilized by World Bank task teams to attempt to uncover potential issues regarding governance failure, collusion, or corruption in projects. They range from the specific – such as falsification...
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