According to a recent Transparency International study, nontransparent business continues to be a nightmare for the Czech economy, costing the government about 32 billion Kč ($1.3 billion) in public tenders that are conducted improperly. Roger Stanley, a partner at the Prague office of PricewaterhouseCoopers, talks with The Prague Post about the issue of transparency on the business scene and encourages other companies to do address the subject as well.
Given your professional focus on forensic auditing and services, do you feel like a business watchdog, or as someone who provides service to companies?
We help both public and private sector organizations deal with dispute- and fraud-related matters. Our role is not as a watchdog, but we do spend a lot of time raising awareness of fraud in the public domain and within organizations. We do this via our involvement with entities such as the Council for Occupational Fraud and NGOs, and by providing industry-specific training to individual companies. One immensely successful tool has been our regular Global Economic Crime Survey, which highlights the perceptions, awareness and impact of economic crime on business in the Czech Republic, Central and Eastern Europe (and worldwide).
Forensic auditing appears to be a nightmare for businesses in this country. How has the perception of forensic audits developed here over the past five years?
I think the nightmare came from not facing up to reality; companies hid their heads under the pillow and suffered as a consequence. The damage inflicted by economic crime goes far beyond direct monetary loss. Business relationships, staff morale and reputation are critical to any business; these can all be undermined by the occurrence or even the perception of fraud. Now companies understand the benefits that a properly structured fraud investigation can bring; more importantly, they recognize the benefits that fraud risk reviews can achieve. Prevention is always better than cure and is nearly always a lot more cost effective.
How does the business transparency develop? Is it fair to say that most Czech companies still lag behind foreign firms in business transparency?
This is one big change I have noticed in the last five years. At first, most of our work was for foreign investors in the Czech Republic . Now, however, it is clear that there is a shift in the mindset of local companies. Local management and supervisory boards are recognizing the benefits that codes of conduct and ethical business policies can bring; not just well-intentioned words, but actually setting the tone from the top and implementing them. More and more of our work has been assisting Czech boards to ensure that they have exercised the appropriate duty to (take care of) their stakeholders. Of course there is still work to do, and as we continue to see, foreign companies are by no means perfect.
PricewaterhouseCoopers' Dispute Analysis and Investigations team in Prague also serves other countries in the region. While the Czech Republic and Slovakia became EU members last year, Romania is still waiting to be admitted. Did the accession of the Czech Republic and Slovakia bring about any significant changes that put the two countries ahead of Romania in business transparency?
For those countries wishing to accede to the EU, they must comply with the 'acquis' for anti-corruption measures as part of their accession preparation, as indeed happened in the Czech Republic and Slovakia ; this necessarily raises the bar. Transparency is perceived to be better here than in Romania. For example, the Czech Republic is 30 places higher than Romania in Transparency International's Corruption Perceptions Index. Though perception does not always equate to reality, in this case, my experience says it's true. The new Romanian government is starting to take measures and, interestingly, I am now seeing there the same issues and types of work we saw here four or five years ago.
Accession raised the level of regulations in many fields. Do you think this could encourage businesses to avoid various rules?
Yes. In very simple terms: The more regulations there are, the more opportunities there are to break them. If you look at the United States, which has always had a very rule-based approach, this did not stop the big scandals there (Enron, Worldcom and the like), and the response was yet more rules (for example, Sarbanes-Oxley). In Europe there is the 8th Directive, and we already have anti money-laundering regulations and the OECD convention for combating bribery (which, incidentally, the Czech Republic adopted before the United Kingdom ). However, rules alone change nothing. To be effective you need a change in the mindset within a business. Senior management must lead by example and set the right tone from the top. This can then be instilled throughout the organization.
To what extent do you think the complicated tax system in this country contributes to evasion and nontransparent accounting?
I remember a time in the United Kingdom when the top marginal rate of tax was a staggering 98 percent. What did people do? Of course they went to extreme lengths both legal and illegal to avoid such charges.
Do you believe the flat tax suggested by the senior opposition party, the Civic Democrats, could make the business environment more friendly to companies and entrepreneurs?
From a personal perspective, yes. I think what is happening in Slovakia, for example, is making it more attractive to business, and that the country is benefiting. Of course, there are lots of economic arguments both for and against, but now is not the time to go into these in detail.
Despite the country joining the war against terrorism, Czech authorities have not reported any frozen accounts suspected of being tools for terrorists. Are Czech financial markets unattractive for international money laundering and terrorist funding, or are local anti-laundering measures simply ineffective?
This is a complex area; the key point is that the fight against terrorists and money launderers is a global effort, and all financial institutions and other 'gatekeepers' need to ensure that they are not the weakest link. The FIU (the body to which suspicious transactions are reported) receives thousands of suspicious transaction reports from banks and other financial institutions. Following its analysis, many are reported to the economic crime division of the police for investigation. My own experience with the FIU has been very positive in what they are seeking to achieve. The standards adopted (here) are higher than those currently required by the EU. Remember, accounts may have been frozen, just not publicized. ... Sometimes it is better to allow funds to move so that you can trace the final destination and catch the ultimate perpetrator rather than the middleman along the way.
The issue of corruption is evergreen here. Suspicions frequently occur during public tenders, or within the police. Is it true that everything is a matter of price, and that everything can be bought in this country?
When I look back to our last Global Economic Crime Survey for the Czech Republic, I see that a staggering 53 percent of respondents highlighted this as a major concern yet no companies admitted to having either solicited or been offered a bribe. Our experience shows that the true level lies between the two. This is either because corruption and bribery are difficult to detect, as outside parties are involved, or that companies consider this (part of) doing business and therefore do not consider it a crime. Corruption may also be seen as a victimless crime, but this is not the case. It allows funds and talent to be misallocated; companies declare lower profits, and tax revenues suffer accordingly, and false or misleading investment decisions can have a far-reaching impact on the economy as a whole.
If there was one thing that you could change in the Czech business environment, what would it be and why?
Be honest about the threat from fraud - it is a part of everyday life, whether we like it or not, and needs to be addressed. Therefore talk about fraud and properly assess the risk you face; only once there is an increased openness to the threat from fraud will organizations be better equipped to address these issues. As I said before, prevention is better than cure. In one sentence? Remember, fraud is not a dirty word!
