Solution to the Trust Crisis We are Having: Urgent Ethics, Urgent Compliance…

Turkey is going through one of its toughest traumas in its history. This trauma is getting deeper as time passes and reasons are being surfaced. The trust crisis that has been going on for a long time at every level of the society including business, politics, sports, and art has moved to a different phase; politicians, the media, and non-governmental organizations are discussing and seem to keep on discussing for long the reasons of the recent events in every aspect. There has been self-criticism regarding the past, although not loudly, but still no one says out loud “we did not behave ethically”, “we were not honest”, “we did not act in accordance with the laws and people’s expectations of us.”

Our situation deems it necessary to analyze our recent experiences in terms of universal elements including corporate governance, business ethics, integrity and compliance in order to better understand the reasons of this recent trust crisis and to rebuild trust.

Risk of Corruption and Ethics & Compliance

When we talk about ethics, integrity or compliance in the world of business, the most critical points that come to mind are fraud and corruption. There is nothing shocking about this, as the highest risks that institutions might face and that have the biggest impact are the risks of fraud and corruption. The ethics and compliance programs that have become popular in private companies nowadays and that are based on the “Federal Sentencing Guideline” of the USA are essentially about the behavior expected of employees by institutions, in short the concept of “compliance”. We should not think of compliance in its strict sense, compliance with the laws only. Compliance here is a larger concept that stipulates the code of conduct expected by the company beyond obeying the laws. I believe that behind this approach lies the desire to create a corporate culture that goes beyond the compliance with laws and that basically gives priority to doing the ethical and the right behavior in a company. With this particular corporate culture that is desired to be created, the aim is to minimize the risks of fraud and corruption.

Corruption Perception High in Turkey!

I am one of those people who think the trust crisis in Turkey stems mainly from corruption and the resulting degeneration. I would like to list three researches detailed below in order to understand the truth of corruption in Turkey.

Transparency International: Corruption Perception Index

The first index to check out regarding the corruption risk analysis before investors invest in a country is the “Corruption Perception Index” prepared by the Transparency International through researches. This index shows that the corruption perception has been quite high in Turkey in the recent years and even, Turkey is among the top countries that this situation has deteriorated.

Every rational citizen of Turkey living in Turkey already knows or feels that the country is well behind the point where it needs to be in terms of fight against corruption. The Index is only important in basing the known on a research.

Even though the corruption in Turkey is not institutionalized and has not spread to every level of life as in Nigeria, Russia, Ukraine, and Angola, our ranking in this index as one of the most important economies in the world indicates that we have failed in the fight against corruption. We have a particularly poor performance especially in the recent years.

ACFE 2016 Report – Global Fraud Study

Association of Certified Fraud Examiners (ACFE) has issued the 2016 Global Fraud Survey that researches the fraud of employees. The study is based on 2.410 cases investigated by ACFE-member fraud examination experts worldwide. This study lists Turkey in the Middle East / North Africa region. However, since the general characteristics of this region is not adequate to explain Turkey, I think it will be better to base the information I will present to you on the common findings on the West Europe, East Europe and Middle East / North Africa regions.

According to the study, companies pay approximately 5% of their turnover by fraud! This percentage is quite reliable, as the rate is generally calculated around 5% in this study that has been performed for years. Considering that the global gross national product in 2014 was USD 78 trillion, the loss by fraud is USD 3,9 trillion. For Turkey, the GNP is USD 800 billion and the loss is USD 40 billion. In other words, every citizen of Turkey pays about USD 550 (TRY 1.600) per year to fund frauds.

According to the study, the type of fraud that is observed most frequently in these regions including Turkey is corruption. The half of the cases investigated is corruption cases. The other types of fraud cases following corruption are non-cash frauds, billing frauds, fraudulent financial statements, cash theft and expense fraud.

TÜSİAD – “Corruption in Turkey from the Perspective of the World of Business” Study

In 2014, TÜSİAD conducted a study named “Corruption in Turkey from the Perspective of the World of Business” in order to investigate the corruption perception of the world of business and to identify the tools of solution for fighting against corruption. As per this study, 46% of the participants think corruptions in Turkey will increase, 28% think they will remain the same and 16% think they will decrease. The study indicates that the economic impacts of corruption are unfair competition and the breach of the investor’s confidence and draws attention to that the social impact is the lack of confidence. In terms of what should be done against corruption, the study highlights the need to correct the distribution of income and to eliminate economic injustice, to reinstate independent judiciary, to implement the applicable legislation against corruption and to provide education.

The study results mentioned above reveal the picture of corruption in Turkey.  In short, there is widespread corruption in Turkey. This fact feeds the lack of confidence in the society.

Backbone of Corruption: Conflict of Interest

Wherever there is corruption, there is always conflict of interest. According to the definition by OECD, “Conflict of interest occurs when an individual or a corporation (either private or governmental) is in a position to exploit his or their own professional or official capacity in some way for personal or corporate benefit”. In other words, when an individual abuses his position that requires reliability for his personal interests, a conflict of interest comes to play. For instance, in terms of bribery which is a form of corruption, the person who conducts corruption puts his personal interest before the interests of his institution by accepting a bribe. In this case, two conflicting interests and a resulting corruption occur.

Let us see how this is relevant with our topic. As per ACFE, corruptions that involve a conflict of interest do not only include obtaining money and physical assets. Any misconduct that causes a conflict of interest and that stems from cronyism, nepotism, favoritism or pressures from or motivations due to ties with a tribe, a religious community or compatriotism constitutes different forms of corruption.

Corruption does not only mean stealing from an institution. Any misconduct that causes a conflict of interest and that stems from cronyism, nepotism, favoritism or pressures from or motivations due to ties with a tribe, a religious community or compatriotism is also corruption.

The situation that has been known for years, but surfaced on July 15 in its most concrete form has revealed how various positions (that require reliability) have been abused in Turkey especially by individuals and institutions that are involved with a community for their personal interests. It was seen that in appointing officials employed in a number of public and private organizations, different criteria and hiring and promotion techniques than education, skills and qualifications, which cause a conflict of interest, were applied. Moreover, it is understood that this conflict of interest was in play in many business transactions performed. News that we hear every day reveal how large scale these corruptions were. For example, the claims that in 74 out of 81 cities, the chiefs of police were appointed among individuals that are affiliated by a community as a result of corruptions that are caused by a conflict of interest or that certain individuals that are affiliated by this community have an incredible wealth are only some of the news. At this point, we should note that all this news are only claims now and these claims need to be investigated by independent judiciary.

Importance of Corporate Governance and Business Ethics in Fight against Corruption

The use of corporate governance tools plays a critical role in managing an institution (public or private) well. In institutions where the philosophy of corporate governance is embraced and its tools are effectively used, the cases of fraud and corruption can be minimized. Otherwise, the processes of institutions do not function properly. If it is a private company, it goes bankrupt in a while; and if it is a public institution, it cannot serve the public properly. In a world where corporate governance is not even discussed in terms of the sustainability of organizations, why do our institutions not prefer to be more transparent, why do they avoid being accountable, and why are they reluctant to be fair and responsible? Or why do they pretend to do such good practices? Where is the problem?

There are two critical actors who can demand transparency and accountability from institutions (public or private): Shareholders and Lawmakers. Considering our current situation in the global corruption index and the current trauma we are under, these two actors should immediately handle this matter of survival for the organizations in Turkey. Why? It is because corporate governance is not just a tool to increase efficiency, facilitate access to capital or ensure sustainability, but also the most effective tool to fight against corruption. Via corporate governance practices, transparency and accountability are embedded in the “decision-making” mechanism, which is the most critical element for organizations. Thus, “how” and “why” a decision is made becomes transparent and the decision makers undertake the responsibility for the outcome of such decision. Lastly, with corporate governance practices, “business ethics,” the moral compass of corporate governance, structures the corporate culture.

Now let us think about it. In an institution where the decision-making mechanism functions as described above and business ethics and the right conduct of business are sine qua non, what is the risk of committing corruption?

Can We Learn from Our Mistakes?

Learning from our mistakes may start with first acknowledging mistakes and our responsibility for such mistakes. Turkey has not yet achieved the desired level in terms of business ethics, honest conduct of business, compliance, and fight against corruption. Is it possible to put more effort and achieve the desired level? Sure it is. However, this is not an overnight process; we should acknowledge that it is a long process that requires devotion.

Here are my suggestions as to the points that need focus in this tough process:

• Institutions should have a transparent process regarding how and why decisions are made and executives should be accountable for the outcomes of their decisions,
• Generalizing and encouraging ethics & compliance and fight against corruption in the private sector,
• Concretizing through the operations carried out and messages given by the board of directors and the senior management that integrity and the right conduct of business are among the top priority values and no compromises can be made on them within the institution,
• The management of conflict of interest risks and taking corrective actions to remove any conflict wherever is a risk that a conflict of interest can cause corruption,
• Bringing the applicable legal regulations on fight against corruption and implementations of such regulations to universal standards,
• Creating an independent and objective audit function in the private and public sectors,
• Private companies and non-governmental organizations working in collaboration to fight against corruption and demanding clean business and fair competition more loudly.

Last Words

We can start today building the future when integrity is the “fundamental value” in everything we do. How can we do it? We are the answer to all the questions we ask.

Taking inspiration from “Urgent Democracy” that is the song of Bulutsuzluk Özlemi (Turkish rock band)…”Urgent Ethics, Urgent Compliance…”

Fikret Sebilcioğlu, CPA, CFE