CHAPTER 1 INTRODUCTION
Corruption has become a complex issue in developing countries which needs to be addressed. Several definitions have been provided to create an understanding of corruption in developing countries, but this has not been conclusive (Mauro, 1998). Yan and Oum (2014) have defined corruption as an offence that permits dishonesty through use of high power within organizations. Generally, many definitions agree that corruption involves a person or an organization that is influenced by money or position to achieve an individual gain (Tanzi & Davoodi, 1998). In the context of developing countries, corruption is a major barrier for achieving economic development (Khan, 2006). According to the World Bank (2020), corruption is a major challenge for ending extreme poverty and promoting sharing of prosperity for about 40% of low-income people in developing countries. As such, corruption affects realization of millennium development goals because it leads to increase social inequality and promotes poverty (World Bank Report, 1997). Importantly, corruption is a vital factor that restricts improvement to the quality of services offered by governments to poor people in developing countries. Consequently, the impact of corruption in developing countries does not affect government institutions and private sector alone, but its consequences have a wider effect to the society (Hwang, 2002).
Spector (2005), has found out that corruption in developing countries is a dangerous problem that impedes economic development and provides negative impacts to third world countries compared to developed nations. Sandholtz and Koetzle (2000), stated that corruption is the main challenge facing developing countries. Corruption affects people in many ways through causing problems in education, finance, administration and social concerns (Sandholtz & Koetzle, 2000). Thus, developing ways of fighting corruption in public and private sectors of developing countries is an essential strategy for solving societal problems and economic development.
In the private sector of developing countries, corruption reduces competition, hampers efficiency and increases the cost of doing business. In the public sector, corruption increases general expenses, reduces tax amounts, creates a huge financial deficit and results to a macroeconomic uncertainty (Bhargava & Bolongaita, 2004; Accinelli et al., 2017). It is clear that corruption in developing countries has an impact in both private and public sectors and it should he managed. Considering the impact of corruption in both public and private sector, efforts in mitigating their impact should not be limited to the government. Instead, fighting corruption should be a joint effort by all parties in private and public sectors. In this regard, a notable strategy for fighting corruption in developing countries is implementing reforms in accounting information systems. Malagueno et al. (2010), have found out that corruption is correlated with accounting systems. Therefore, it is possible for developing countries to reduce corruption through implementing reforms in the accounting information systems and proper auditing (Malagueño et al., 2010). However, the major concern to this strategy is that accounting information systems in developing countries is still based on traditional accounting approaches and cannot fight corruption properly. This study will focus on identifying the impact of accounting information systems in reducing corruption in developing countries.
Organization that are regarded as financially accountable have strong systems for undertaking auditing of their accounting information. An auditing report is required to provide an actual financial position of a particular company to form the basis for stakeholders to make informed decisions (Lisciandra & Migliardo, 2017). Organizations with poor auditing of their financial information are negatively affected by lack of accountability by stakeholders concerning their accounting information. At times, managers and business administrators work contrary to the stakeholder expectations, and this can lead to misallocation and misuse of corporate resources.
Auditing is an important activity in an organization that ensures transparency in the accounting information and this will mitigate any risks that can arise from false reporting. Basically, the auditing standard restricts the possibility of managers and other members of the executive team to act contrary to shareholders preferences (Fredriksson et al., 2007). Good standards in auditing offers and opportunity for corporate organizations to benefit from proper disclosure of accounting information. It is strategic in creating an accurate, transparent and comparable financial information. Investors rely on financial information to informed decision on investing in a particular organization. Auditing provides investors with an opportunity to evaluate the assets of a company and minimizes the possibility of corruption manifesting itself (Lisciandra & Migliardo, 2017). Accounting information systems are implemented in ensuring economic transactions are done properly in a transparent way in order to promote efficiency of operations. In this regard, financial accounting is important in providing requisite information to third parties in order to understand the actual position of the organization. Therefore, accounting information systems are essential in ensuring effective operations and implement legal activities like rent-seeking behavior. Through transparency and honesty in financial reporting, accounting information systems can reduce corruption in third world countries.
Research aim and objectives
In developing countries, accounting information systems still follow the traditional approaches that are weak. This is the case in Brazil that has failed to curtail problems of budgetary evaluation within its internal departments. This study aims to investigate the impact of AIS in reducing corruption in Brazil. The main research question for this study will be to establish “what is the role of accounting information systems in reducing corruption in developing countries?” however this research question will be guided by several objectives as;
- To establish the extent of corruption affected Brazil
- To investigate how corruption is manifested in Brazil
- To find out the if Brazil has a proper accounting information system
- To identify ways in which accounting information system can be used to reduce corruption in Brazil
Significance of the study
This study will detail the negative impacts of corruption in developing countries across the world. According to the findings of the World Bank, corruption has been identified as a major impediment to reducing inequalities that will promote long-lasting and sustainable growth of developing countries. Also, corruption is the key factor that hinders economic development and prosperity of poor people in developing countries. Similarly, technological change, economic integration and equitable financial flows have reduced economic gaps in developing countries. However, corruption has limited sharing of this resources equitably. Therefore, through this study, the relationship of corruption and accounting information systems will be identified. In particular, it will identify the structural problems in Brazil that have limited the role of accounting information system in fighting corruption. Consequently, the study is important because it will be used by other developing countries to utilize accounting information systems in reducing cases of corruption.
Background of the problem
Developing countries are considered as countries that gained independence towards the end of 1950s. They are classified as third world nations because of a low level of economic development in their countries compared to the western countries. Majority of the developing countries can be found in Africa, Latin America, Oceania, and the Middle East. Developing countries are characterized as being non-homogenous because every country has a different degree of literacy, population, gross national product (GNP), cultural, political and economic system (Agerberg, 2017). Although there are distinct differences in these key factors, several similarities characterize the developing economies. The similarities include; the absence of a coherent exchange market, low standard of living, high population growth, and political mismanagement. Developing countries have a high level of corruption, which impacts on the effectiveness of the operations and proper allocation of resources (Søreide et al., 2009).
In the developing countries, accounting information systems are influenced by the negative environmental factors (Moro & Moro, 2018). Considering that accounting does not work independently, it is affected by external environment, it is imperative that proper legislation and standards are adopted to ensure that it is followed. Undertaking a study about an accounting system of a particular place, it is important to focus on techniques that are implemented with the overall intention to link environmental factors and success of the accounting system. according to Moro and Moro (2018), they identified environmental factors as leading challenges in the realization of a proper accounting information system. As such, this has several consequences to the credibility of accounting information given to stakeholders. Basically, environmental factors are many and it is not easy to generalize such information and how it affects AIS in developing countries. Cultural factors, legal constraints and political underpinnings are the main factors that hinder or promote AIS in fighting corruption in developing countries (Accinelli et al., 2017).
This study will focus on Brazil as ideal case study to understand the role of AIS in fighting corruption. Brazil has a liberal economy that is democratic in nature and has sufficient measures for combating corruption and inflation (Marcos, 1997). The democratic development in the country has set the environment for an inclusive approach in how policy frameworks are implemented. This is appropriate in learning how AIS as part of the policy framework can be used to fight corruption in the country. Whereas policy frameworks exist in Brazil, corruption is still high and it has caused a lot of destruction to democratic institutions leading to lowered credibility in delivering services to its people and the economy (Mungiu-Pippidi, 2013). The levels in government departments in Brazil have increased with the latest scandal documented as the ‘misuse’ of Brazil national budget. As a response, the government has established an institution that promotes political corruption and implemented some structural development strategies that are focused on addressing the issue of corruption in the region.
Several studies have been conducted to evaluate the legitimacy and effectiveness of AIS in Brazil with the intention of determining ther role in minimizing corruption (Cervantes & Radge, 2018; Van, 2015; Fogel, 2019). Several corruption scandals have been reported in government, which have raised issues with the general resolve of the government in undertaking its operations. Lula government demonstrated that accounting information is easily swindled with the view of benefiting a few individuals in prime positions. The Lula government was accused of payments it made to individuals with the intention of supporting its activities like soliciting for the congress vote (Guimarães, 2016). The investigators in this case recommended freezing of several bank accounts include those of construction companies. Basing on the report of the investigations, former president of Grupo OAS, Jose Aldemario Pinheiro, its executive chairman Agenor Medeiros were found guilty and sentenced to a 16-year imprisonment (Fogel, 2019). Similarly, in 2014, Brazil experienced another corruption scandal dubbed ‘Operation Cash Wash’. In tis particular scandal, it increased the money laundering activities which notable government officials were directly involved in receiving kick backs (Fogel, 2019). Due to money laundering incidences, million of cash were transacted through accounting systems as kickbacks. Consequently, the corruption scandal raised the questions concerning the credibility of government auditing framework and its ability to reduce corruption in government institutions.
In the context of Brazil, corruption is deeply rooted in the budgetary system because of weak internal controls systems that are evident in the region. The congress has failed to initiate proper measures that are integral in regulating economic activities reported by the government (Timmons & Garfias, 2015). Corruption is not entirely caused by control systems like accounting, but it is the way credibility of accounting information is reported to the economy. For example, several structural frameworks have deterred the budgetary process, which is displayed by the character of politicians in addressing the problem of corruption. Cases of budget corruption are in the rise and the government has failed to initiate a clear follow up on the expenditures allocated to various budgetary units in a particular region. Therefore, budgetary evaluation is the key factor that has affected the government in dealing with corruption within its departments (Fleischer, 1997). Strict adherence to accounting information systems will solve this problem through auditing and it will be able to identify corruption from any department.
Organization of the study
In order to achieve the aim of the research, this study will be divided into five main chapters. The first chapter, will provide an introduction to the study by providing a background of the study, aim of the study, research questions and significance of the study. The second chapter will provide literature review about the topic. In this chapter, this thesis will define corruption and other important terms and provide an insight about corruption in developing countries. Also, the literature review will provide a relationship of corruption and accounting information systems. Through understanding the level of accounting information system and corruption in developing countries, the research question will be formulated. Chapter three will provide the methodology for the study through discussing a qualitative approach, an interpretive paradigm and application of Brazil as a case study. Also, important background information about corruption in Brazil will be detailed in this chapter. Chapter four will deal with results and discussions by identifying the themes in the findings and provide discussions. Lastly, chapter five will provide the conclusions, limitations of the study and important ethical considerations.
CHAPTER 2 LITERATURE REVIEW: CORRUPTION
Introduction
The literature review will focus on setting the research question through exploiting information from previous studies in the same topic. It will focus on providing a detailed account of accounting systems as an important approach in fighting corruption. Relevant literature will be reviewed so that it can create a connection between different studies. The review will focus on defining the relationship between corruption and accounting systems and evaluate the extent in which it can be used to reduce corruption.
Corruption is a major problem affecting human beings across the world. It is a common problem in all civilizations and societies without any considerations to the degree of prosperity in the countries (Haller & Shore, 2005). Civilizations across the world have led to different levels of corruption in their jurisdictions becuase of cultural, ethical and political issues (Génaux, 2004). With the increased prevalence of corruption across the world, it is clear that it has become a global pandemic in the 21st century particularly for developing countries (Campos et al., 2010). Many discussions across the globe throughout the 20th century have focused on discussing corruption, but this has not changed so much. As such, a lot of studies and research have been formulated to discuss the impact of corruption in developing countries (Mo, 2001).
Definition of terms
It is important to provide a clear understanding of corruption. Lambsdorf (2006) defined corruption as a complex phenomenon that cannot be defined easily because of its different types and forms. There ae no clear definition of corruption, but this paper will consider some of the widely accepted definitions of corruption (Rabl, 2008). According to Campos et al. (2010), corruption is defined as the use of public office in a way that it will provide only individual gain. The transparency international has offered a similar definition of corruption but claimed that corruption is a form of abuse to bestowed power for individual gain (Transparency International Annual Report, 2004). These two definitions have demonstrated that corruption is connected to the public sector even though it is a common problem in both public and private sectors. Therefore, corruption manifests itself through an individual using their prime position in an organization to advance an individual agenda (Sandholtz & Koetzle, 2000). The definition of corruption demonstrate that it is an illegal act the revolves around fraud, bribery, nepotism, graft, theft, kickbacks and doctoring of records. Corruption is a phenomenon that is wide spread to many sectors apart from the government like political parties and non-governmental organizations (Kaufmann, 1997).
Forms of corruption
The USAID has categorized corruption in two major categories as being systematic or spontaneous (USAID, 2005). Systemic corruption is located in communities that have increased cases of corruption and occur perennially. In this context, corruption is a way of life that is a major strategy for people to advance their interests. This is the main form of corruption in developing countries because of a weak system of political governance. On the other hand, spontaneous corruption is common in developed communities that have a strong control ethics within their public sector.
Deflem (1995) argues that there are two types of corruption as either monetary or bureaucratic. In the context of this study, monetary corruption that exists in the public sector will be studied. This form of corruption is undertaken through money laundering, bribery, fraud, favoritism, and embezzlement of funds. Bribery as a form of corruption is the main common because it is paid as the amount of money received by an individual who has a prime position after fulfilling a particular task (Vargas-Hernández, 2009; Amundsen, 2000). Fraud is a form of economic scandal that inflicts a financial injury through swindling and deceit (Singleton & Singleton, 2006). It exits when an official person tasks with a particular responsibility is involved in an illegal act through manipulation of documents to achieve an individual gain (Andvig et al., 2001). Embezzlement is a form of theft undertaken by a dishonest agent is involved in stealing from his employer through abusing and misappropriation of assets of that particular organization to achieve an individual gain (Andvig et al., 2001).
Theoretical framework
There are different theoretical frameworks that have been put in place to explain the corruption levels that are reported in various regions across the globe. According to De & Livio (2017), corruption is one of the serious problems that has affected the global countries, which has resulted to increase in the criminal activities associated with imbalances in resource allocation. Corruption has been known to reduce foreign direct investment (FDI), and this has impacted the economic growth and development of the region. The corruption incidences in the region have an implication on the investment that is directed to health and education, and it puts these institutions in a disadvantaged position in maintaining their activities. In addition, corruption is known for reducing the revenue outlay that the government generated though taxes, and this has a negative role in meeting the functions of the different government activities (Puneet & Alberto, 2018). With corruption, the trust that is credited to the political systems and functions erodes with the public viewing some of the policy frameworks developed aimed at enriching the few individuals within the society. For instance, the cost of corruption in China was estimated to have impacted China’s GDP level by between 12 and 16 percent between 1995 and 2000, and this shows that there were issues that the government needed to address in order to have success in its operations (De & Livio, 2017).
As corruption is considered to be a long-term problem facing an institution, the recent increase in the levels of corruption amongst the developing countries has meant that the researchers have scrutinized the topic in determining the trend and seriousness of this problem on the political and economic front (Lee, Jusup & Iwasa, 2017). There are two theories that the researchers have used in explaining corruption incidences in different countries, and they include the public choice theory and game theory (Mueller et al., 2008). In the case of public choice theory, it involves studying the political behaviour and determining the traditional or national problems that it faces the institution during the dissemination of activities. The policy framework that is enacted by the political leaders can have an implication on the effectiveness of the activities that are enacted in the region. Public choice theory is based on the principle of collective approach in which individuals have the decision to determine the political leaders, and this is integral in improving the decision-making process when it comes to policies that are enacted.
For the game theory, it indicates that corruption can be viewed and dealt with when focusing on two main ways. One strategy developed is by linking corruption with the prisoner’s dilemma (Lee, Jusup & Iwasa, 2017). In a situation where the government provides an opportunity for the firms to get contracts to supply products in the organization, bribing an individual improves the chances of getting such a contract. There is a need to establish the norms that should be followed when seeking contractual agreement between the firms and the government institution. A successful resolution that can be realized when dealing with the prisoner’s dilemma is on the stability of the community and having a good communication platform in which the government activities can be easily communicated. There is also an assurance game in which it provides that it is important for the individuals to refrain from corrupt activities, and this can be integral in sustaining the government activities and reducing the possibility of corruption in the region. However, it is not easy for the government to develop a common knowledge towards achieving convergence in the attainment of equilibrium levels and addressing the problem with the prisoner’s dilemma.
In further explaining the game-theory on corruption, Lee, Jusup & Iwasa (2017) study claims that most of the workers and consumers tend to be characterized by unethical preference when working in the government institutions as they are not interested in following due process. There are three distinct elements that explain this phenomenon and the ways in which the government can enact measures in addressing corruption incidences. The corruption incidences can be reported in countries where there is 1) discretionary power, 2) economic rent, and 3) legal system. The legal system is tasked with unmasking the corruption incidences and any other wrongdoing that is undertaken in the government. According to Schneider & Bose (2017), these three elements can be broken down into two main aspects for ease of linking them to corruption incidences reported in the region – corruption incentives (denoted by the first two elements) and detection of wrongdoing (the third element). In this report, the focus is on the detection of wrongdoing, and this can be evident from the analysis of the accounting information systems that can be enacted in the developing countries in addressing the corruption incidences in such regions. With the detection of wrongdoings, there is the possibility of understanding the key issues that can affect the credibility of the operations of the government and the best ways in which the government can undertake in improving the quality of its operations in the long-run (Fogel, 2019).
In the past three decades, there has been an increase in the overall knowledge on the corruption incidences that are reported globally. There is empirical evidence to suggest that the majority of the individuals are subjecting the government institutions to checks and balances in reducing the incidences of corruption in such region (Cooray & Dzhumashev, 2018). The concern has been on enacting proper legislation that is not discriminatory, which is elusive in addressing the corruption problem within the government departments. The level of uncertainty in the corruption incidences reported across the globe has been a major problem in the implementation of a coherent system that can mitigate corruption. Different individuals and government institutions are involved in constantly changing the way corruption is undertaken in the economy, and this has been a challenge to the various anti-corruption bodies that have been developed in the respective countries. According to Nur-tegin and Jakee (2020), there have been mixed results in the explanation on the way corruption can be addressed and this is attributed to the economic transactions that are based on ‘greasing the wheels.’ Most of the activities within the government cannot be undertaken without the possibility of giving kickbacks and this has derailed the economic growth and development of such countries.
With the understanding of the key determinants of corruption, it is easier to develop measures that can mitigate corruption incidences in the region. The study by De & Livio (2017) noted that the corruption incidences in the developed and developing countries are influenced by the economic development, imports, political system of the government, and the cultural norms and ethos. Other elements affecting the level of corruption in the economy include income distribution, resource allocation, and the high unemployment rate in the country. As such, there has been a challenge in addressing these factors especially where the economic policies enacted in the region do not support the development of structures that can reduce the corruption incidences in the region (Fogel, 2019).
Apart from the environmental factors and the role of government in implementing policies to address corruption incidences, the issue of accounting and auditing of the government’s budgeting system has researched. Based on Timmons & Garfias (2015) findings, the quality of accounting information system that is developed in the region can have an implication on the reduction of corruption incidences that can be recorded in the economy. However, the success of such an accounting system can only be realized where there is the independence of the auditors. As such, it is important for the government to invest on high-quality auditing and accounting system in ensuring that the effectiveness of the information that is shared with the high-level government officials are not compromised (Fogel, 2019). The auditing firms should be supported in their intention in offering quality services to the individuals across the globe and ensuring that there is credibility of operations. Although the information on accounting information system is necessary in addressing the challenges that face the corrupt governments, there is no research that has linked quality accounting system with corruption incidences in the targeted country (Timmons & Garfias, 2015). As such, this study is integral in bridging the knowledge gap on the importance of using high quality auditing and accounting system in reducing corruption in the economy.
According to Agerberg (2017), the nature of business ownership operating in the economy has an implication on the accounting systems to be employed in the region. Business entities that are concerned with safeguarding the brand image across the globe tend to target economies that are characterized by transparency in their activities and the policies are clear and easy to follow. Most governments in the developing economies control some of the business fields such as mining and agriculture, and it makes the foreign investor to develop and grow the business ideas in such closely monitored and controlled sectors. Notably, in the mining industry, government officials are often involved in controlling the activities of the mining companies and this creates a possibility for bribery and corruption to be undertaken (Timmons & Garfias, 2015). With effective accounting systems and transparency in the allocation of resources and tenders, there is the possibility that such corruption incidences can be managed and the government can formulate strategies that can improve the quality of services that are offered to the foreign investors. There should always be reflective relationship between the government policies and the accounting information system that is developed in the region as this is integral in maximizing the resource allocations in the respective economies.
Corruption in developed countries
Compos et al. (2010), have argued that corruption is an international concern that is not directly linked to a particular nation. Corruption does not have boundaries and can occur in any country and pose problems to governments, business organizations and that society at large. However, the level of corruption in developing countries gas been found to be rampant compared with developed economies. The wide spread nature of corruption across many countries in the word is the main leading factor that has made it an important topic for discussion by the IMF, WTO and World Bank (Sandholtz & Koetzle, 2000). Throughout the discussion, particular recommendations and strategies have been provided to institutions as approaches in dealing with the problem so that the lives of poor people are improved.
In comparison to developed and highly industrialized countries, several studies have demonstrated that the level of corruption has gradually increased in third world countries. For example, a study by MacDonald and Majeed supported the hypothesis that corruption is higher in the European countries. The results from the study showed that corruption had continued to increase in the European countries (MacDonald & Majeed, 2011). In the last 30 years, corruption among the European countries was experienced at an average of 0.74 units. After 17 years, the average level in the same countries increased to 2.12 units (MacDonald & Majeed, 2011). The results point at alarming statistics that need immediately redress by policy makers in the government. Currently, it has been established that corruption exits even in countries that have been designated as corruption free like he Scandinavian countries like Denmark.
A similar study has supported the findings provided by MacDonald and Majeed. According to Mungiu-Pippidi (2013), they found out that many years of corruption has become a chronic problem for many poor nations and the economic crisis within the European countries has demonstrated that managing corruption has become difficult. For instance, in Greece and Spain the level of economic growth has regressed as opposed to growing. The findings of a survey by the Special European Survey showed that 79% of its respondents supported the idea that corruption is present in their countries (Mungiu-Pippidi, 2013). The two studies have shown that entirely, all countries in the world are faced with problems of corruption. These prior studies have rejected the assertion that corruption is only a problem for developing countries. Consequently, it is imperative that we acknowledge the fact that developing countries have a higher level of corruption because their main form of corruption is systemic, and this requires a combined approach to fight the menace.
Corruption in developing countries
The economic and prevailing political situation in the third world countries has shown that very few countries under this classification have low levels of corruption (Khan, 2006). This implies that corruption poses a real threat to the sustainability of developing countries because it creates, financial, cultural and social problems (Sandholtz & Koetzle, 2000). According to Shabbir and Anwar (2007), they have postulated that corruption increases by 1% developing countries, which causes a retardation of GDP by 3%. These findings are consistent with an early study by Lambsdorff (Lambsdorff, 2006). Based on these findings, we clearly conclude that corruption affects the level of foreign investment, reduces the GDP, enhances poor quality institutions, increases public expenditure and hampers maximum collection of income tax (Lambsdorff, 2006).
Education is another major sector that has suffered much from the evils of corruption. A recent study has indicated that corruption has a negative impact to the level of education in a particular country from a study sample comprising of 50 nations (Campos et al., 2010). In this study, corruptors have targeted the education budget because they get the highest share, which is always 30% of the total (Campos et al., 2010). In the end, the allocated funds for education are not utilized as planned. Therefore, the extent of teaching process in education institutions, the scientific and logic rooting is now disregarded. This has been a precursor of poor education outcomes. According to Chapman (2002), corruption permeates routine daily transactions at schools and administrative levels. The real impact of corruption in education is observed when the whole generation is miseducated. This changes the ideals of logical reasoning to support illogical perspectives that success is not founded on merit and hard work, but instead favoritism, deception and bribery (Chapman, 2002). These issues are sufficient to destroy the civil society in protecting the future (Chapman, 2002).
According to several studies concerning the impacts of corruption, it has been identified that corruption had resulted into many problems than gains in developing countries (Bardhan, 1997). A few studies have found a positive link between the impacts of corruption. Bardhan (1997), established that corruptions promote the economy in a positive way through improving the level of effectiveness in the private sector and acts as a major catalyst for trade (Bardhan, 1997). This assertion has also been supported by a study by Rock and Bonnet (Rock & Bonnett, 2004). In their study, they claim that corruption in developed economies results to positive impacts on increasing investments and growth (Rock & Bonnett, 2004). Leff (1964) found out that in an environment, corruption through bribery serves to attract investors because it makes the process of obtaining government licenses to be easy (Leff, 1964). This is observed as an advantage because it reduces unnecessary delays that can cost the business a lot of money. Similarly, the study established that corruption can increase the level of investment through lowering the impact created by a volatile government because some of the interventions can destroy investment projects.
The studies have indicated that positive effects of corruption are only short lived because at some stages the trend of growth will decrease. This is because systemic corruption will cause distractions in the socio-economic system of a particular nation. Here, corruption will slowly and naively affect poor people and those without connections with those in leadership and authority (Mauro, 1998). This section has demonstrated that systemic corruption is rampant in the developing countries and results in a higher negative impact to the poor people. As such, the high level of corruption in developing countries becomes difficult because many people are involved. Here, the war on corruption considers several political aspects, administration and control systems. Whereas, many studies have been conducted on corruption there are limited studies that have linked corruption to accounting information systems. This study seeks to bridge this research gap through providing how can accounting information systems be used to reduce the levels of corruption.
Corruption and accounting information system
Everrett et al. (2007) set up a study to determine the link between accounting and the strategies for fighting corruption across the world (Everett et al., 2007). In the study, they stated that accounting and auditing systems play a critical role in managing the financial health of an organization. Accounting is an information system that provides information concerning a particular economic entity through provision of financial statements and audit reports (Everett et al., 2007). This provides an important basis for decision making. On the other hand, auditing is a specific monitoring system that offers a non-biased opinion about a particular financial statement (Everett et al., 2007). Therefore, accounting serves two important purposes of providing information relating to the economic transactions and checking the accuracy of financial information. Similarly, accounting as an information system through auditing will provide an important tool for monitoring and checking the level of accuracy to the accounting information system to promote accountability and easier detection of corruption activities (Everett et al., 2007).
A similar study has supported that accounting information systems provides an avenue for increasing accountability and early detection of corrupt activities (Malagueño et al., 2010). In this study, they focused on identifying the relationship between accounting, auditing and the level of corruption in that organization. Through the survey, the data collected showed a practical evidence that linked the level of corruption to the standard of implementing the accounting information systems (Malagueño et al., 2010). Financial reports that are prepared with a high level of transparency and disclosure were found to have corresponding low levels of corruption (Malagueño et al., 2010). This implies that a country is able to reduce the level of corruption through implementing accounting information systems (Malagueño et al., 2010). The authors elaborated that stakeholders will be able to access the information about performance and the true position of the organization through an audit report. The reports will be used by investors to make real time decisions about their investments. Ordinarily, countries with poor accounting information systems will lead to inaccurate financial reports and this means it will become unsuitable to stakeholders in th process of making decisions (Malagueño et al., 2010). Accounting information systems create an environment that allows employees to work against the auditing regulations so that they obtain a personal gain (Malagueño et al., 2010). Consequently, the government is a vital player in the whole process because researchers have indicated that accounting and auditing systems are linked to low levels of corruption. As such, it is possible that governments are able to reduce the rate of corruption through initiating strict implementation of accounting information systems following the international standards (Malagueño et al., 2010). This will reduce the impact of corruption because it will create a favorable business environment, encourage investments and increase the GDP.
A similar study found out that AIS is an important element of management that determines early detection of corruption (Wu, 2005). Through evaluating corruption in the Asian corporate sector, they found out that AIS is effective in detecting bribery and fraud forms of corruption (Wu, 2005). The study revealed that Asian countries have implemented poor AIS in their business reporting. According to the studies, the poor standards of AIS in Asia have caused a financial crisis (Wu, 2005). The increased financial crisis has prompted the adoption of international standards for AIS to avert an increased level of corruption and financial crisis. The studies have indicated that AIS play a critical role in enhancing the organizational structure for both public and private sector. Similarly, the studies have pointed at a relationship between AIS and corruption. Through good AIS, developing countries will be able to reduce the level of corruption.
Accounting system
It is important that this study provides a general understanding of an accounting system. AIS is an essential part within an organization structure that is concerned with provision of financial information of a certain organization as an internal or external control. Auditing is a section of AIS that is focused on verifying information obtained from an accounting system. AIS is implemented in an organization so that it can provide reliable, accurate and transparent information about an organization financial performance (Kimbro, 2002). The World Bank has indicated that AIS offers a good opportunity for organizations to fight corruption and strengthen economic development (Kimbro, 2002). Traditionally, AIS was perceived as a mere system for providing financial information regarding the performance to facilitate decision making. In the contemporary world, the role of accounting has continuously evolved especially in the developed economies. Currently, AIS is implemented to ensure transparency and accountability in both public and private organizations. Therefore, in the modern business environment, accounting is used for providing both financial and non-financial information relating to the organization performance (Shabbir & Anwar, 2007). As such, accounting plays an integral role in socio-economic development because it provides important information about the GDP, resources and critical environmental considerations (Shabbir & Anwar, 2007).
Accounting information system change
Several factors in an organization affect the effectiveness of an accounting system (Barth et al., 2008). According to Barth et al. (2008), these factors include; international trade, capital flow, level of technology, foreign investment, financial crisis and globalization. The important role of accounting in the contemporary market place has necessitated various federations to develop important standards and changes to the AIS so that it becomes consistent with the level of competitiveness in the global market. Many countries in the developed economies have instituted essential changes to AIS by implementing the requirements of the international standards. According to Mangualde (2013), he revealed that in the last 3 decades, the public sector has been affected by several reforms so that it can adopt business practices that are vital for better resource management. Basically, the modern changes to AIS ae based on the adoption of accrual accounting to improve the process of accounting. Other international standards for accounting include; IAS, IPSAS and IFRS (Barth et al., 2008). Nations like the UK, Australia, Singapore and New Zealand have adopted the new changes in the AIS within their jurisdictions (Ouda, 2003). Through the implementation of the new standards, the countries which are in the developed economies category, have improved their productivity and efficiency. In particular, New Zealand was experiencing a huge economic crisis prior to the implementation of the new standards and reforms (Ouda, 2003). The new changes offered an opportunity to increase the level of accountability and transparency across government sector (Ouda, 2003). Also, the changes have initiated a new measure that strengthen internal and external auditing systems (Ouda, 2003). Brazil is another country in the Latin America segment that has implemented the new accounting reforms as a basis for increasing disclosure and transparency (Mangualde, 2013). The reforms in the AIS offered reliable accounting information, high accountability, transparency, better management practices and efficiency in utilization of resources (Mangualde). The major concern for developing countries is that majority of their accounting systems are based on traditional approaches and have failed to offer a competitive role in fighting corruption.
Accounting information system in the developing countries
Briston (2007), provides that AIS in the developing countries was designed to satisfy the needs and demands of colonial masters and not to improve the state of the countries. The traditional approaches in the AIS suit different economic situations and they are no longer good for the colonialists because of globalization. According to Piers et al. (2007), many developing countries have their accounting records characterized by poor management and routine designs. This makes it difficult for investors and stakeholders to obtain accurate financial information because of weak auditing systems, poor accounting and manual systems. Hopper et al. (2009), found out that transparency and accountability are critical in promoting good governance in public and private organizations. Transparency was found to be correlated with accountability and this is important in ensuring that the public can access vital financial information to determine the effectiveness of the government (Hopper et al., 2009). In developing countries, the public sector has low institutional ability, non-effective procedures, limited accountability and little access to financial information (Mimba et al., 2007). According to Svensson (2002), majority of anti-corruption strategies focus on improving the level of accountability and transparency. Here, good government systems will improve the level of transparency and reduce corruption (Mimba et al., 2007). Contrarily, majority of the developing countries have weak regulations that promote corrupt activities. This implies that conventional systems and current state of AIS are ineffective in fighting corruption (Mimba et al., 2007). However, the studies have supported adoption of new AIS that conforms to the international standards as critical in fighting corruption.
Another problem affecting AIS in developing countries is inadequate staff and human resources (Pratap, 2006). The implementation of accounting qualifications is insufficient in dealing with financial crisis. This implies that developing countries should focus on adopting new changes in AIS so that they become able to satisfy the needs of a contemporary business environment. Part of the strategy for achieving this need is through implementing training programs to improve the skills of accountants in managing the accounting system. According to the World Bank (2003), developing countries can use AIS to fight corruption by adopting new accounting systems, develop capacity for accounting professionals and adopt new changes to AIS.
In conclusion, the literature review has demonstrated that corruption is a phenomenon in developing countries and it is a serious problem that affects economic development. Secondly, the literature review has indicated that accounting and auditing are the main weakness of a good AIS because due to lack of accountability and transparency. The literature shows that the increased cases of corruption in developing countries require implementation of changes to the accounting and auditing. Therefore, the literature review leads us to the research question “What is the role of accounting information system in deterring corruption in developing countries?