5.2.5 Internal control requirements as a corporate law mechanism to fight corruption

One of the roles of corporate law in the prevention of corruption can be found (through corporate governance and accounting regulations) in the internal control provisions on financial reporting. As explained in section 5.1 supra in relation to the Siemens and ABB corruption scandals, the financial and accounting controls of these companies had not detected or prevented corrupt payments from being made. This shows that maintaining weak financial and accounting controls substantially increases the risk of corrupt practices by employees. The internal control regulations described in sections 5.2.2 to 5.2.4 do not explicitly require that companies include information on their methods for avoiding corruption. However, they do require that companies implement and maintain financial and accounting controls that ensure the reliability of financial reporting, including controls concerning the disposition of assets. Therefore, if companies comply strictly by implementing and maintaining these controls, their financial reports can be expected to be fully reliable and the potential for ' hiding' illicit payments in the financial reports will in principle be reduced substantially.

Solid controls are particularly relevant if the company invests or does business in countries where the enforcement of anti-corruption rules is weak. In those circumstances, civil society expects more corporate initiative from a CSR perspective. See e.g. the Ruggie Report (section 7.5 infra)1This Report reiterates that businesses have a greater responsibility to behave responsibly in weak governance zones and that, consequently, businesses have to anticipate and incorporate internal programmes in order to avoid corporate-related human rights abuses. As mentioned above, corruption is an obstacle to realising public goals, among which are human rights. In particular, the implementation of the second generation of human rights, i.e. the economic, social and cultural rights, will be impeded when public income disappears into the pockets of a few powerful people as a result of corruption.

An example of the role that internal financial and accounting controls play in the avoidance of corruption can be found in Siemens AG's 2007 Management Report. The "Information to Shareholders" section disclosed the actions which Siemens management had taken to strengthen its financial reporting controls in order to prevent corruption:

This example demonstrates that maintaining effective internal controls over financial reporting is a prerequisite for a company to prevent corruption. A corporate law obligation to report on this, such as required by SOX and the Frijns Code (through the DCC), certainly motivates a company's management to survey risks and to take measures to avoid such risks.