Corporate scandals take time to be erased from public memory

NMC and Abraaj cases show that corporate governance needs tightening

In the wake of the many corporate misconduct scandals, activist investors and constant media scrutiny, a wide consensus on the need for robust corporate governance, transparency, and new roles for board of directors has emerged.

It is imperative the causes of such scandals, as well as their consequences, are ascertained.

Since 1953, research has tried to explore the inducements that lead to individuals’ unethical and fraudulent behaviour. Among these was one by Donald Cressey, a criminologist, who defined the “Fraud Triangle Model”. According to it, the incentive to commit fraud can arise from three elements — financial and non-financial pressures such as losses, greed or personal debt; the need to meet stakeholders’ expectations; and social recognition.

Secondly, the availability of opportunities to commit fraud and bury it, which arise from a weak governance structure, inadequacy of internal controls, and an incompatible control environment. Third, rationalisation, in which the fraudster concludes that gains from such activity outweigh all other aspects, coupled with the justification to undertake this misconduct.

Narcissist theory

Furthermore, the narcissist theory asserts that executives with high levels of self-confidence are more likely to commit fraud to preserve a positive image of themselves or their corporates.

Corporate scandals hinder the economic, social, and financial growth of a country by impeding investments, raising the cost of the transactions, and creating uncertainty in the investment environment. These scandals can hamper the corporate, the industry and the host country’s reputation. For example, the fraudulent fixing of emissions and fuel-efficiency tests by Volkswagen dealt a significant blow to Germany’s industrial reputation.

Additionally, the Fukushima disaster arguably sabotaged Japan’s reputation for integrity.

In the UAE, NMC, the country’s largest private health care company, has become the latest corporate to be involved in a financial scandal related to fraudulent asset values and theft of company assets. NMC’s scandal follows two others, involving private equity firm Abraaj and the construction contractor Drake & Scull International.

Taken together, these scandals potentially undermine the UAE financial sector’s reputation. However, despite the ramifications for the individual sectors and associated industries in the UAE, they are also persuading regulators to undertake measures that plug gaps in corporate governance. This will lead to better countering such problems at an early stage, and further strengthen regulations.

A report by the Association of Certified Fraud Examiners found that in 2019 organisations lost 5 per cent of their annual revenues to frauds, which equals to the loss of more than $4.5 trillion of 2019 Gross World Product.

Corporate scandals can occur from different causes. But once they occur, the impact can last for a proverbial eternity.