Accountability during the COVID pandemic: the perspective of emerging economies podcast

Transcript

Accountability during the COVID pandemic: the perspective of emerging economies

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Daniel Ridge (DR): Over the course of the last year governments across the world were forced to take drastic measures in response to the COVID-19 pandemic, in order to protect public health and support struggling economies. While necessary, such responses created opportunities for corruption, which may ultimately undermine their very purpose. What will be the long-term impact of the pandemic on different parts of the world, and how does pandemic response help or hurt those who are already disproportionately vulnerable? In this episode, we speak with the guest editors of Transparency, accountability, and the role of control mechanisms during the Covid crisis, a special issue in the Journal of Accounting and Emerging Economies, to discuss the impact of the pandemic on emerging economies.

I begin my conversation with Professor Javed Siddiqui, and I am also joined by Professors Thankom Arun and Hassan Yazdifar

Well thank you so much for joining me today Javed.

Javed Siddiqui (JS): Thank you so much Daniel for having me.

DR: So tell us about what got you started on the special issue, why are you placing the focus on emerging economies?

JS: I think it's a good question. Of course, we're in the middle of an unprecedented global health crisis, and governments around the world have had to respond to it, almost like a wartime measure. And then of course to cover for the economic losses, they had to come up with a number of stimulus plans to cushion the economy from the blow. And then, because they're having to react very quickly to it, they had to bypass a number of normal internal control procedures. As a result, that has raised the risk of corruption. Now, your question was why we are focusing on emerging economies, only. Of course, because if you look into the nature of the pandemic, it seems to be having a disproportionate impact on the developing countries and emerging economies, simply because these countries sometimes have incomplete institutions. There is lack of proper monitoring, and also because of the sheer number of people below the poverty line, there's a risk of higher impact of the pandemic. Basically, that is exactly why the focus of this particular special issue would be on emerging economies only.

DR: Can you tell me a more about what are the essential characteristics of an emerging economy, how do we define that?

JS: From an accounting finance point of view, or an economics point of view, there are different definitions of emerging economies. But from this point of view we actually mean countries that are characterised by presence of weak capital markets. There is poor stakeholder activism, so sometimes the stakeholders do not know, or do not have adequate knowledge about the companies they are trying to invest in. There is poor monitoring. There is sometimes lack of second audit institutions, for example, the audit profession sometimes is not as well developed as in developed economies. The legal system sometimes does not offer adequate protection. And also this coupled with the nature of the capital market, so there is the presence of state business nexus, whereas the government has a very good relationship with the businessman. There is extended family governance and presence of traditional elements of the society. So basically, these are essential characteristics of emerging countries, and that's why I think this is such an interesting field.

DR: One of the main ideas in the special issue is that pandemic response creates the opportunity for corruption- can you give me some examples of what this corruption might look like and how it can impact these emerging economies?

JS: I was just looking at all the reports and actually yesterday, Transparency International came out with another report on corruption during the pandemic. Basically, it does surveys basically saying that corruption has worsened, especially in the European Union and that report was on EE all day, and they're saying the pandemic has worsened instances of corruption in European Union. Health care sector of course, that is a hotspot for corruption that's not surprising, given that of course there has been a lot of pressure on this particular sector. It says that people are having to pay outright bribes in some cases, to receive healthcare. And also, very importantly, there's a public perception that governments have not handled it very well or have not been transparent enough in terms of handling the crisis. Now looking at emerging economies, they have similar sort of trends coming out in countries such as South Africa, in various parts of Africa and developing countries in South Asia as well. For example in South Africa, there was a minister that was removed due to allegations of irregularity during the COVID pandemic, irregularities in terms of awarding contracts. So in terms of if we look at the nature of corruption, I think we're seeing that trend. I think the majority of the corruption seems to be happening from procurement in this particular pandemic because as I said, you're trying to bypass many of the regular normal internal control procedures, and so there is further scope for corruption. Many governments have awarded stimulus packages to the public and of course, the disbursement of it as I said, especially in emerging countries because of the lack of proper monitoring and accountability, that has become problematic. There has been gross misconduct and abuse of funds, dispersed in this pandemic, there has been reports of inflation of healthcare and food prices and elements of corruption. But also quite striking is the role of numbers that also is part of the corruption process, because if you look at it in many countries there has been reports of underreporting of the number of COVID deaths, COVID patients and so on because this almost become a political game. So, governments in different countries across the world are being judged on the basis of numbers, and how they've done during this pandemic, so there has been a tendency to underreport these numbers so there is corruption in that sense as well.

DR: Well I’m interested in what this would mean for achieving the United Nations Sustainable Development Goals: how could this pandemic in the various responses to it impact the ability of emerging economies to achieve the UN SDGs by 2030?

JS: In terms of the SDGs, of course, a trend was quite positive just before the pandemic struck. However, if you look at the last two years (the UN actually comes up with a report every year), if you look at this year’s report and last year’s report, for the first time we are actually going back; we are reversing, the process is reversing, so a significant number of people have gone back into poverty. There has been significant unemployment, especially in developing countries, school closures have resulted in millions of children being outside the schools, and there has been this risk of child labour because what's happening is that people are being put out of jobs, so there is a tendency of child labour, workers abuse and so on. So, if you look into emerging economies, these governments have to operate within very limited resources and in this pandemic a large amount of resources had to go out to help out people to get the health care services fixed. So as a result, there is of course less amount of resources available now to meet the targets to go back on track. So we presume that there will be a significant impact on the ability of these emerging economies to meet the SDGs, so this will be a major setback in the target that would have been achieved by 2030. That was actually the start of what we're looking for, but it remains to be seen what will happen for the next couple of years, because that will have a significant impact on whether we are able to do anything by 2030 or even by 2050.

DR: I'm curious when you were working on the special issue if there was anybody's research or anything that really stuck out to you as being new or innovative that you hadn't thought about before.

JS: There are actually a number of papers coming out of COVID actually, everybody's working on the impact of COVID and disease. I don't want to mention a particular author, but overall, I think what we're seeing is that there are emerging practices in auditing for example, because of course my research interest is in auditing. For example, in many countries as supply chains in emerging economies, there was a certification process in place, for example to make sure that the wages paid out to workers in these factories are being paid properly, that there is proper working conditions being ensured, and we have reports of violations of these practices in these over the last couple of years or over the last year. This is where auditing and independent certifiers have got a massive role to play in order to step in and say that, despite the impact of this particular pandemic, we have to ensure that workers are being paid up properly because I think if that is not insured we're going to go back to where we were 10/15 years back. So, I think these are interesting issues coming out. Public accounting, if you look at audit of public interest entities, audit of government owned businesses, this has been a major issue in recent times as well as public procurement, procurement for health services for hospitals for education. These have been a major areas where we normally as accounting academics do not look into. So, this particular COVID pandemic has created opportunities for us to enter into many fields that were previously normally not exploited by accounting academics and finance academics. I think there's a very good opportunity for people to come in and start working on these areas.

DR: Well I know that you're particularly interested in auditing, corporate governance and CSR reporting in the context of developing economies. How did this, you know, inform your contribution to the special issue?

JS: I mean if you look into the overall aspect of corporate governance and auditing, especially in the context of emerging economies, the existing literature keeps on saying that in emerging economies, because of the family control because of the lack of accountability, there's this tendency of trying to overrule or bypass corporate governance and auditing arrangements, and this is likely to happen of course during the COVID pandemic. So if for example, auditing was properly being implemented and corporate governance was properly being implemented, corporations wouldn’t be able to bribe people or the government for the contracts, the government won't be able to award contracts to corporations they'd like to. So, these are the areas where auditors and corporate governance has got a major role to play, especially in the context of the current pandemic. Because, of course, one is that the pandemic is having an impact on the society anyway, but if you think about the corruption, the nature of corruption that actually means that all this money that the governments in emerging countries are spending, they are not being spent they're not going out to the people that they're being spent on. It basically defeats the purpose of the entire COVID package. So if you think about it, auditors and corporate governance mechanisms have a got massive role during this current pandemic. There are new forms of audit reports that allow auditors to disclose these activities nowadays, so it remains to be seen what auditors have done over the last couple of years- I think that's going to be fascinating to study.

DR: Thankom you specialize in global development and sustainable development. Can you give us an overview of the current state of play in the subject area, and I'm curious about how COVID-19 has changed the conversation?

Thankom Arun (TA): This is very important, because since 2000 through a millennium of development goals and Sustainable Development Goals, we have been successful in reducing inequality, particularly the income inequality between countries- that has declined sharply over the past two decades. But that has actually changed now, particularly looking at the data from the last two years, the situation has diabolically changed to a different direction. And what is important here is the pandemic’s pressure on the implementation of Sustainable Development Goals. As you may know, IMF has projected a fall of 4.9% of global GDP in 2020, and World Bank projects about 93% of all countries in the world will go into a recession these days. So many of these economies are facing double digit declines in one way or the other. And OECD has actually come out with a big report on global outlook on financing for sustainable development, which calculated that there is nearly a shortfall of US dollars 1.7 trillion in the financing of attaining the Sustainable Development Goals. So that enormous pressure in terms of financing Sustainable Development Goals actually puts quite a lot of shade on the successful outcome of these goals. And how do they manage this kind of a big drop in finance is a big question, which needs to looked at from a wider angle.

DR: Hassan I know you're interested in management practices and accounting, what developments have you noted in this area over the past year?

Hassan Yazdifar (HY): The COVID 19 pandemic arose suddenly and unexpectedly and has brought unprecedented pressure and short term challenges for global business activities. Organizations needed to act rapidly on a myriad of issues that includes the health and safety of employees and customers, sales, cash flows, supply chain and marketing and many other internal and external relationships that they have. The decision-making process was unstructured as organizations lacked clear reference points and historical data was not particularly useful. Given the uniqueness and recentness of the COVID-19 pandemic, it has been unclear the extent to which prior theoretical or empirical studies could serve to predict management control system design that supports managerial decision making under a new and unknown scenario with huge uncertainties.

DR: What has been the impact of the pandemic on the public accountancy profession?

TA: Most of the government accounting relies on very ancient methods, it's basically a cash based one. But that narration behind the accounting system during the last couple of decades were mainly based on governments versus the private sector. But COVID-19 pandemic has revealed how much governments matter these days, and it's so important about this public account system. Unfortunately, our public account system is based on a cash based accounting, and there is very little about the modern accrual based accounting normally used by the public companies, are actually used by the governments in that case, except in New Zealand or a couple of other countries, in that sense. So, I think it actually opens up the importance of very high-quality information and how to support very fast and informed decision making. And moreover, I think that is the most important thing, the profession needs to support the governments to regain public's trust and public's trust is actually the numbers and trust as Javed mentioned earlier. I think it's a really important challenge for the accountancy profession to gain the importance of public's trust in their activities.

HY: I think what is clear that the level of perceived environmental uncertainty requires a different approach in decision making and decision making processes. This would also bring challenges to the roles of public accountants and the accountancy profession. And it is imperative that they should know about various forms of management control systems, control system designs, and their strengths and limitations. It will also affect significantly Accounting Education, and the importance of equipping accounting graduates with the right skills and knowledge to be prepared for joining the industry and facing unknown futures.

DR: Well, to follow up on that, I'm curious how was the COVID crisis reported in the extended formats of the audit reports, and really how did this crisis change auditors’ approach towards clients?

HY: In that situation, and also governmental financial support, has created possibility for corruption and that is clearly an issue that could be considered by auditors. What approaches should be adopted, and how the result should be reported in the auditing report, and the structure of session discussions, require proper thinking and monitoring by the professional bodies.

DR: If we look at it this way what would have been the ideal pandemic response in terms of accounting and what we've been talking about?

HY: The current pandemic may not be the last one. And also, we don't know when this will really end, and therefore it is important that businesses prepare themselves for unknown situations and ongoing uncertainties in the business environment. Researchers should also examine the design of different control systems on their uncertainty and crisis management, and consider how the broad scope management of those systems, the management control system which is much different from the traditional one, may help organizations to alleviate the negative effects of the COVID-19 pandemic on investors and shareholders expectations. The lesson learned from this would help businesses and the accountants to be ready for similar situations in future.

DR: What is the role of accounting and governance in this context of the COVID-19 pandemic?

TA: The concept of accountability has been dramatically changed during the period of COVID. But irrespective of the bleak picture from many parts of the world, there are quite a lot of positive things coming up in terms of accountability. One of them is female leadership, it was associated with many countries in that sense, from Taiwan or New Zealand or Singapore, and also excellent performances, including the South Asian regions like Sri Lanka, or the region Kerala in India, and others. So that sort of examples actually brought some of the common elements together, such as effective leadership, transparent communication, excellent targeting, community engagements, etc. So that shows a new kind of experience, a new kind of governance and accountability in debate with wider participation of all stakeholders, including its own user groups. I consider this is a great opportunity for the state to reinvigorate and to gain back that trust and how to revitalize their mandate for many democratic institutions. I look at the responses in the field of health and other relief things: they are highly designed and costed and resourced in many countries, irrespective of their poor or limited public resources. So, I consider the demand or the nature of our debates on accountability, actually more from something like a more collaborative in nature, and also more participatory in that.

DR: Is there a role for developed economies to help these emerging economies respond to the pandemic and still work toward the SDGs?

TA: Again I consider it's a very important question, because pandemics risk putting pressure on flows of development and development aid or development support from advanced to developing economies; because there is a drop in private finance and there is a drop in portfolio investments, a drop in foreign direct investment, decline in climate chances. So, all together, it’s quite a lot of pressure, particularly in terms of it’s a fiscal situation financing both pandemic and also the attaining the SDG goals there. So developed economies, they can’t think about concessionary loans or more kind of collaborative platforms where the developing countries can borrow money without much difficulty. IMF’s extension of the sovereign debts platform, etc. a classic example, in that case. And one more thing, because most of the developed economies, they have the privilege in terms of borrowing their own currencies. But many of the developing economies, they don't have that, they are actually dependent on that development cooperation. So, I think the most important challenge here is how to scale up finance for development, and that needs to be the centre stage in a post COVID situation.

DR: I'm interested in surveillance mechanisms, and I'm wondering what does research tell us about the very surveillance mechanisms used during the pandemic, and you know what were some of the most effective management control systems used?

HY: Earlier, I referred to the concept of broad scope management control systems: the broader scope management control systems comprise information that is quantitative and qualitative, internal and external, financial and non-financial, historical and future oriented. Those systems include a large spectrum of information that could range, for instance, from over-costing to customer satisfaction, from marketing trends to new governmental policies, and from employee training needs to new investment opportunities. Contrarily, narrow scoped management control systems are based on historical and financial data, and on past operations and events within their organizations. Those broad scope management control systems support managers in the formulation of more comprehensive strategic agenda in terms of idea size, meaning the number of issues considered at one time and variety, meaning the diversity of issues considered at one time. These systems enhance the quality of managerial decision making, accelerate organizational learning processes and assists in performance evaluation and monitoring of the environment. Additionally, cost management studies indicate that in times of crisis, decision making, or decision makers, find it difficult to gain access to needed information, which is often difficult to locate and generally complex in nature. Under such circumstances, using broader scope management control systems should better position managers to respond faster to the impact brought by COVID-19, as they are equipped with more comprehensive information, enabling better and accurate decision making.

DR: Well I think it's really important to keep looking ahead and to learn from what has occurred over the last year- what needs to happen for accountability to adapt to a post pandemic world, and all the new ways of working that it introduced?

HY: The role of higher education such as government industries, professional bodies and higher education institutions is very important in promoting best practice, and also facilitating the implementation of them by providing necessary support and required training. These are issues that might be easy to discuss but requires proper thinking in preparation and implementation of them in the universities and in industries and requires proper teamwork within all stakeholders involved.

TA: It is really important to highlight the element of transparency as well, and that's what we are trying to do in this special issue, because accountability and debate is very much dependent on the extent of transparency in the system: transparency in government reporting, forecasting regular and user friendly communications on risk, that's also important. At the pandemic, we saw that many global leaders actually communicated to the people directly through their electronic media, television, and that has a profound impact on people. So, the transparent and timely interactions of the elected officials or elected representatives with the people, I think that is very important; that's one of the key lessons we learned during the pandemic, that previously we saw similar a kind of thing only during World War Two. But now after 50/60 years later, we are seeing close communication between the elected representatives and user groups.

DR: Great I think all that's really interesting, is there anything that you think you'd want to add that we didn't cover?

TA:  In this special issue we welcome multidisciplinary contributions, not on accounting or finance alone, but a multidisciplinary contributions from development studies, accounting and finance, so they can talk more about the impact of COVID in emerging economies, and how the existing practices of accounting, auditing and control mechanisms are not enough to address the post-COVID challenges.

DR: We'd like to thank you for listening to today's episode. For more information about this special issue in the Journal of Accounting and Emerging Economies, please see our show notes in our website, along with the transcript and more information about our guests. I'd like to thank Melissa Close for working on this episode and Alex Unis of This is Distorted.