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Auditing Not Just Inspection But The Way For Corruption Control

Corruption has severe impacts, especially on the poorest citizens of developing countries. It has no borders and has spread worldwide, even to the countries once known as "clean country."

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Despite rapid economic growth and meticulous efforts in anti-corruption campaigns, Indian financial system continues to be plagued with rampant corruption problems. The progress towards corruption reduction has stagnated over the last decade as measured by corruption perception indices. This paper focuses on the corporate sector as the main source of corruption in Indian taxation system, with particular emphasis on the impact, that auditing practices have, on the level of corruption. Using a unique country wide firm-level dataset, the present paper examines some distinct characteristics of corruption in corporate India. The research paper focuses on the corruption in the area of taxation in India and its relation to Auditing Practices followed in corporate sector.

The paper empirically tests the relationship between auditing practices and its impact on the level of corruption. Our findings suggest that better auditing practices can help in reducing the incidence of corruption activities and the amount of corruption payments.


Principally, the corruption has spread in current years because of the advancement of economy, increase in legal and procedural requisites and non adherence of constraints that has established to prevent it. Corruption has severe impacts, especially on the poorest citizens of developing countries. It has no borders and has spread worldwide, even to the countries once known as "clean country."

Corruption works as an additional tax on investment by limiting the potential return to an investor on both the initial investment and on future returns. The secretive and illegal nature of bribes means that there is considerable uncertainty as to whether bribe takes will live up to their part of the bargain. Corrupt transactions are not enforced into the court, and it is quite probable that the bribe taker backs on his understanding with the investor or simply returns to demand another bribe. These considerations are showed in the higher risk premium that foreign and domestic investors attach to investing in India given the unpredictability of decision making.

According to World Bank report (2007), corruption is a 1 trillion-dollar industry around the world, thus combating corruption becomes one of the most important issues in the 21st century. Since corruption is a multidimensional phenomenon, caused by several factors, the solution cannot be simple and the fight must be pursued on many fronts. The major emphasis should be put on prevention, and particularly on the enforcement of corporate control mechanisms.

Audit was originally confined to ascertaining whether the accounting party had properly accounted for all receipts and payments on behalf of his principal, and was in fact merely a cash audit. Modern audit not only examine cash transactions, but also verify the purport to which the cash transactions relate. But nowadays the views about auditing are changing and it becomes a tool for corruption control.

Impact of Audit on Direct Tax Related Corruption
In the present study, an attempt has been made to examine the impact of auditing practices followed by companies and the incidence of corruption. As the intensity of audit increases the level of corruption is decreases. From the analysis the value of Z = 4.8254 for relationship of audit and direct tax is significant which indicates that as the auditing play an important role in direct tax corruption control.

Impact of Audit on Indirect Tax Related Corruption
From the analysis of impact of audit on indirect tax related corruption, the value of Z = 3.6942. This shows that the relationship of audit and indirect tax is also significant which indicates that the auditing plays an important role in indirect tax corruption control. Thus, there is a significant relationship between the intensity of auditing practices on indirect tax related corruption.

The economic growth experienced by India has been extraordinary during last few decades .The corruption occur when a public official acting for personal gain, violates the norms of public office and harms the interests of the general public. The study indicates that auditing practices have very much impact on taxation related corruption practices. The progress towards corruption reduction in India has stagnated despite enormous resources directed to anticorruption programs.

After the study it can be concluded that the auditing practices have significant impact on the taxation matter, so for control mechanism auditing practices have to be applied in a professional manner.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Tags assigned to this article:
corruption in india economy growth taxes

Rakesh Rangwani

The author is Chartered Accountant, presently pursuing PhD in Finance. His current area of research include financial engineering. He had attended international and national conferences and presented his research papers.

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