Exploring illegal guarantees between group companies: a case from Turkey

Abstract

Purpose

The purpose of this paper is to discuss that in an uncontrolled business environment public companies' resources may be abused to fund other group companies by their management.

Design/methodology/approach

The paper has been designed on fraud theory. The theory has been developed on interviews with key management personnel, financial analysis, audit tests and gathering the facts on each step.

Findings

The paper concludes that in an uncontrolled financial market, owners, executives and statutory company auditors acting in harmony may break the financial rules, statutory obligations and convert a healthy public company into bankruptcy by means of milking its resources to other group companies on unfeasible projects or on individual pleasures.

Practical implications

Auditors both internal and external should pay attention to intragroup transactions. Companies, partially or wholly owned by the public might be under the influence of owner/executives. Here, it is not only the government interests as tax or social insurance, but also the shareholders' interests are at stake.

Social implications

Resources are scarce, especially in developing countries. The public's savings must be sourced to feasible projects in trustworthy hands, otherwise public's trust is shaken which will deter potential shareholders to invest in capital markets, and consequently these negative repercussions will affect the whole community.

Originality/value

The case that the paper covers reflects the author's own audit experiences as an ex‐auditor. The names of the companies have been changed but not the essence of events. It is believed that the paper will shed light onto the path of the reader who might be an external or an internal or a statutory auditor or a manager of a company who might be involved in similar situations.

Citation

Ilter, C. (2010), "Exploring illegal guarantees between group companies: a case from Turkey", Journal of Money Laundering Control, Vol. 13 No. 2, pp. 155-166. https://doi.org/10.1108/13685201011034096