Ernst & Young, a fortnight back released an India based fraud survey report titled “Fraud and corporate governance: Changing paradigm in India”. The survey had 114 online completed forms with respondents categorized in three groups – 45% foreign MNCs, 32% Indian MNCs and 23% Indian companies with domestic operations. Though the survey information is worth reading, the results are not truly representative of the Indian corporate world. In India, around just 10% of the companies are listed, 90% of the companies are private or unlisted public companies, and less that 5% are foreign companies. Hence, the results shows a tilt towards MNCs understanding of fraud risks.
1. Main Fraud Risks
As per the survey the following are the top five risks of fraud :
a. Data and information theft and IP infringement
b. Bribery and corruption
c. Fraud by senior management and conflict of interest.
d. Vendor fraud or kickbacks.
e. Regulatory non-compliance.
Further on, the profile of the fraudster is a male middle management level employee in his 30s working in procurement or sales department. This maybe true for the smaller amount of frauds, as the survey doesn’t discuss accounting manipulations, though does state that senior management involvement is there in high value frauds. The high level window dressing and accounting manipulations of financial statements at the behest of CEO, CFO and Board is an unmentioned aspect in India due to the power equations. The survey gives a contrary viewpoint than that mentioned in the Fraud Symptom series. In this aspect, the survey shows that Indian fraud scene is better than the US fraud scene, and that is quite hard to believe.
2. Fraud Reporting
In India, most frauds go unreported, specially senior managers. The survey makes this candid observation, that I am in complete agreement with – “Companies are reluctant to take legal recourse against employees responsible for committing fraud. Only 35% of the respondents said that their company takes any disciplinary action against unscrupulous employees. ” Although fraud incidence has increased, the organizations do not report due to the time taken in judicial resolution, to escape regulatory repercussions and avoid huge reputation damage. Moreover, the practice is to ask police to help recover the defrauded money, and after that let the law takes its own course. Since, the plaintiff (in this case the company) is provided a public prosecutor, the company stops pursuing the case after some time. Hence, usually the fraudsters go unpunished.
Due to this approach, fraud in private sector is mainly unreported. The government sector auditors (CAG) are doing a far better job in highlighting fraud cases. In comparison to government reporting on fraud and bribes, private sector is not even showing one-tenth of the cases. The situation is absolutely unlikely and has to be viewed skeptically. When the demand side (government) bribe cases are high, the supply side (private sector) has to be equivalent. The private sector is in no position to hold the holier than though attitude.
3. Fraud Detection
The survey mentions the paradox – “fraudsters are using advanced tools and technology to perpetrate frauds” and organizations are using excel based worksheets to detect frauds. It states – “Less than 50% of the respondents are aware of fraud-prevention and detection tools. Moreover, in spite of the current popularity of social media, only one-fourth of the respondents are aware of IT based tools that can be employed to identify unethical behavior, based on a social network analysis”. In India, fraud detection and investigation skills are in short supply. Since organizations aren’t focused on risk management, the fraud risks remain unaddressed.
Another challenge, brought out very well in the survey is absence of whistle blowing systems in Indian organizations and high level of retaliation due to lack of whistle-blower protection laws. The survey mentions – “Less than half of the respondents reported that their companies have a telephone hotline.” Additionally, as the hotlines are internal, anonymity is low and risk of retaliation is high.
The survey gives, in addition to fraud risks, interesting insight on bribe and corruption, and new regulatory changes. It is a good read and there are very few fraud surveys available solely focused on India. Disclosure: I am ex-E&Y, hence am likely to be biased. Mind you, I haven’t written previously of E&Y surveys and reports, hence, you can presume that some level of independence in thought has been maintained.