Corporate frauds need better detection

After the high-profile scandals of companies such as Enron, the recent fraud by a rogue trader that cost French bank, SocGen, $7.2 billion has again brought the issue of corporate fraud back into the limelight. Maybe such news is merely of idle interest to the Indian corporate world which may have seen a reduction in the number of corporate frauds reported in 2007 in comparison with 2005, but that in no way means that corporate frauds have actually reduced in number.

According to a recent 'Economic Crime' survey by PricewaterhouseCoopers (PwC), there has been a drop in the percentage of companies in India that reported the fact that they were victims of a fraud. The study points out that the number of reported incidents of frauds has decreased from 54 per cent in 2005 to 35 per cent in 2007.

India seems to have a much higher tolerance for fraud, cases of which go mostly unreported unless the amount of money involved is high. Ashwani Puri, leader, India advisory service & investigations and forensic services, PwC, points out, “In India, there is a higher tolerance of fraud and there is a general perception that certain types of fraud are a necessary by-product of rapid growth.”

Steven Skalak, global and US Investigations Leader, PwC, says, "Our study reveals that 35 per cent of companies in India were victims of economic crime during the past two years as compared to 43 per cent in the Pacific region." He adds that detection of frauds despite internal audits have gone up in India but reveals that the detections have been more by chance than due to any anti-fraud programme put in place by companies.

"The reliance of frauds getting detected by chance has increased from 37 per cent in 2005 to 50 per cent in 2007," he says. And yet, “36 per cent of companies in India failed to take any action against the people who committed the fraud as against 16 per cent globally."

Detection of and action against frauds by more organised methods is increasingly going to be a need for corporate India since, as Indian companies expand globally, they will become susceptible to more frauds. So what are the reasons inhibiting formal detection and action?

The cost of managing frauds is one of the biggest reasons. The cost is high both in terms of managing losses as a result of fraud and putting mechanisms into place to prevent it. Companies in India have reported direct losses of $1.5 million due to fraud, the report says. “Legal investigation, public relations costs and shareholder management costs are high in India," says Puri. Respondents in India reported management costs of $1 million, which is double that of global and the Asia Pacific region’s costs.

Then there is the cost of insurance cover in case of frauds. The survey says that 34 per cent of companies in India have insurance against fraud as compared to 45 per cent globally. There is also the technology cost. A recent ‘Ernst & Young Global Information Security Survey’ shows that companies struggle to balance risk mitigation efforts with performance improvement initiatives.

As a result of all these factors, fewer companies in India take action against perpetrators of fraud. Also, a whistleblower mechanism that exposes wrongdoings of companies is on the decline in India when it is the other way around globally.

The Reserve Bank of India has stepped up enforcement of anti-money laundering regulations. Similarly, the Foreign Corrupt Practices Act of the US and the adoption of Clause 49 in India are ensuring that Indian companies put some measures that would help economic crime. But in the final analysis, the report says, lack of faith in the judicial system is a matter of concern and 89 per cent of the respondents cited this as another key reason for frauds not getting reported.