Corporate fraud in India will rise, due to failures to update

The rate of corporate fraud in India is at an all-time high and will continue to grow over the next two years – outpacing official efforts to mitigate it – because mechanisms in place to manage fraud risk are outdated or inadequate, a report finds.

MUMBAI – December 30, 2014.

Fraudulent areas set to rise include bribery and corruption, the diversion or theft of funds and goods, and regulatory non-compliance.

Many of the 400 chief executives at the Indian businesses who took part in the survey, conducted by Deloitte India’s forensic wing, did not identify emerging fraud risks such as e-commerce, social media, virtual/crypto currency fraud or cloud computing as being threats.

This is despite them acknowledging that leakage of company information, fraudulent use of credit cards and the diversion of payments to fraudulent accounts are key risks to online business, today.

While just over a quarter of those interviewed said they had not faced any fraud in the last two years, nearly half said fraud had cost them over US$150,000 – a gross underestimate, according to some reports.

Indian company directors displayed an alarming reliance on outdated or simplified fraud controls with little relevance to the fraud threats of tomorrow, with over half saying they rely on whistle-blower hotlines, IT controls and internal audit reviews to detect fraud, in Deloitte’s report.

More than half (56%) of the execs polled believed fraud levels would continue to rise to 2017, citing corporate India’s failure to educate employees on matters of fraud prevention – with only a third of respondents admitting they trained top staff in fraud risk management. Only a third, again, said they took legal action where a fraud was discovered.

Rohit Mahajan, Head of Deloitte Forensic, said: “Businesses make limited investments in fraud risk management, relying on a generic set of controls to mitigate all frauds. Over time, these mechanisms lose effectiveness, exposing companies to an increased risk of fraud.

“While firms in India have historically taken a reactive approach to mitigating fraud and complying with regulatory requirements, with organisations being exposed to new frauds and a changing regulatory environment, a proactive approach is now urgently required,” he added.

The survey showed that 88% of the Indian company directors polled believed a stricter regulatory environment will help reduce future corporate fraud in the country, with more use of proactive data analytics, improved monitoring and more comprehensive due diligence checks required, to ensure better fraud risk management.

The most likely source of fraudulent activity within a corporate business in India is the senior management, and the least likely is an external party, it found.

New company law recently introduced to tackle business fraud in India contains some stringent provisions, but in reality, these translate to ‘conservative’ action by corporates on detection of fraud, according to the report, leaving them highly vulnerable.

Such actions include the renewal or updating of existing controls, internal investigations and disciplinary action against the fraudsters taking precedence.

Some progress is being made, however… Two key provisions in Indian company law regarded to have improved trust where foreign companies in India or Indian cross-border businesses are concerned are: the mandatory establishment of a vigil mechanism for listed companies, and greater accountability on the board of directors to prevent and detect fraud.

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