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Fraud Findings

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Is there something like lower vulnerability to fraud? Or are Indian companies just being complacent? Two surveys — the annual fraud survey conducted by Kroll Advisory and another by KPMG, the professional services firm — provide some interesting insights. 
The Annual Global Fraud Survey commissioned by Kroll Advisory Solutions, and conducted by the Economist Intelligence Unit,  asked 60 Indian corporate executives (along with more than 800 of their global peers) questions ranging from their perception of vulnerability to fraud, to measures being adopted to deal with the risks. Of them, 68 per cent admitted to being affected by fraud in the past year, a few percentage points more than in China, the US and Europe, against 84 per cent who said so the previous year. 
But that was too good to last. The loss to Indian companies due to fraud, at 1.2 per cent of revenues, is higher than the global average (0.9 per cent). In eight of the 10 parameters in the survey, Indian companies performed worse than the global average; respondents claimed internal financial fraud and vendor procurement posed the biggest threat.
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KPMG’s survey found that up to 71 per cent respondents saw fraud as a ‘natural’ fallout of doing business in India, perhaps explaining why they don’t really ‘react’ to it. The Kroll Advisory survey said that only 40 per cent of Indian companies (versus 55 per cent globally) planned to invest in preventive security systems against fraud. 
This is alarming as Rohit Mahajan, partner and co-head of forensic services at KPMG, says, “Responses to fraud in Indian companies are very reactive, rather than being futuristic — exposing the company to serious risk.” In fact, about 43 per cent said that in India the complexity of the information technology system was the single largest source of leakages.
As you get deeper into the specifics, the results of both surveys become interesting. Corruption and bribery don’t seem to be the biggest concerns any more. The Kroll Advisory survey shows that only a fifth of the respondents put corruption as their area of frequent loss, lagging the number of respondents who regarded theft of physical stocks and data as well as financial fraud as bigger threats. 
Ironically, Transparency International’s recently released Corruption Perception Index 2012 pegs India at 94 among 176 nations, indicating that corruption in the country is fairly high. India scored 36 on a scale of zero (highly corrupt) to 100 (very clean).
India,despite improvements, is a challenging environment. outside of african countries, it has the highest number of firms affected by fraud (68 per cent). Eight of the 10 frauds in the survey were widespread, including internal financial fraud (22 per cent firms were affected vis-a-vis 12 per cent overall) and vendor or procurement fraud (20 per cent vis-a-vis 12 per cent).

The respondents to the surveys, a good part of them from top- or mid-level management, claim that the biggest frauds were committed by vendors or junior employees. Reshmi Khurana, associate managing director at Kroll Advisory, is not in the least surprised. “Fraud involving senior management traditionally invokes silence,” she says, adding, “as they take longer to uncover and address, and also have a greater impact on business continuity and reputation of the company involved.” 
Mahajan has an alarming statistic. The KPMG survey shows that when senior management is involved, the value of fraud can be three times higher than those involving others. Recent media reports have highlighted high-level fraud at a number of places — Libor fixing in London’s financial market and, more recently,  at Reebok India. 
Can Indian companies afford to be as complacent as they have been so far? CEOs and senior management would do well to remember that “thinking that fraud will not happen to you means that it probably will, or already has”.

(This story was published in Businessworld Issue Dated 17-12-2012)