fraud and corporate governance: changing paradigm in...

Fraud and corporate governance: Changing paradigm in India

Survey findings

A report based on India fraud survey 2012

► What lies beneath

► Fraud scenario in India — ground reality

► Areas of concern

► Tools for fighting fraud

What lies beneath

Changing scenario: increasing awareness

From your understanding of recent scams and large-scale corporate fraud, which of the following options have most significantly contributed to the detection of fraud??

According to more than three-fourths of the respondents, the incidence of fraud has increased in the country in this last one year. But the fact that around two-thirds of the respondents said that scams and corporate frauds were unearthed because of legislations such as the Right to Information Act (RTI) and Public Interest Litigation (PIL) speaks volumes about public awareness in India.

Multiple Answers Allowed

Fraud scenario in India — ground reality

Increasing incidence of fraud

Do you believe the incidence of fraud has increased in the last one year in your industry??

Nearly three out of five respondents revealed that their companies had been subjected to fraud during this last one year. In addition to industries such as banking, Non Banking Financial Companies (NBFC), real estate and telecommunications, which are generally perceived as being highly fraud prone, around 50% of the respondents from infrastructure, IT/ITeS and consumer product companies also indicated that fraud incidents have increased in their segments.

Top five fraud risks

Which of the following types of fraud do you believe could pose the biggest risk to your industry??

1. Data or information theft and IP infringement2. Bribery and corruption3. Fraud by senior management and conflict of interest4. Vendor fraud or kickbacks5. Regulatory non-compliance

Cost of fraud- more than monetary

How would you rank the following six forms of collateral damage (actual or potential) stemming from fraud? ?

Loss of reputation emerged as the biggest and severest collateral damage caused by fraud.For companies, public perception can have a dramatic impact on their business. According to more than three-fourth of the respondents, loss of reputation is the most serious collateral damage (actual or potential) stemming from fraud.

Discovery of fraud – methodical or accidental

Has your company experienced any incident of fraud in the last one year? If yes, which one of the following methods of detection were employed??

Only 14% of the respondents attributed detection of fraud to automated surveillance systems. It seems counter-intuitive that we still detect most cases of fraud by being tipped off or by accident, even with advancement in technology and heightened regulatory activity.


Weak anti-fraud measures

Does your company have any of the following anti-fraud measures in place??

Companies still rely on internal/statutory audit to detect fraud

Lack of action against the fraud perpetrator

“ Companies are generally interested in recovering the defrauded money rather than getting the culprit punished under the law of the land as it is not legally binding on them.

Section 39 of the Code of Criminal Procedure, 1968, imposes no legal binding on any person to report cases of economic offences under the IPC, such as theft, dishonest misappropriation of property, criminal breach of trust, cheating and dishonestly inducing the delivery of property, forgery for the purpose of cheating, using as genuine a forged document and other offences of corruption and bribery, to the police. ”

According to most survey respondents, “He is an internal employee of a company, who is in his 30s and is far from retirement. He is in the middle management cadre, working in the procurement or sales department.”

Companies are reluctant to take legal recourse against employees responsible for committing fraud. Only 35% of the respondents said that their companies take legalaction against any employee responsible for committing fraud.

Areas of concern

Technology frauds: a changing world

Source: Technology frauds: a changing world, Ernst & Young, 2011

“74% of the respondents strongly perceive IT fraud as a serious risk for the organization”

“One-third of the respondents were unaware of the IT Act 2000 and its amendments. We also observed minimal awareness of the Indian Evidence Act and the new data privacy law.”

“An alarming number of respondents (61%) revealed that their companies rely on basic spreadsheet software for IT fraud investigations ”

“31% of the survey respondents are aware that IT data breach investigation and its prevention gets covered in the overall compliance audits in a company ”

Bribery and corruption – the perpetual challenge

Increased awareness of local laws, but lowawareness of global ones

Are you familiar with the following acts or regulations??

After the recent scams, there seems to be an increased awareness of anti-graft laws, and nearly three-fourth of the respondents indicated that they were aware of anti-corruption legislation in India — the Prevention of Corruption Act. However, although three-fourth of the respondents represented MNCs, less than half of them were aware of important anti-graft legislation such as the US FCPA and the UK Bribery Act, both of which have extraterritorial reach.


What corporate think about bribery and corruption risk?

Cash seems to be the most popular mode of paying bribes.

Around 33% of the respondents said that lack of an effective regulatory and compliance mechanism, and weak law enforcement are equally responsible for facilitating corruption.

Perceptions and ground

realities

Kickbacks to win or retain business

To get routine approvals from government agencies

Influence people in making favorable decisions

Nearly 40% of the respondents indicated that the inherent nature of the industries in which their companies operated was responsible for facilitating corruption; 34% respondents said that it was due to the “weak tone at the top.”

Continuing bribery and corruption risk

Tools for fighting fraud

Proactive fraud risk managementRole of technology

Is your company familiar with any of the following fraud-prevention/detection tools??

Less than 50% of the respondents are aware of fraud-prevention and detection tools


Whistle-blowingWhat makes whistle-blowing ineffective in Indian companies?

Nearly 50% of the respondents representing Indian companies revealed that their organizations do not have a whistle-blowing mechanism, while 75% of the respondents from Indian MNCsclaime to have one.

Absence of a telephone (hotline) as reporting mediumLess than 50% of the respondents reported that their companies have a telephone (hotline) for whistle-blowing.

Operating hotline internally Around 90% of the respondents, who reported that their companies had a whistle-blowing mechanism, revealed that these hotlines are operated internally.

Lack of awareness 71% of the respondents said that only 10% of the complaints received through the mechanism require further investigation.

Fraud response plan

Which of the following, if any, apply to your company's response to the first reporting of a possible case of fraud, bribery or corrupt practice??

According to 63% of the respondents, their companies have well-defined roles within their internal audit, compliance, risk and legal functions in the event of investigations, and 55% said that their companies had in place a clear procedure for reporting incidents, butonly 32% have documented response plans.


Third-party due diligence

Does your company conduct background checks on third-parties (vendors, consultants and suppliers, for example) it engages??

Nearly two-third of the respondents said that their companies conduct due diligence on ethics and integrity for third parties. This positively reinforces the fact that globalization and the regulatory “push” is driving companies to proactively manage their fraud risk.

Thank You

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com

© 2011 Ernst & Young Pvt. Ltd. Published in India. All Rights Reserved.This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailedresearch or the exercise of professional judgment. Neither Ernst & Young Pvt. Ltd. nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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