Pointing to the rise in incidents of corporate fraud in India over the past 15 years, Karnataka Lokayukta Bhaskar Rao said on Wednesday nearly half of these cases were related to siphoning off of funds by promoters of a company or its top management.
He was speaking at the third annual Fraud Conference by the Bangalore chapter of Association of Fraud Certified Examiners (ACFE). Quoting from a report by the Thought Arbitrage Research Institute, Rao said corporate fraud in India caused losses amounting to `43,815 crore. Among different sectors, 35 per cent of incidents of fraud were reported in manufacturing, 21 per cent in IT and 16 per cent in banking and financial institutions. “Although nearly three out of five Indian companies were victims of fraud, according to a report by Ernst and Young, many incidents have been hushed up to preserve a firm’s reputation,” he noted.
A major reason for increase in corporate fraud was the low rate of prosecution, he pointed out. Quoting a report by SEBI, he said that in nearly 80 per cent of cases, there was no sentencing. In 18 per cent of cases of corporate fraud, sentences were less than 6 months.
Rao stressed the need for internal auditing in companies, pointing to the impact of the Satyam computers scam. “It is important that effective internal audits are done regularly. But companies are not even equipped or have the skills to conduct internal audits,” he said.
Saket Bhartia, president, ACFE, said the government’s move to extend the ambit of the Prevention of Corruption Act, 1988, to commercial organisations was a step in the right direction. He also referred to changes made in the new Companies Act, which ensures stringent penalties for fraud related offences, allowing anyone to file a suit and making it compulsory to protect whistle blowers in companies taking public deposits.
Bhartia also emphasised that companies could do their bit to prevent fraud. “An effective whistle-blowing mechanism, training, use of technology, periodic fraud risk assessment, due diligence, response plan and action against fraudsters are some measures that can help companies reduce fraud risks,” he said.
Vidya Rajarao, national leader, forensic services-PWC India, pointed out at least 35 per cent of incidents of fraud were detected by accident. Moreover, most companies did not impart any training in cyber-security.
“Incentives and pressure to meet profit benchmarks are a predominant cause of fraud. Despite various clauses, internal audits, process audits and sustainability audits, no one looks at the psychology of fraud, which perpetuates it,” she said.