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Corporate India still napping on fraud prevention: KPMG study

Neha Kapoor

MUMBAI, Aug. 7

FOR most Indian organisations, corporate espionage is something that happens to others. An attitude that probably explains the inadequate preparedness of most corporates in handling white-collar crimes, says a recent fraud survey carried out by KPMG India.

"We have been conducting this survey for a couple of years now and find that nothing much has changed in terms of the attitude of Indian companies towards control and prevention of fraud. There is an underlying belief that corporate frauds happen to others,'' said Mr Deepankar Sanwalka, Executive Director, Forensic Practice, KPMG India.

Sample this. KPMG's India Fraud Survey Report 2002 says that 61 per cent of respondents believe that their organisations remain vulnerable to risk of fraud.

More than half of them have been victimised by fraud. And, though 75 per cent of the respondents believe their organisations could become corporate espionage victims, more than half the respondents do not have adequate counter-espionage measures and protocols in place.

Financial services (81 per cent) and information communication and entertainment sectors (84 per cent) appear to be particularly at risk from corporate espionage.

The survey adds that 77 per cent of respondents have not conducted comprehensive fraud diagnostic review in their organisations and 84 per cent of respondents do not have a written fraud policy.

Of the organisations that did not undertake a fraud diagnostic review, 44 per cent were victimised by fraud.

According to Mr Sanwalka, there are three aspects to dealing with frauds: Developing a control plan, regularly reviewing robustness of the system and appropriate implementation of measures.

"More often than not, even if companies have a fraud prevention or detection policy in place, they do not review it periodically, rendering the control environment ineffective, so that a fraudster can easily circumvent the system,'' said Mr Sanwalka.

According to him, the survey reveals that the most common frauds - in terms of numbers - are employee related, but these are smaller in value from a corporate point of view.

From a value perspective, the biggest crimes are management frauds such as the recent Worldcom controversy.

"In this case, the issue really goes back to corporate governance. It is not just important to focus on the filing exercise, but to practise good governance policies in everyday running of the company. Until then, things are not going to change,'' Mr Sanwalka said.

The profile of a typical fraudster, as per the report, is male, aged between 26 to 40 years, who has been with the organisation for less than two years.

"Based on the survey, 92 per cent of fraudster were male. But this figure should be considered in light of the fact that the number of working males is more than females,'' said Mr Sanwalka.

The survey found that maximum losses in monetary terms were attributed to expense accounts (37 per cent), followed by secret commissions/kickbacks (30 per cent) and forged documents (18 per cent) in the consumer and industrial market segment, whereas the financial services sector lost the maximum due to false information (50 per cent) and the ICE sector suffered on account of misappropriation of funds (22 per cent).

The consumer and industrial sector faces the highest (40 per cent) number of occurrences of ethical violations at the work place.

Most of the ethical violations occurred to due to a conflict of interest and supplier relationships.

Organisations primarily tend to blame poor internal controls and collusion between suppliers, vendors and employees for allowing fraud to take place.

Most corporates do not favour investigations carried by Government agencies; 79 per cent of respondents were of the view that investigations carried out by the police or other Government regulatory agency have proved to be ineffective.

"This is mostly because Government agencies have a lot on their plate, and for them, the more visible crimes such as robbery and murder become more important compared to corporate/economic crimes,'' said Mr Sanwalka.

Also, most investigations are incomplete as companies shy away from booking culprits citing adverse publicity as a reason.

Mr Sanwalka added: "The decision to pursue a criminal proceeding is a simple cost-benefit analysis for companies as the process will eat into management time and may cost the company more than the fraud itself. If the amount of loss is small, then companies prefer to simply get the bad apple out of the basket and it also works as an example to others in the company. However, if amounts are large, then companies might think about recovery and thereby consider launching criminal proceedings.''

Also, 17 per cent of respondents who conducted investigations hired external investigators.

"And, 69 per cent of them identified a professional unbiased approach as the key reason for doing so. Which is a good sign, because, in internal investigations, biases may crop, leading people to read more than what is there,'' said Mr Sanwalka.

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Corporate India still napping on fraud prevention: KPMG study

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