The Hindu Business Line : Kickback is the most prevalent form of fraud

Organisations frequently fail to recognise their vulnerability to fraud and misconduct until they become victims, often at the hands of a trusted employee, a valued business partner, or even a member of the management team.

MR DEEPANKAR SANWALKA, EXECUTIVE DIRECTOR AND HEAD OF FORENSIC, KPMG.

Inducement, backhander, enticement, carrot, sweetener, and kickback are all among the synonyms that Microsoft Word suggests for `bribe.' The word gets rarely uttered, even when the `demand' is tall, nor does one find tariff cards mentioning the going rates, possibly because speed money is part of our ecosystem.

Therefore, it may not come as a rude shock to most of us that a majority of a survey's "respondents quite candidly stated that coporates in India pay bribes or facilitation payments to conduct business," as Mr Deepankar Sanwalka, Executive Director and Head of Forensic, KPMG observes.

"However, most of them were not aware about the anti-corruption laws," he adds, during the course of an e-mail interaction with Business Line, a day after his firm released `India Fraud Survey Report 2008.'

Regulators are tightening their grip around unethical business practices and hence it becomes important that organisations understand the risks being faced by such practices, cautions Mr Sanwalka.

Excerpts from the interview:

What are the surprises in this year's fraud survey? And what have become pass‚?

The survey is an attempt to provide an insight on the antecedents of fraud and its aftermath. In the 2008 survey we sought information on the general fraud scenario in India, extent of fraud perceived in different industries, who are the perpetrators, factors that increase the risk of fraud, types of frauds, etc.

As compared to our last survey, in 2006, the fraud victims have increased by 54 per cent and the respondents believe that fraud will increase in the coming years. And yet people have a very reactive approach to fraud as almost 60 per cent of the respondents stated that their organisations neither have a complete understanding of various fraud risks faced by them nor they have an effective internal control mechanism to manage fraud risk.

After financial services, real estate/infrastructure sector is believed to be more susceptible to fraud compared to other sectors.

Though supplier kickback has emerged as the most prevalent form of fraud faced by organisations today, going forward IP (intellectual property) and IT (information technology) related frauds are expected to increase. This is on account of our shift towards becoming a knowledge economy.

Has the survey identified the key drivers behind the increase in fraud? Is this something that is consistent with any economic development and growth?

To a large extent the survey has been able to establish the key drivers.

The most important factor is the reactive approach to fraud. Till such time organisations are not hit by fraud they remain passive to fraud risk.

For instance, the respondents have clearly stated that fraud is a problem in India, however a large number of respondents are not sure about the efficiency of their internal control to combat fraud risk.

Moreover, a number of times, the effectiveness of internal controls and processes of an organisation are not able to keep pace with the growth in the industry, exposing it to threat of fraud.

Hence it is imperative that while organisations are riding on the economic boom and harnessing market opportunities they keep a strong and timely vigilance on their internal control frameworks to gain insight on better ways to design and evaluate controls to prevent, detect and respond appropriately to fraud and misconduct.

With supplier kickback being widely prevalent, do we have estimates of how much frauds add to the total costs? Are any patterns visible across the industry verticals, and also between manufacturing and service, and public and private sectors, w.r.t. kickbacks?

It will be difficult to estimate the quantum of loss in supplier kickbacks. In any organisation, procurement faces the risk of supplier kickbacks. Though it is prevalent across industry, the risk of fraud may vary depending upon the amount that an organisation spends on a particular item.

For instance, in ITeS (IT-enabled services), recruitment and transportation are more susceptible to fraud, as organisations have big spends in these two areas. Similarly, in manufacturing, procurement of raw material and consumables would be more susceptible to fraud.

Your suggestions on the type of internal controls companies can have, as antidote to fraud. Also, are the guidelines from the ICAI (Institute of Chartered Accountants of India) helpful in this regard?

An effective, business-driven fraud risk management approach encompasses controls that have three objectives:

Prevent: Reduce the risk of fraud from occurring.

Detect: Discover fraud and misconduct when it occurs.

Respond: Take corrective action and remedy the harm caused by fraud and misconduct.

The challenge for companies is to develop a comprehensive framework, which, among others, will include risk assessment, codes of conduct and whistleblower mechanism integrated into corporate objectives and create a broad ranging programme that manages and integrates fraud prevention, detection and response efforts.

Some of the key factors in prevention of fraud would include:

Board/audit committee and senior management oversight;

Strong internal control systems;

Fraud and misconduct risk assessment;

A well-defined code of conduct;

Employee and third party due diligence; and

Communication and training

The ICAI provides recommendatory guidelines for auditors to consider fraud and error in an audit of financial statements. Auditing and Assurance Standard 4 (AAS4) gives an overview of auditor's responsibility in relation to the fraud and error.

Can insurance products help in coping with frauds?

Fraud is a complex issue and exists in many forms, including asset theft, asset misappropriation, financial misstatement, contract fraud, and manipulation of books of accounts.

It is difficult to estimate the loss due to fraud because on one side there is a loss directly attributable to fraud but in addition to that there is a cost to investigate the fraud and legal cost in case it goes to the court. So it becomes difficult to define the scope of cover.

Most of the insurance products currently available again cater to fraud mostly in the form of theft.

For instance, some insurance companies offer cover to IT companies for data theft. Some products deal with identity theft (in banking and insurance).

But these products are very specific and have a lot of applied conditions. It is very challenging for companies to come up with products that cater to other forms of fraud. However, considering that many companies are facing the threat of fraud, going forward insurance companies might want to see it in a different light and introduce innovative products.

Rather than being lax, shouldn't companies have stringent internal policies to deal perpetrators of fraud, considering that frauds can adversely impact the organisation's goodwill?

I cannot agree more on this point. Fraud is a real threat and organisations need to be fighting it proactively rather than keeping a blind eye to it.

Close to two-thirds of our respondents believe that their organisations were not entirely aware of fraud risk they face, with the consequence that they are not prepared to put in place preventive and detective controls around them.

What countermeasures do you propose to tackle IT-related frauds? Being in the forefront of IT services, do you think we can put in place the right systems that can avert frauds, and trigger red flags?

Today all organisations use IT to conduct business. Whether these are their internal controls or customer interface, technology is paramount.

Given the volume and frequency at which transactions can occur in an IT environment, the magnitude of financial implication in such kinds of frauds is fairly significant.

Moreover enormous amount of data stored on an organisation's system pose a challenge to identify the red flags and gaps. Hence it becomes imperative that organisations use technology in identification of gaps and red flags.

Continuous monitoring, data mining and data analytics (collectively forensic technology) can help companies extract specific evidence of wrong doings from large masses of data.

Data mining and analytics can uncover patterns and relationship in data sets that on face value may appear unrelated. It also helps in highlighting activity of fraud and irregular behaviour, or to explain what lies behind previously identified discrepancies.

D. MURALI

http://AccountSpeak.blogspot.com

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