Fraud risk in India

According to the Association of Certified Fraud Examiners's 2012 Report to the Nations, the impact of occupational fraud is as below:

The typical organisation loses 5 per cent of its revenues each year.

The median loss caused by occupational fraud cases was $140,000. More than one-fifth of these cases caused losses of at least $1 million.

Nearly half of the victim organisations do not recover any of the losses caused by fraud.

German sportswear maker Adidas announced commercial irregularities of about €125 million in its India operations, and the wrongdoing at Satyam Computers resulted in diminishing India's image. These incidences show that Indian companies are vulnerable to frauds of large magnitude and which remain undetected for a long period of time.

A Planning Commission study in 2005 found that for every rupee the Government spends on the targeted public distribution system, only 27 paise reach the poor.

It is amply clear that occupational frauds are increasingly common these days and fraud is becoming an inherent risk for organisations.

Prevention through a proper tone at the top, and a focus on ethics and values are clearly more preferable than detection of fraud.

Missed lessons from Barings

JP Morgan CEO Mr Jamie Dimon recently announced that the firm's handling of trading in synthetic credit securities was “flawed, complex, poorly reviewed, poorly executed and poorly monitored”.

We seem to have forgotten the lessons learnt from the collapse of Barings Bank. Investigations by the UK's House of Commons emphasised that:

Management teams have a duty to understand fully the business they manage;

Responsibility for each business activity has to be clearly established and communicated;

Clear segregation of duties is fundamental to any effective control system;

Relevant internal controls, including independent risk management, have to be established for all business activities;

Top management and audit committee have to ensure that significant weaknesses, identified to them by internal audit or otherwise, are resolved quickly.

The failings at Barings were not a consequence of the complexity of the business, but primarily a failure on the part of a number of individuals to do their jobs properly.

At Barings, neither the top management nor the relevant members of management had a satisfactory understanding of the business that was purported to be transacted, despite the significant profits that were reported and the funding required.

2G auction: the wish-list

Telecom generates revenue of about Rs 50,000 crore per quarter and contributes about 3 per cent to the Indian GDP. The country's GDP has been falling in the past few years and needs to be shored up. According to the World Bank, a 10 per cent increase in mobile penetration drives a 0.6 per cent increase in a developed country's GDP and a 0.81 per cent increase in a developing country's GDP.

The European 3G experience more than a decade ago clearly showed that auctions designed to maximise revenue (UK auctions raised £22.5 billion and Germany around £30 billion) hamper the development of the telecom sector and the socioeconomic benefits that mobile phones deliver to the public. Within a year of 3G auction, 100,000 jobs were lost in telecoms support and development across Europe. Many operators were forced to write off billions of dollars in 3G investments.

The 3G offtake in the country is very slow and much below expectations. The price (Rs 50,900 crore) paid for 3G auctions in India has already strained the balance sheets of operators.

In line with the National Telecom Policy, the Government should provide spectrum at a reasonable price to operators. Consider the following:

Set the reserve price of spectrum auction to zero and let the market forces determine the spectrum price;

Auction at least spectrum equal to cancelled licences in each service area;

Auction based on revenue-share model rather than fixed price;

Allow mergers between non-performing and performing players to facilitate consolidation in the sector, which would ensure efficient and effective utilisation of spectrum (as is done in the banking sector);

Do not restrict the auction to only 5 MHz, as only one operator will get it, forcing others to shut shop;

Benchmark with other Asian economies such as China, Malaysia, Sri Lanka and Pakistan.

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