Not consumed by fraud

Progressive policy changes under the current government have made India a more attractive destination for the retail industry. The Government’s decision to allow 51 per cent FDI in multi-brand retail and 100 per cent in single brand retail has set the stage for consumers to be spoilt for choice, and fuelled competition amongst existing and new retailers. However, the opportunities and optimism cannot overshadow the grey areas of fraud and misconduct in the sector. Companies planning to enter India or those already operating here should give due consideration to ‘fraud proofing’ their India story.

Fraud is of particular concern to retail and consumer companies because of the critical nature of their brand and reputation. One of the challenges facing retail companies globally is shrinkage — that is, reduction in inventory due to shoplifting, employee theft, paperwork errors and supplier fraud. According to the Global Retail Theft Barometer, 2011, India tops the list of shrinkage rate (as percentage of sales) at 2.38 per cent. In the current economic environment, where revenues are under pressure, shrinkage poses a great threat to companies’ ability to make profit.

Other pressing challenges for retail and consumer companies include trade loading and channel stuffing, misappropriation of inventory, ‘return’ fraud, barcode frauds, theft of discount coupons and promotional items by employees, compromised IT and procurement systems, deliberate un-optimised inventory, e-commerce related frauds, counterfeits and economic adulteration, and so on. Due to the nature of the industry, salaries at retail outlets are lower — and easy access to expensive products is a temptation to steal. Hence, when instituting controls, companies must be wary of such behavioural challenges too.

While it may not be possible to eliminate the risk of fraud altogether, companies can minimise it through proper planning, policies and controls. A comprehensive fraud risk management programme can — in addition to helping prevent and detect fraud — help companies respond effectively to a fraud incident with appropriate investigation and remediation. A strong control environment plays a crucial role in reducing fraud and misconduct within companies and their dynamic business environment. The pre-requisites for building a strong anti-fraud control framework is a mix of management accountability, fraud risk assessment, controls to address fraud ‘hot spots’, assessment and monitoring of controls, incident response and remediation, and timely internal communication.

Companies have to meet rising consumer demand for product and price innovation. This puts them and their business partners under more pressure, which may further incentivise fraudsters to commit economic crime. In India, the retail industry is in the midst of a period of intense change. The country is in the spotlight for sourcing, production and other retail opportunities. Companies should monitor suppliers rigorously in emerging markets to prevent fraud and corruption.

They should correlate market expansion strategies with the potential increased risk of economic crime. Retailers and consumer goods companies should shift away from a narrow focus on shrinkage, and move to a company-wide approach on monitoring, detection, and investigation. This will provide an expanded view of the overall economic crime risks, and enable appropriate management.

The author is leader Forensic Services, PwC India.

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