Checkmate the fraudster

Eliminating corporate fraud and corruption seems an impossible task in India, a country where they are often seen as an inevitable cost of doing business. But like any other business risk, these ills can be managed and controlled through appropriate strategies.

An ethical culture of “zero tolerance” towards fraud, corruption and bribery, training programmes, implementation of a whistle-blowing mechanism and timely disciplinary action are a few prerequisites of any plan to effectively mitigate fraud and corruption risks, according to a new report jointly published by research and consultancy firm Deloitte Touche-Tohamatsu and FICCI.

The key element in mitigating fraud is an appropriate system of governance that dictates monitoring objectives, accountability and performance management, says the report, titled “Corporate Resilience: Managing the growing risk of fraud and corruption”.

Control measures

Corporate governance needs to include “high level controls” that span the organisation, rather than being specific to processes and functions.

These controls need to clearly communicate to all employees, including senior management, that fraud will not be tolerated. Emphasis must be placed on compliance with laws, ethical business practices, accounting principles and corporate policies.

The report says while it is rare to have a foolproof system or process, timely preventive measures can combat fraud and be a good safeguard. In this regard, a holistic approach is necessary. Above all, such exercises should not be reduced to merely putting a tick in a box or be recommendatory in nature.

According to the report, the four critical aspects of fraud and corruption risk management are assessment, prevention, detection and response.

Well-defined strategy

Assessment involves a periodic and competent evaluation of risks and necessary mitigation techniques. This process will identify individuals both within and outside the organisation who could perpetrate fraud and establish preventive and detective controls.

In terms of prevention, training programmes placing emphasis on corporate ethics and highly targeted controls designed to prevent specific frauds should be key focus areas.

Attention must be paid to adequate due diligence in relation to third parties and business partners that could compromise the company, with transaction-level controls being duly vetted.

As far as detection of fraud goes, one of the most effective methods is implementation of a robust whistle-blowing mechanism within the organisation.

According to the report, recent forensic investigations have revealed that many frauds have been detected solely due to tip-offs or complaints via such a mechanism.

But while a whistle-blowing system is recommended by SEBI, few Indian companies have them in place, unlike multi-national firms.

Anonymity is one of the prerequisites for such a mechanism, but many employees fear being exposed and persecuted, and thus abstain from reporting their concerns.

Detection of fraud also becomes easier through continuous monitoring and review of systems and processes for timely identification of control gaps. Immediate corrective action should be taken, but a follow-up is also necessary to ensure that gaps are effectively plugged.

This is particularly important in the light of rising instances of technology-based fraud.

Forensic data analytics is a useful tool to combat such hi-tech fraud through periodic analysis of vast and complex data to determine irregular or unusual patterns in a short time span.

Quick response

When fraud does take place, companies must be primed to respond decisively to deter such acts.

A fraud response management programme should encompass procedures and processes through which an organisation is alerted to allegations of potential fraud and misconduct.

It also includes a mechanism for initial and subsequent communication of such allegations with the organisation, as well as delegation of responsibility and accountability while handling such allegations.

Too little is too late

Part of the response phase is to recover monetary losses due to fraud. The amount, though often significant, can be difficult to recover. Most often, the perpetrator has spent or hidden all or most of the ill-gotten gains, and there is little to recover from the fraudster.

An Association of Certified Fraud Examiners (AFCE) report published in 2012 says the chances of recovering the proceeds from fraud are remote.

Of the few victims that actually take concrete steps toward attempted recovery of financial loss due to fraud, most are only able to recover 25 per cent or less of the misappropriated funds from the fraudster, on average.

The majority of the victims, however, recover nothing, the report says.

In such circumstances, it becomes necessary to establish a framework to deter acts of corporate fraud by mandating checks and balances both within and outside an organisation.

It has been said that corruption can only take place when there is space beneath the table.

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