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Business News/ Companies / Hiring in forensic services grows as corporate fraud awareness spreads
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Hiring in forensic services grows as corporate fraud awareness spreads

More than two-thirds of firms in India are victims of frauds of various types, according to a report released last year by Kroll

India ranked 94th among 177 countries surveyed and was labelled more corrupt than three of its BRICS peers—China (80th), South Africa and Brazil (both ranked 72nd), according to the Corruption Perceptions Index 2013 by Transparency International. Photo: Pradeep Gaur/MintPremium
India ranked 94th among 177 countries surveyed and was labelled more corrupt than three of its BRICS peers—China (80th), South Africa and Brazil (both ranked 72nd), according to the Corruption Perceptions Index 2013 by Transparency International. Photo: Pradeep Gaur/Mint

Chennai: When the level of debt at a seemingly profitable retail store business started to pile up, the private equity (PE) fund invested in the business smelled a rat and hired the services of a forensic advisory firm. The fund had been invested in the firm for nearly four years and through most of that the company’s business fundamentals had seemed healthy. But as debt rose, it became clear that something was amiss.

The forensic firm conducted an intensive internal and external examination over two months: reviewed financial statements, poured through the computers of all employees, used analytics to decipher patterns and conducted discrete interviews with people associated with the business.

What emerged at the end of that investigation was a check list of all possible corporate crimes—from duplicate sales invoices, fudged profits and fictitious expenses to a promoter who had criminal cases against him.

All this had gone unnoticed in the due diligence conducted by the investor at the time of investing.

“The PE firm had stayed with this company for four years and it had no idea that the books were being cooked as all it saw was that the company was generating profits," said a senior executive of an advisory firm who did not want to be named. He also declined to name the firm and the investor, due to client confidentiality issues.

The PE firm eventually sold its stake in the company back to the promoter at a throwaway price and filed litigation against the auditors.

More than two-thirds of firms in India are victims of frauds of various types, according to a report released last year by Kroll, a corporate investigations and risk consulting firm. India ranked 94th among 177 countries surveyed and was labelled more corrupt than three of its BRICS peers—China (80th), South Africa and Brazil (both ranked 72nd), according to the Corruption Perceptions Index 2013 by Transparency International.

With increasing awareness about incidents of frauds and stricter regulations, companies and investors are increasingly reaching out to the forensic practices of the big four consulting firms—KPMG, EY, Deloitte and PricewaterhouseCoopers (PwC) to conduct investigations.

“The industry is seeing at least a 20-30% year-on-year growth in the number of fraud investigations," said Reshmi Khurana, managing director and head of Kroll India, a corporate investigation firm.

As a result, the forensic practice is among the fast-growing businesses for these firms, which are increasing hiring across this vertical. Together, the big four will hire an estimated 450 people, adding to the 1,650 professionals already in this practice, to meet the increased demand, according to numbers compiled by Mint based on estimates from each of these firms.

For instance, EY’s forensic practice, which was a 30-member team five years ago, is now a 500-member team. EY will add 150 people to this in the current fiscal year.

Similarly, KPMG, which has the largest forensic team in the country with 750 members, plans to become a 1,000-member team by the next fiscal.

PwC will add at least 100 people to its forensic team of 250 people, while Deloitte intends to hire 50 people to ramp up its 150-member division.

“Forensic services are no longer a one-trick pony," said Rohit Mahajan, senior director and head, Deloitte Forensic, in India.

“The perception among the general public is forensic accounting only relates to fraud investigation. Over the last few years, the scope of forensic work and solutions have expanded spanning across analytics and technology, intelligence gathering, litigation and dispute resolution," said Mahajan.

One of the main reasons for the increase in demand for forensic services is regulation. The Companies Act 2013 and the US Foreign Corrupt Practices Act (which brings US-based firms in India under its lens) have forced companies to take preventive measures, said Sandeep Dhupia, a partner and head forensic services, KPMG in India.

The Companies Act mandates fraud reporting to such an extent that even the intent to commit fraud has to be reported by audit committees of companies. The Act also holds those in the audit committee and board criminally liable.

“The law is much harsher now," said Subba Rao Amarthaluru, group chief financial officer (CFO) of RPG Group. “Earlier, frauds at 1,000-5,000 level were not taken to the board, but now it is mandatory to report all frauds to the board without any threshold denomination."

“There is definitely more pressure on corporates and individuals as the level of scrutiny has intensified. In fact, every figure that goes into a financial statement now has to be backed by documentation, and failure to do so is an anomaly and is unacceptable" says Ramesh Swaminathan, chief financial officer, Lupin Ltd.

Given the varied nature of frauds, audit firms have been tapping into talent from every possible profession. In addition to chartered accountants and financial consultants, lawyers, IT professionals, former bureaucrats, law enforcement professionals, data scientists, psychologists, mathematicians and even journalists are being hired to investigate corporate crimes.

Leaders of the forensic practices at audit firms say forensic talent is in short supply and, hence, professionals from a variety of fields are being hired. Most expect growth in this business to continue, with demand from PE investors and banks likely to be strong.

“There is over a 10-fold increase in NPAs (non-performing assets) over the last five years and a significant spurt in failures of PE invested businesses due to governance issues. This sets the stage for growth as all these situations are investigated to fix accountability and recover the invested/loaned amounts," said Sanjay Mehta, partner, BMR Advisors, which has an alliance with Kroll.

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Published: 08 Aug 2014, 12:18 AM IST
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