Economic crime down, but may be because of under-reporting

Economic crime down, but may be because of under-reporting

New Delhi: Indian corporates seem to have learnt to live with economic crime. A higher tolerance for fraud and a general perception that certain kinds of fraud are inherent by-products of rapid growth are being cited as reasons for the steep decline in reported incidence of fraud in the last two years by corporates.

The fourth biennial Global Economic Crime Survey for India was conducted by PricewaterhouseCoopers (PwC), one of the four leading global audit and management firms in the world. It reveals that 35% of corporates in India are victims of economic crime or fraud, down from 54% in 2005.

In contrast, the number of victims of economic crime during the past two years (2005-07) has decreased marginally by 2% (to 43%) at the global level, and remained unchanged at 39% for the Asia Pacific region.

The survey, which was done in association with Germany’s Martin-Luther University, Halle-Wittenberg, covered 152 organizations in India in a mix of small, medium and large companies. Globally, 5,400 organizations were covered. The survey is conducted by PwC once in every two years.

The PwC report cautions that the decline does not call for any complacency. According to it, the fall in the number of reported incidents may be because of reasons such as reluctance on the part of corporates to report fraud because of continued stigma attached to such reporting, scrutiny of recent corporate scandals, increased media coverage as also a relatively ineffective management systems to detect fraud. Nearly 50% frauds are discovered by chance, it said.

Ashwani Puri, advisory leader, PwC, said the incidence of fraud has remained pretty much unchanged despite internal controls intensified by corporates. “Even while the companies are doing the right things, lack of demonstration and anti-fraud measures are resulting in no major improvement in combating fraud," he said.

The frauds covered in the survey include intellectual property rights infringement. money laundering, corruption and bribery, accounting fraud and asset misappropriation. Asset misappropriation and corruption and bribery ranked high in India at 20% each, the latter up from 17% in 2005.

Rival audit and management consulting firms agree that the incidence of fraud has more or less remained unchanged or even increased. “We are in the process of coming out with our survey on economic crime, which will be released in January next year and I personally believe that fraud is not coming down. This is despite some improvements in the regulatory mechanism with bodies such as the Securities and Exchange Board of India tightening controls," said Deepankar Sanwalka, head, forensic, KPMG.

Sanwalka added that recent surveys such as the Transparency Index revealed India’s position has improved only marginally; it has remained unchanged in the Bribe Payers Index.

India’s integrity score this year increased to 3.5 from 3.3 last year on a scale of 0-10 in the Transparency Index released last month by Transparency International India, the Indian chapter of the Berlin-based not-for-profit organization committed to countering corruption in business deals.

What is alarming is that the average direct loss to companies on account of fraud was Rs6 crore during 2005-07. “The average cost to manage economic crime in India is almost double as compared to the global average," said Puri.

Besides, fraud results in loss of face to companies. More than 90% companies reported that fraud has damaged their brand, 75% said it has strained their relations with regulators.

However, in 42% cases of reported incidence, the economic crime was committed by the company’s own staff, and of this, one-third was committed by those at senior levels who had spent some years with the company.

The survey revealed that India scored poorly on global perception. Of the 5,400 companies surveyed globally, 38% said they had to pay bribes to obtain licences. India ranked higher than only Turkey and Mexico amongst emerging markets on this issue.