Business News/ Companies / Financial fraud hit 87% of Indian companies in past two years

Mumbai: With white-collar crime almost doubling from last year, financial fraud by insiders remains the single greatest fear of Indian companies, according to the results of a survey by audit and consulting firm KPMG. The results were released on Tuesday.

Of the 1,000 companies covered in the survey, 87% said they had incurred losses of at least Rs10 lakh due to fraud in 2009.

The previous survey, carried out in 2008, had only 47% complaining on this count. At least 75% of Indian firms said instances of fraud had increased over the past two years.

Also See Perception of Fraud in India (Graphic)

A lack of objective and independent internal audits, inadequate oversight of senior management’s activities by the audit committee, and weak regulatory environment were pinpointed as culprits for the spike in financial statement frauds.

The 10th biennial India Fraud Survey Report 2010 reveals that 81% of the companies surveyed feel that financial statement fraud is the biggest threat in India, with at least 60% of them saying inadequate enforcement of regulations has increased such fraud.

The findings of the report suggest that weak internal control systems, eroding ethical values and lack of legal action against fraudsters create an environment conducive to such crimes.

The survey, conducted by KPMG’s forensic wing in India, covered leading Indian firms from the public and private sectors. The respondents included chairman and managing directors, chief operating officers, chief financial officers, internal auditors, heads of investigation divisions and other senior management officials.

Indian companies, according to the study, remain highly vulnerable to fraud in the absence of “inadequate internal control framework" that can identify and deal with such crimes. The report suggests that 41% of Indian firms do not have fraud risk management systems.

The KPMG report shows that 45% of the firms have experienced fraudulent activities in the past two years, with financial services and consumer markets showing the highest levels of risk.

But more than the lack of monitoring systems, what is prevalent and disturbing is the reluctance of companies to report incidence of frauds. According to the survey, only 35% of the companies initiated legal action against a perpetrator of fraud. A majority of the frauds had been investigated internally.

That, however, may be changing. Deepankar Sanwalka, head (forensic services), KPMG, said that following the scam at Satyam Computer Services Ltd, in which founder and chairman B. Ramalinga Raju admitted to showing non-existent income over the years of Rs7,136 crore, the trend in fraud detection has changed.

“Companies are more open to discuss and take action against fraudsters. Increasingly, fraud risk mitigation mechanism are being discussed in management meetings," he said.

The frauds covered in the survey include anti-corruption compliance. Almost 42% of the companies strongly believed bribery is acceptable behaviour in India while 38% said it is an “integral feature of the practices in their industry".

According to the World Bank, bribes paid annually amount to more than $1 trillion (Rs44.5 trillion) globally.

India scores poorly on corruption and bribe payments in the list of organizations such as Transparency International, which ranks countries based on corruption and propensity to demand bribes.

India’s corruption perception index score in 2009 was 3.4 on a scale of 0-10, with 10 being the least corrupt.

In 2008, it was one of the bottom four on the global bribe payers index, with a score of 6.8.

The way to a cleaner balance sheet, however, may be harder than expected. As Rohit Mahajan, executive director (advisory), forensic services, KPMG, told Mint, “Indian firms lack (a) holistic approach to frauds. Focusing on financial fraud will not help control white-collar crimes."

Graphic by Ahmed Raza Khan/Mint

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Updated: 07 Apr 2010, 10:02 AM IST
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