The pandemic-led financial stress could lead to an increase in fraud and corporate misconduct—the hallmark of similar crisis periods in the past, experts have warned.
Struggling companies often face pressure to dress up earnings to understate threats to their viability or to secure financing during a downturn. Besides, the general tendency of companies to attribute an angle of criminality while taking legal action in an otherwise civil dispute to put pressure on the other party for settlement will also play out in hard times, experts added.
White-collar crimes typically include money-laundering, improper payments to officials, dressing up books, insider trading, diversion of funds and, in many cases, frauds perpetrated by employees against the company.
“Lessons from the 2008 financial crisis have shown us that major disruptive events such as the pandemic, always increase the propensity for fraud and allied criminal misconduct. Typically, the gestation period for discovery and prosecution of fraud is 24-36 months, hence, it’s too soon to call trends; however, the obvious genres are likely to be misuse of stimulus or government aid packages and an increase in cybercrime," said Sherbir Panag, partner at Law Offices of Panag and Babu.
According to Suveer Khanna, partner, forensic services, KPMG in India, frauds caused by employees in an organization are often influenced by greed or pressure while instances of misconduct by corporate borrowers that adversely affect lenders’ interests could be traced back to the credit crunch in the economy and the recession. “One circumstance where employee-driven fraud takes place is when incentives are linked to targets and financial performance. Among small companies, we have recently seen GST (goods and services tax)-related frauds coming to light. Strong internal controls will help unearthing frauds while preventing it will require more proactive approach involving an element of deterrence," said Khanna.
Experts said about 70% of the frauds are exposed by whistle-blowers, key stakeholders in the corporate ecosystem who need protection. “In terms of substantive reform, the need of the hour is enhancing protection for bona fide whistle-blowers, who should be viewed as strong pillars of corporate governance rather than a nuisance," said Panag.