Ernst & Young's 9^th Global Fraud Survey, Fraud Risk in Emerging Markets, reveals that levels of frauds have increased acutely in the past two years. A significant number of Indian organisations, i.e., 42% of Indian companies believe that levels of fraud have increased in the last two years. This is a higher percentage vis-à-vis global findings wherein 27% respondents indicated increasing fraud levels.  Further, about 14% of Indian companies also admitted experiencing "significant" fraud in the last two years. Here, Ernst & Young's experience suggests that the actual number may be higher due to various reasons including non-disclosure of fraud and non-discovery of significant frauds, among others.

Says Sunil R Chandiramani, National Director, Risk & Business Solutions, Ernst & Young , "The growing focus on cross-border expansion, high levels of growth with internal processes not keeping pace and large number of new employees joining the organisation are making most companies vulnerable to greater fraud risk in recent times." This year's survey found 14% Indian organizations have made a decision not to invest in an emerging market as a result of a fraud risk assessment.

 When surveyed about the greatest fraud risks which companies face, respondents in India consider internal collusion with third parties (36%) as the greatest fraud risk, followed by corruption and bribery (29%). Only 14% of the respondents considered financial statement fraud as the greatest fraud risk. While corporations certainly need to be aware of the risks associated with bribery and corruption, the survey suggests that companies may be underestimating the threat of financial statement fraud, which runs a high risk of being perpetuated at international subsidiary locations. 

Further, the introduction of new accounting standards in emerging markets and the move towards convergence with International Financial Reporting Standards (IFRS) could negatively impact subsidiary's financial statements in some instances, thereby increasing the risk of financial statement fraud, warns the report. 

Among factors deemed important for determining the success of an organisation's approach to fraud prevention and detection, 70 percent of the Indian respondents considered 'Internal Controls' and the 'Internal audit function' as the most important factors. Only 24% of Indian respondents compared to 59% of respondents globally viewed corporate security/ prevention and detection, corporate culture/ ethics, documented formal processes, legislation or raising employee awareness and training as important for determining success towards fraud prevention and detection. It is evident that Indian companies are placing little attention on these factors.

"Many organizations are still not considering appropriate fraud risks while designing their controls systems and procedures. Though robust internal controls remain the first line of defense against fraud,  anti-fraud controls are not always integrated under an anti-fraud programme and monitored for compliance," says  Chandiramani.

According to the report, a high percentage of Indian companies (38%) do not have a formal or documented anti fraud policy when compared to their counterparts in developed markets (29%). Three fourth of respondents in India agreed that their organization works with intermediaries or agents who are paid on commission basis and 12 % of these companies do not have specific anti fraud measures in place that apply to these third parties. However, our experience suggests that the actual percentage of companies who do not have specific anti fraud measures in place for third parties may be much higher as these results relate to organizations that set the industry benchmark and hence may not be representative of the cross-section of organizations across India.

About 25% of the Indian respondents stated that the senior management had not identified and communicated their most significant fraud risk exposures to the board of directors. A large majority, 68% of Indian respondents said that they do not provide formal training to help employees understand and implement anti-fraud policies. The effectiveness of any such communication is also suspect, as 70% respondents admitted to not communicating the anti-fraud programmes in the local language. 

More than one-third of the Indian respondents considered 'Internal control system' (18%), 'Special bribes/ corruption' (8%) or 'Growing size of business/ employee base' (8%) as the biggest challenges for their organization in the next two years in relation to be the risk of fraud in emerging markets. 

 "Fraud is expensive and disruptive, making prevention preferable to investigation and recovery. Preventing fraud before it happens is the ultimate goal of a successful fraud prevention & awareness program." According to Chandiramani, "Management should strive hard to create a zero tolerance environment towards fraud by instituting measures such as fraud policy, code of conduct, whistle blower policy, fraud hotlines etc. Also, undertaking comprehensive Fraud risk assessments to identify fraud risks and establishing an adequate monitoring procedures to review & improve the effectiveness of anti fraud programmes & controls are key to mitigating fraud." .

Organizations will continuously face the risk of fraud, which will continue to remain a serious and costly problem. It can, however be countered by effective controls, a strong culture of prevention and deterrence and decisive action when cases arise. The most effective and appropriate response to the problem of fraud will involve a combination of fraud prevention, detection and investigation techniques, concludes the report.

Sourced From: Vaishnavi Corporate Communications