Upholding Corporate Conscience: Why India needs a robust fraud prevention framework

A 2022 report unveils a particularly disconcerting reality: on average, a fraud case remains hidden for about a year before coming to light.

In the dynamic and intricate world of corporate affairs, where economic progress and ethical conduct are expected to intertwine seamlessly, the persistent threat of fraud casts a long and troubling shadow. As the global business community observes ‘International Fraud Awareness Week’, it’s a poignant time to reflect on the challenges posed by corporate malfeasance.

A 2022 report unveils a particularly disconcerting reality: on average, a fraud case remains hidden for about a year before coming to light. This stark revelation is not just a statistic; it represents a systemic failure in existing fraud detection and prevention mechanisms. And it poses a pressing question for businesses worldwide: how can we better safeguard our operations against fraud?

The answer lies in making a fundamental shift in our approach—from traditional, often reactive, methods to more robust, proactive strategies in preventing and detecting fraud. This shift is crucial in not just identifying and mitigating fraud but in fundamentally transforming the very culture that allows it to thrive undetected.

The landscape of corporate fraud is not only vast but also riddled with complexities. Fraudulent activities significantly impact procurement, supply chain and accounting departments, often considered the lifelines of any organisation. Insights from KPMG in India’s latest report on ‘Evolving frauds and profile of a fraudster in the Consumer Markets sector’, paint a troubling picture, one in which mid-level employees predominantly orchestrate fraud. These individuals, often entrusted with substantial responsibilities, exploit weak internal controls to their advantage. This scenario underscores the imperative need for organisations to transition from a traditionally reactive stance to a more proactive approach in fraud prevention.

Stringent continuous monitoring, robust codes of business conduct, and an unwavering zero-tolerance policy towards violations are essential. The leadership’s role in this transformation cannot be overstated; the ethical tone set at the top reverberates throughout the organisation, influencing behaviour and establishing a culture of integrity and vigilance.

In recent times, ‘Governance’ within the ESG (Environmental, Social, and Governance) framework has gained significant prominence, emerging as a critical determinant of an organisation’s long-term viability and attractiveness to investors. This trend is particularly noticeable among startups, where robust governance structures are instrumental in enhancing market valuation and investor trust.

This emphasis on governance is also reflected in the union government’s initiatives. Efforts to enhance transparency and accountability in business operations are evident in the government’s push for digital transformation, sweeping regulatory reforms, and the rigorous implementation of the Insolvency and Bankruptcy Code (IBC). Listed companies, finding themselves under the stringent oversight of regulatory bodies such as the Securities and Exchange Board of India and the Ministry of Corporate Affairs, are increasingly expected to adhere to the highest governance standards outlined under the LODR regulations. This heightened regulatory environment is shaping a new era, where governance is not just a compliance requirement but a strategic imperative.

In the quest to fortify defences against corporate fraud, developing resilient anti-fraud frameworks is essential. These frameworks should be complemented by empowered complaints committees, tasked with the critical responsibility of overseeing investigations and ensuring fair and unbiased resolutions.

However, building robust frameworks is only part of the solution. Regular, proactive forensic audits have become a vital practice in identifying potential fraud risks, serving as an early warning system for organisations. Furthermore, the role of education in shaping an organisation’s ethical landscape cannot be overstated. Regular training and awareness programmes for employees on ethical practices and potential fraud risks, such as Conflict of Interest, are fundamental in fostering a culture of integrity and accountability.

In mergers and acquisitions, the scope for due diligence has expanded significantly. It now encompasses not only pre-investment analysis but also post-merger evaluations. This comprehensive approach to due diligence ensures that merged entities adhere to strict governance standards and are well-equipped to identify and prevent fraud in their integrated processes. Such diligence is crucial in maintaining ethical conduct at the newly formed entity and safeguarding its reputation and operational integrity.

As we observe International Fraud Awareness Week from 12-18 November 2023, the message is clear: combating corporate fraud demands a proactive, transparent, and educated approach. This responsibility extends beyond the confines of individual organisations, and encompasses the broader fabric of our economic institutions.

Embracing these principles of rigorous governance, continuous education, and vigilant oversight is not just a corporate mandate but a societal imperative. It is a commitment to ensuring that the pillars of our economy are fortified against the insidious challenges of misconduct. Thereby, they will help preserve the integrity and trust that are fundamental to the sustainable growth and prosperity of our corporate landscape.

Sidhartha Gautam is Partner – Forensic Services, KPMG in India. Views are personal, and do not represent the stand of this publication.