Vivek Aggarwal & Vineet MehtaFraud has a direct impact on a company’s bottom-line. Hypothetically speaking, it acts like a burglar that easily enters the premises due to an open window you had forgotten to close.
Fraud has the ability to impact all industries, irrespective of sector, size or location. According to a survey by the Association of Certified Fraud Examiners (ACFE), it is estimated that a typical organization loses 5 percent of revenues to fraud. The Indian environment is no different. A highly fragmented market, numerous middle-men and distortion in price variations across regions makes it vulnerable to fraud. These could give rise to losses; on an average which could potentially affect as much as 10 percent of the total transaction value.
The susceptibility quotient
Any fraud occurrence requires opportunity; provided by either weak controls or a lack thereof, which can exploited by perpetrators. If these gaps in processes are not proactively identified and mitigated, exploitation could continue. Furthermore, it has been observed that in most circumstances, a key reason for fraud is weak monitoring within the organization. The following instances highlight how companies view normalcy in outlined procedural measures versus how an aberration to the rule could exploit these situations.
| Sr. No. | A ‘normal’ situation or transaction | When an employee or party defrauds Company |
| 1 | An employee submits reimbursement claims and the individual’s supervisor approves the claim | Reimbursement claims submitted by the employee belongs to the supervisor |
| 2 | A profit sharing arrangement undertaken with another party as per industry practices | One party in the profit sharing arrangement misrepresents the figures required for calculating profits |
| 3 | A company pays a contractor for contracted employees | The contractor in turn short-pays the contracted employees |
| 4 | A company pays a distributor his commission for their monthly sales | Sales are intentionally booked under different sales channel (where commission is higher) to inflate commissions |
| 5 | An employee sends emails to personal webmail accounts | Employee could consequentially leak confidential data (i.e. customer data etc.) |
| 6 | Customer discounts accounted for in the books of record | Discounts listed in the books, however the customers are billed for the full amount |
This demonstrates that unless effective monitoring controls are in place, the company would not be able to identify the fraudulent transactions in a timely manner.
An impelling cause for action
Fraud by nature is hidden, the more time it takes to identify a fraud, the more losses the company suffers. In fact, any savings made by early detection of potential fraud areas is considered to be a profit by leading companies. Furthermore, fraud occurrences can significantly affect employee morale and hence impact productivity. Companies therefore, must be extremely vigilant about such situations and emphasise the unacceptability of unethical behaviour. Enforcement plays a large role in demonstrating this stance and acts as a more resolute deterrent for employees.
Key fraud scenarios
Procurement
The industry accepted methodology of obtaining quotations gets misused by perpetrators. For instance, this could be exploited through leakage of competitor rates, creation of fake competition, related companies quotation, etc. Another common procurement fraud, which has been quite rampant, relates to identification of vendors for tenders and evaluation of vendors to award contracts. While companies may be attentive during the procurement of high value goods and services, they may fail to closely monitor the consumption process. It has been observed that wrong vendor selection could potentially cost a company close to 10 percent of the contract value.
Weight manipulation
The receipt of raw material or alternatively, finished goods being shipped out of company premises can enable perpetrators to easily siphon off materials or goods. Weight manipulation allows trucks to bypass the scrutiny of controls, thereby creating losses. For example, a chemical company discovered through a proactive review that they were losing 2-3 trucks of raw material to employee fraud every year which resulted in losses amounting to crores per year.
Proof of delivery
Another major issue faced by companies is during the interaction of various departments with vendor touch points, i.e. marketing, logistics, facilities, etc. These departments are vulnerable to service delivery certification fraud. For example, it is extremely challenging to identify duplicate lorry receipts inserted into thousands of receipts per month or about the amount being claimed by customs handling agents.
Leading industry practices
Companies are safeguarding themselves by outlining a more robust code of conduct which intricately captures acceptable and non-acceptable behaviour to be exhibited. Subsequently, the code of conduct is required to be read, understood and signed by employees and vendors. This helps companies to take action against an employee or vendor in a legally acceptable manner. In the last 4-5 years, companies have changed their strategy and started seeing value in proactively addressing fraud risks. These companies, on the basis of cost benefits, analyse and identify high fraud risk areas in operations and proactively mitigate these fraud vulnerabilities. For example, an infrastructure company was able to cut costs of high value contracts by over 14 percent after conducting proactive reviews. Another manufacturing company was able to recover a significant amount from a logistics service provider for overbilling them over a period of two years by using duplicate lorry receipts.
It is certainly beneficial to heed to the age old adage - prevention is better than cure!Vivek Aggarwal, Partner, Fraud Investigation & Dispute Services, EY India. Vineet Mehta, Director, Fraud Investigation & Dispute Services, EY India
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