How big is the risk for Indian corporates? What were the key findings of your survey on corporate frauds?
The fourth edition of our survey tries to address three things: what is the state of corporate frauds particularly in this time of the pandemic? Second is whether the fraud risk management frameworks of companies are geared up to address the new and emerging risks, and the third one is what is the role of the technology?
About 80% of our respondents said corporate fraud will rise in the next few years. This number is significant because in previous surveys, 50-55% was the benchmark. Also 70% of the respondents said the fraud losses as a quantum will increase. This is significant given that about a third of our respondents have said that fraud losses are estimated to be 1-5% of the turnover of a company. Given the pandemic, companies are anyway reeling under the effects of the lockdown. Now they are trying to recover and some fraud represents a real and present risk.
Second, in terms of preparedness, about 45% of the participants said that the fraud risk management frameworks are not adequate to tackle this future fraud and that the fraud is emanating from risks such as working from home and from new business models. Companies are trying to produce new kinds of equipment and there is a lot of technology enablement by corporates in their new business models.
Some of these reasons are resulting in large statistics. The last thing is on technology adoption. While there has been a lot of technology that corporations have adopted over the last decade or so, it will be bent more towards fraud prevention. The one glaring statistic is that about 85% of our respondents say that fraud needs to be prevented upfront and not detected as in the past. These are some of the key statistics that I would like to present here.
How many companies participated in it?
Over 200 companies participated in our survey. It was quite agnostic in terms of the representation of industries and almost 70% plus were companies with turnover in excess of Rs 500 crore.
What are the companies which participated in this?
It was sector agnostic. The participants were from across sectors and most of the people who participated were people who were in the corporate compliance functions, internal audit functions and people with direct engagement in the fraud or the risk departments of their particular organisations.
Could you share some real life examples of how companies faced these issues?
Some of the key fraud risks were cyber crimes and we saw a huge increase in cyber crimes during this period and in the last two months you will be aware there are so many large corporates in India who have been affected by cyber crimes.
Second, given the pandemic, there has been a huge dependence on vendors and the overall ecosystem of companies, given that people have been largely working from home. So there is a deteriorating trust in the vendors and our findings as opposed to earlier surveys where one of the questions was who is most likely to commit fraud and this time the answer is vendors as opposed to employees and senior management in corporates who have that ability to carry out fraud.
The third significant trend is on bribery and corruption. While a lot has been done and India’s rankings have improved, our survey and our real life experience suggest that because of this dependence on vendors and new business models, there is a large perception that bribery and corruption will be rampant. Even Transparency International in their findings earlier this week said that while things have progressed and have got better, India has the highest bribery and corruption rate in Asia.
The corporates are now trying to readjust their fraud risk management systems to cater to some of these issues.
How open are companies working with experts in this field to have systems in place?
Over the last decade, it has really been about reacting to fraud in India. But over the years, given the importance of fraud, the loss of reputation, loss of business and the loss of profit, companies have now pivoted or are in the point of pivoting and trying to prevent fraud or they are trying to predict fraud. Technology plays a pivotal role.
Currently a lot of companies are using static, risk-based models. They have implemented some amount of risk analytics. But the future is all about implementing artificial intelligence and machine learning so that you can detect it real time. A lot of our survey participants have also indicated that almost half of them are in the process of implementing such technology.
Earlier we used to hire CAs and MBAs but today technology consultants or people with technology backgrounds are pivotal to our business and in years to come, we are going to see the forensic team 50-50 consisting of the functional experts as well as the technology experts.
What kind of costs are involved, what kind of stakes, what kind of value is at stake?
Fraud risk management is looked upon as a cost centre but really one has to change the mindset because the cost of fraud is very high. There are financial penalties, regulatory penalties, loss of reputation, loss of customers and it is intangible to a large extent apart from what we can quantify.
One of the key aspects is that one needs to reprioritise investments into fraud risk management and this is something which is very critical. There are lots of technology companies and lots of tools, whereby one can implement these technologies in new age businesses and that is what some of us seek to do, It is very critical that this happens and given the pandemic, the focus was on re-operationalising the business or getting the operations back on track.
But now the focus has to be on trying to ensure that there are enough preventive fraud risk management systems in place to address the new age issues which are brought on by remote working, new business models, etc.