Fraud and Corruption – A threat to Promoter Driven Companies

Particularly talking about India, Promoter Driven Companies (“PDC”) have been the key contributors of growth in the last decade. Even at the time of crisis across the world, when multinationals across the world have suffered losses and business closures, a large proportion of PDCs in India have bloomed.

Indian market capitalization of these PDC’s has taken a huge jump from 30% to nearly about 75% market share over the past 25 years.

Having said that, this growth has not protected the PDCs from the risk of corporate frauds, malpractices and misconducts. In the first set of cases addressed by the Insolvency and Bankruptcy Board of India, it was estimated by the Ministry of Corporate Affairs that a third of the bad debts reported by organizations filing for bankruptcy (about INR 1 lakh crore) were funds siphoned off by senior management. This included names like Bhushan Steel Limited, Amtek Auto Ltd, etc.

Let’s have a look at the common myths which prevent these PDC’s from addressing the fraud risk or corruption : 

  • Believing that when family members are involved in a business, no wrongdoing can be witnessed.
  • Substantial focus on growth of the business while overlooking the manner in which it is conducted, thereby leaving the company vulnerable to malpractices and corruption.
  • Entirely focusing on the cost of fraud risk detection and having a mindset/notion that compliance is a wasteful expense and simply adds to the company’s cost, and therefore is unnecessary, without observing at the benefits derived from it.
  • Underestimating the cost of fraud wherein the Indian Legislation has taken limited action on cases of corporate fraud and existing legislation was not so much deterrent for malpractices.

Recent amendments in the Legislation passed by the Government to curb these malpractices and corruption :

  • The Prevention of Corruption Act in year 2018
  • Insolvency and Bankruptcy Code in year 2019
  • The Fugitive Economic Offenders Act in year 2018
  • Personal Data Protection Bill in year 2018
  • Recent amendments with enhanced clauses in The Companies Act, 2013 that increase liability for directors and key management personnel in managing fraud risks.

Besides the above stated legislations, the PDCs today are also experiencing a change in management with young family members joining the business who are well educated and are keen to make changes to the business that reflect a global culture of fairness and compliance.

Global practices which can be adopted by the PDC’s to curb the numerous scenarios of Frauds and malpractices :

  • The most important and crucial practice would be to undertake comprehensive forensic audit review to identify business practices indicating non-compliance issues that covers: a) Vendors’ due diligence before onboarding, b) Strategic and competitor intelligence, c) Mystery shopping etc.
  • Undertake data readiness assessments to strengthen the response mechanisms and investigations to identify suspected fraud and noncompliance.
  • Undertake customised training programmes for employees to create awareness about the anti-fraud and compliance practices.
  • Introduce forensic technology platforms into the ERP system to fetch red flags items proactively.
  • Undertake proactive fraud risk assessment to identify potential asset misappropriation, financial and non-financial reporting, and regulatory compliances.
  • Conducting computer forensic analysis, data analytics, business intelligence, etc., to identify the nature of the issues, its root cause, people involved which will help to strengthen the vulnerable areas.

Conclusion :

Even today also, a transformation is required in the thought process of PDC’s on the issue of fighting with frauds and adhering to compliances. With the rising opportunities for global investors in Indian market, the demand for effective governance is well required. The management of PDC’s needs to prioritise their efforts towards evaluating the existing anti-fraud and compliance structure and enhance its effectiveness to bring in line with global best practices.

Though these practices will call for some additional cost, however, investing in these initiatives will definitely help in upholding reputation, ensuring long-term survival, significant cost savings, avoid regulatory non-compliances, and achieve growth aspirations.

Author: Ayush Bhatia

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