Upholding Corporate Conscience: India’s Journey Towards Robust Fraud Prevention

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 statistics; it represents a systemic failure in existing mechanisms of fraud detection and prevention. It prompts a pressing question for businesses worldwide: how can we better safeguard our operations against fraud?

The answer lies in embracing a fundamental shift in our approach - moving from traditional, often reactive, methods to more robust, proactive strategies in detecting and preventing 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..

Expanding the scope of corporate fraud and proactive measures

The landscape of corporate fraud is not only vast but also riddled with complexities. Fraudulent activities significantly impact sectors like 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’, paints a troubling picture where mid-level employees predominantly orchestrate fraud. These individuals, often trusted with substantial responsibilities, exploit weak internal controls to their advantage. This scenario underscores the imperative need for organizations 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. Leadership’s role in this transformation cannot be overstated; the ethical tone set at the top reverberates throughout the organization, influencing behavior and establishing a culture of integrity and vigilance.

Deepening the role of Governance in ESG and Regulatory Compliance

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 Indian government’s initiatives under the leadership of Prime Minister Narendra Modi. 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 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.

Strengthening frameworks, education, and due diligence in M&A

In the quest to fortify defenses 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 organizations. Furthermore, the role of education in shaping an organisation’s ethical landscape cannot be overstated. Regular training and awareness programs 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 of 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 the ethical conduct of 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 organizations, encompassing 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 preserving the integrity and trust that are fundamental to the sustainable growth and prosperity of our corporate landscape.

[1] ACFE 2022 report link - 2022+Report+to+the+Nations.pdf (amazonaws.com)

A version of this article was published on Nov 17, 2023 by Moneycontrol.com