The exposure of Indian companies to corporate fraud increased in 2012-13 after declining sharply in the previous year, according to the Kroll Global Fraud Report. The proportion of firms reporting increased exposure to fraud was pegged at 71 per cent this year against 67 per cent the previous year, according to the report based on a survey commissioned by consultancy firm Kroll with the Economist Intelligence Unit. The proportion of firms reporting increased exposure to fraud was pegged at 85 per cent in 2010-11.
The report says that 69 per cent of companies in India were hit by fraud, against 68 per cent the previous year and 84 per cent the preceding year.
Indian firms reported higher risk perception for seven types of fraud. These include theft of physical assets (33 per cent of Indian companies were affected compared with the global survey average of 28 per cent), corruption and bribery (24 per cent in India compared with 14 per cent), internal financial fraud (22 per cent in India compared with 16 per cent internationally) and information theft (24 per cent compared with 22 per cent globally).
“While Indian companies have always operated against the backdrop of a high-corruption environment, 37 per cent of respondents acknowledged that their firms have become even more vulnerable to corruption and bribery related fraud, up from 32 per cent last year and well above the survey average of 20 per cent,” the report said.
The report highlighted that insider fraud is particularly rife in India compared with other BRIC countries. Of the Indian companies which suffered from fraud in the last year and where the perpetrator was known, 89 per cent indicated that the perpetrator was an insider and 69 per cent of respondents indicated that junior employees appear to be leading culprits. This is far higher than what was experienced in other emerging markets such as Brazil, Russia and China.
High staff turnover is the second-most common factor increasing fraud exposure in India as cited by 29 per cent of respondents.
Another interesting finding from the survey was the incidence of fraud committed by vendors and suppliers in India. Around 40 per cent of companies surveyed indicated that a vendor or supplier played a part in the fraud; this was above the global average and what is seen in other BRIC countries.
Due to fraud, Indian companies lost 1.4 per cent of revenue, a rise of 1.2 per cent compared with last year.
“The increased focus on procurement fraud is driven by greater emphasis on good corporate governance and by a difficult economic environment, where companies are looking for ways to stem economic losses due to potential fraud. However, though India leads in vendor fraud and fraud undertaken by junior employees, only 45 per cent of respondents in India plan to increase investment in vendor, partner and client due diligence,” said Reshmi Khurana, head of Kroll in India.
The report revealed that around half of the respondents indicated that fraud was discovered via internal audits (substantially higher than the global average of 35.8 per cent). Around 5.9 per cent of respondents from India indicated that external audits played a role in the discovery of the fraud. While managements of the firms were proactive in detecting fraud, whistleblowers spotted over a quarter of the fraud. Indian firms said IT complexity continues as one of the biggest drivers of increased exposure to fraud.
Among the vulnerable sectors, there has been a surge in fraud in financial services and the sector remains one of the most affected industries with three-fourth of the companies being affected. The sector witnessed problems in the areas of internal financial fraud, regulatory or compliance breach and money laundering.
The manufacturing sector continues to lead with the highest overall incidence of fraud. The sector also has the highest number of respondents reporting increased fraud exposure from information technology complexity and from the ever greater complexity of its products.
(Edited by Joby Puthuparampil Johnson)