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Fraud reports by the big accountancy firms are prolific in India, but there are limits to the information produced and fears that much corruption is still going unreported

This article was first published in the May 2013 International edition of Accounting and Business magazine.

It is clear that accountancy firms in India consider fraud a significant and continuing problem. The country’s newspapers are quick to highlight increasingly regular fraud reports, with articles carrying headlines such as: ‘Corporate India still napping on fraud prevention: KPMG study’; ‘India Inc worst affected by frauds after Africa: Kroll report’; ‘Investors are biggest sufferers of frauds: Ernst & Young’; and even ‘Cos feel frauds are “inevitable cost” of doing biz: KPMG’, to name a few.

Given the weaknesses in Indian law enforcement regarding the investigation and prosecution of fraud and the ever increasing social pressure to get rich quickly, fraud remains a constant danger to businesses. ‘The confidence of international investors and domestic entrepreneurs has been low in the last two years, thanks to the various scams that have come to light during this period,’ says the introduction of KPMG’s India Fraud Survey 2012.

The report was based on the responses from high-ranking executives from 293 Indian corporations. It focused on regulatory frameworks, emerging frauds, bribery and corruption, identity theft, intellectual property fraud, counterfeiting, piracy and cyber crimes. KPMG concluded that Indian corporations are not equipped to deal with futuristic frauds and are even reluctant to discuss bribery and corruption.

Indeed, when compiling its report, 80% of KPMG’s interview requests to companies were either ignored or declined. The general unwillingness of the companies to participate in the survey has raised fears that the results could be skewed towards those with a clean record: ‘They are not even including unlisted companies where more frauds are happening,’ says Sharat Kumar Pakalapati, an accountant in Hyderabad and a senior fraud investigator in the US$1bn Satyam Computer Services scam: ‘Their data sample should also be segregated region-wise and segment-wise,’ he adds.

But KPMG says it is aware of the shortcomings of survey-based fraud reports, and so attributes very specific functions to them. ‘They try to answer how rampant fraud is; what the perception of corporations with respect to fraud is; and what the areas are that they believe are yet to be plugged,’ says Deepankar Sanwalka, partner and head of the risk consulting practice at KPMG in India.

EY confirms findings

In March 2012, Ernst & Young released its own interview-based report, Fraud and corporate governance: Changing paradigm in India. That report, based on 114 interviews with Indian corporate executives, came to similar conclusions to KPMG – that technology-related fraud is increasing and companies avoid reporting offences because such openness could damage their reputation.

Although these surveys only convey the impression of the respondents, they do help to share best practices to contain fraud, according to Arpinder Singh, partner and national director of EY India’s fraud investigation and dispute services department. The firm has also tried to present hard facts with comparative data analysis on fraud in India. In October last year, EY released the India Fraud Indicator 2012, which looked at more than 200 cases of fraud, drawn from 180,000 news reports.

‘It split the reported fraud by states, by industry, and by the profile of perpetrators,’ explains Singh. The report estimated that India lost US$1.2bn to fraud during the financial year ending March 2012. Of the frauds, 63% were reported in the financial sector and most of the perpetrators were people under 35 years old.

The report referred to official data compiled by the Reserve Bank of India, to measure banking frauds. ‘It could be a good indicator as fraud in any industry directly or indirectly impacts the banking industry,’ says Singh. The only limitation, according to him, is that the bank does not share all the information, such as the name of the defrauded companies, which makes thorough analysis difficult.

EY, however, also admitted shortcomings in its indicator methodology, such that most of the cases still needed to be proved in a court of law.

For more comprehensive reports in the future, big accountancy firms in India are hoping to access other indicators and sources of fraud-related data. ‘The details of whistleblowing complaints to the companies could one day be made public,’ says Singh.

Regarding the filtering of any anomaly in the data supplied to firms, Singh said that every year, EY India investigates about 150 frauds, which gives him and his colleagues enough insight to detect any unrealistic figures or indicators. ‘I have not seen any report that has been disjointed or drastically wrong,’ he says.

KPMG goes a step further in utilising its in-house data in preparing separate reports. It uses all the information collected while investigating frauds for its clients to prepare a global report on the profile of a typical fraudster. ‘We try to compile the data briefly, both at country and global level,’ says Sanwalka.

That said, even if such reports can be trusted, questions remain about their usefulness. ‘People want to know if frauds are increasing or not, which sectors they are affecting more and what the new fraud techniques are,’ Singh explains.

And the figures and broad indicators arouse keen interest. ‘We definitely look at those numbers published in the reports as they are indicative of what is happening,’ says Nilimesh Baruah, director of India’s Serious Fraud Investigation Office. However he adds: ‘We cannot say if they are realistic numbers as there is no way of verifying them.’

The reports are well circulated and have been quoted in the Indian parliament during various fraud-related debates. After their release, there are consultations between the firms and different trade associations, which seek advice on the possible legal and administrative actions to contain the frauds, says Singh. ‘We received lots of queries when the new companies bill was being framed [in 2010-2011].’

Target audience

Ultimately, the target audience of these reports is the leadership of Indian corporations, says Singh. ‘CEO, CFO and compliance heads treat them as a benchmark to compare the situation within their companies.’ After the media release, these executives are the first people to be presented with the reports. KPMG printed 7,000 hard copies of its fraud survey report for special distribution and it relies on PDF downloads to reach the wider audience. It has even created an iPad application to attract more readers.

Significantly, all this information is available for free. ‘We are happy just with the feedback we receive,’ says Singh. However, critics say it is clearly a marketing exercise. ‘While their effort is laudable the reasoning is not idealistic – it is commercial,’ says Pakalapati. ‘They publish these reports to create more work for themselves.

They are a constant reminder to clients and major accountancy firms that they should invest in fraud prevention initiatives – and who better to offer such advice than the company releasing a comprehensive anti-fraud report. Mayur Joshi, director of Indiaforensic, says: ‘In case a director wants to convince his board to get a review done by one of the firms, he can use their report to argue his case.’

It is also these executives who offer the most valuable information and they are usually the respondents sought out. While gathering reliable information and maintaining checks and balances, KPMG sends a questionnaire to the person with the right work experience and who is in a management role where he or she has an overall perspective of the company, according to Dinesh Anand, partner and co-head of forensic services at KPMG in India.

According to Singh, sometimes firms even hire an outside agency to collect the feedback. Independent researchers can overcome the reluctance of executives to share their companies’ information. To encourage responses there are some confidentiality rules: ‘The respondents are not required to write their names on the questionnaires and data is treated very confidentially,’ says Anand. And no doubt, more information is available, if the right questions are asked: ‘There is much more to capture about the quantum of fraud than what is reported,’ he adds.

Raghavendra Verma, journalist based in New Delhi

Last updated: 14 Jul 2014