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Fraud and corporate governance:Changing paradigm in IndiaFindings from India Fraud Survey 2012
Page 2A report based on India fraud survey 2012► What lies beneath► Fraud scenario in India — ground reality► Cost of frau...
What lies beneath
Page 4Some statistics1. ―Global Peace Index,‖ Institute for Economics & Peace, 2011, p. 82. “2010 Report to the Nations,” ...
Page 5Changing scenario: increasing awarenessFrom your understanding of recent scams and large-scale corporate fraud, whic...
Fraud scenario in India — ground reality
Page 7Increasing incidence of fraudDo you believe the incidence of fraud has increased in the last one year in your indust...
Page 8Changing paradigmInternalControlsInternal and ExternalPressurePressure on earningsLayoffs are increasing,stock price...
Page 9Top five fraud risksWhich of the following types of fraud do you believe could pose the biggest risk to your industr...
Page 10Cost of fraud- more than monetaryHow would you rank the following six forms of collateral damage (actual or potenti...
Page 11Discovery of fraud – methodical oraccidentalHas your company experienced any incident of fraud in the last one year...
Page 12Weak anti-fraud measuresDoes your company have any of the following anti-fraud measures in place??Reliance on inter...
Page 13Lack of action against the fraud perpetrator― Companies are generally interested inrecovering the defrauded money r...
Page 14Changing profile of a fraudsterManaging insider threatCompanies are reluctant to take legal recourse against employ...
Areas of concern
Page 16Technology frauds: a changing worldSource: Technology frauds: a changing world, Ernst & Young, 2011―74% of the resp...
Page 17Management overriding controlsPressure on earningsAccording to 15% of the respondents, management conflict of inter...
Bribery and corruption – the perpetualchallenge
Page 19Increased awareness of local laws, but lowawareness of global onesAre you familiar with the following acts or regul...
Page 20What corporate think about bribery andcorruption risk?Cash seems to be the most popular mode ofpaying bribes.Around...
Changing regulatory scenario
Page 22Changing Indian Regulations*Regulator/ Law Salient featuresThe Public Interest Disclosure (Protectionof Informers) ...
Tools for fighting fraud
Page 24Proactive fraud risk managementRole of technologyIs your company familiar with any of the following fraud-preventio...
Page 25Whistle-blowingWhat makes whistle-blowing ineffective in Indian companies?Nearly 50% of the respondents representin...
Page 26Fraud response planWhich of the following, if any, apply to your companys response to the first reporting of a poss...
Page 27Third-party due diligenceDoes your company conduct background checks on third-parties (vendors, consultants and sup...
Thank YouArpinder SinghPartner and National DirectorDirect: +91-22-6192 0160Email: arpinder.singh@in.ey.comAbout Ernst & Y...
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Findings from India Fraud Survey 2012: Fraud and Corporate Governance - Changing Paradigm in India

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A report based on a survey conducted to understand the fraud scenario in India. This study aims to understand how businesses have coped with increasing fraud and corruption risk last year, what the emerging fraud risks in the industry are and the measures taken by various organizations to mitigate these risks.
For further information on EY's fraud investigation and dispute services, please visit: http://www.ey.com/IN/en/Services/Assurance/Fraud-Investigation---Dispute-Services

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Transcript of "Findings from India Fraud Survey 2012: Fraud and Corporate Governance - Changing Paradigm in India"

  1. 1. Fraud and corporate governance:Changing paradigm in IndiaFindings from India Fraud Survey 2012
  2. 2. Page 2A report based on India fraud survey 2012► What lies beneath► Fraud scenario in India — ground reality► Cost of fraud — more than monetary► Discovery of fraud — methodical and accidental► Current practices — inconsistent with globally accepted norms► Growing greed — profile of a fraudster► Areas of concern► Data and information theft – managing insider threat► Management’s overriding controls► Bribery and corruption – the perpetual challenge► Changing regulatory landscape► Tools for fighting fraud► Role of technology► Whistle-blowing► Fraud response plan► Third party due diligence► Independent directors — a strong influence
  3. 3. What lies beneath
  4. 4. Page 4Some statistics1. ―Global Peace Index,‖ Institute for Economics & Peace, 2011, p. 82. “2010 Report to the Nations,” Association of Certified Fraud Examiners (ACFE), 20103. “Doing business in a more transparent world: Economic profile India,” World Bank and International Finance Corporation report,20124. ―Corruption Perceptions Index 2011,‖ Transparency International, December 2011A typical organization loses 5% of its annualrevenue to fraud. This figure translates to apotential global fraud loss of more than$2.9 trillionIndia is ranked at 132 out of 183 countrieson Doing Business Index, which is lowestamong BRIC countriesIndias political stabilityrating is weak andtherefore a risk todevelopment projects.India is ranked 135among 153 companieson Global Peace IndexCorruption perception index – India ranked low at 95 out of 183 countries
  5. 5. Page 5Changing scenario: increasing awarenessFrom your understanding of recent scams and large-scale corporate fraud, which of the following options havemost significantly contributed to the detection of fraud??According to more than three-fourths of the respondents, the incidence of fraud hasincreased in the country in this last one year. But the fact that around two-thirds of therespondents said that scams and corporate frauds were unearthed because of legislationssuch as the Right to Information Act (RTI) and Public Interest Litigation (PIL) speaks volumesabout public awareness in India.68%61%54%25%0%10%20%30%40%50%60%70%80%WhistleblowingLegislations such as the Right toInformation Act and PILIndependent mediaPublic driven initiativesMultiple Answers Allowed
  6. 6. Fraud scenario in India — ground reality
  7. 7. Page 7Increasing incidence of fraudDo you believe the incidence of fraud has increased in the last one year in your industry??Nearly three out of five respondents revealed that their companies had been subjected to fraudduring this last one year. In addition to industries such as banking, Non Banking FinancialCompanies (NBFC), real estate and telecommunications, which are generally perceived as beinghighly fraud prone, around 50% of the respondents from infrastructure, IT/ITeS and consumerproduct companies also indicated that fraud incidents have increased in their segments.85%67%60%50% 50% 50%0%25%50%75%100%Banking& NBFCRealestateTelecom Infra IT/ITES ConsumerproductsYes
  8. 8. Page 8Changing paradigmInternalControlsInternal and ExternalPressurePressure on earningsLayoffs are increasing,stock prices aredeclining, credit crisisand other externalfactors are increasingOpportunity toCommit FraudInfluence of TechnologyAs business processessuch as accounting,procurement etc. aremoving to IT systems, andslowly to cloud computingso are the related fraudsPressureOpportunityRationalizationLess focus on corporategovernance/ethicsWith Increased pressureand decreased internalcontrols – People willexplore more opportunitiesto commit fraud
  9. 9. Page 9Top five fraud risksWhich of the following types of fraud do you believe could pose the biggest risk to your industry??1. Data or information theft and IP infringement2. Bribery and corruption3. Fraud by senior management and conflict of interest4. Vendor fraud or kickbacks5. Regulatory non-compliance20%15%13%12%10%9%9%4%3%3%2%Data and information theft, IP infringementBribery and corruptionVendor fraud, kickbackFraud committed by senior managementRegulatory non-complianceAccounting fraudProcurement fraud, favoritismMoney launderingAsset misappropriationManagement conflict of interestOthers
  10. 10. Page 10Cost of fraud- more than monetaryHow would you rank the following six forms of collateral damage (actual or potential) stemming from fraud??Loss of reputation emerged as the biggest and severest collateral damage caused by fraud.For companies, public perception can have a dramatic impact on their business. According tomore than three-fourth of the respondents, loss of reputation is the most serious collateraldamage (actual or potential) stemming from fraud.5.273.66 3.36 3.27 3.032.410123456Damage to reputation of brandDamage to external business relationsMonetary lossDecline in employee moraleStrained relations with regulatorsNegative impact on share price
  11. 11. Page 11Discovery of fraud – methodical oraccidentalHas your company experienced any incident of fraud in the last one year? If yes, which one of the followingmethods of detection were employed??Only 14% of the respondents attributed detection of fraud to automated surveillance systems.It seems counter-intuitive that we still detect most cases of fraud by being tipped off or byaccident, even with advancement in technology and heightened regulatory activity.62%41%34%14% 12% 9% 5% 7%0%10%20%30%40%50%60%70%Method employed in the company for detection of fraudWhistleblowing mechanismInternal audit/Corporate securityProactive fraud risk managementAutomated detection/Surveillance systemsRotation of duties/personnelExternal auditBy accidentOthersMultiple Answers Allowed
  12. 12. Page 12Weak anti-fraud measuresDoes your company have any of the following anti-fraud measures in place??Reliance on internal and external audit, and code of conduct is highOrCompanies still using internal/statutory audit to detect fraud93 91 9071 69 67597 9 1029 31 33410%25%50%75%100%InternalAuditingExternalAuditingCode ofconductVendor/Third-Party duediligenceWhistleblowerMechanismAnti-bribery/corruption andethics trainingProactive fraudrisk managementNoYes
  13. 13. Page 13Lack of action against the fraud perpetrator― Companies are generally interested inrecovering the defrauded money rather thangetting the culprit punished under the law ofthe land as it is not legally binding on them.Section 39 of the Code of CriminalProcedure, 1968, imposes no legal bindingon any person to report cases of economicoffences under the IPC, such as theft,dishonest misappropriation of property,criminal breach of trust, cheating anddishonestly inducing the delivery of property,forgery for the purpose of cheating, using asgenuine a forged document and otheroffences of corruption and bribery, to thepolice.‖According to most survey respondents, “He is an internal employee of a company, who is inhis 30s and is far from retirement. He is in the middle management cadre, working in theprocurement or sales department.”
  14. 14. Page 14Changing profile of a fraudsterManaging insider threatCompanies are reluctant to take legal recourse against employees responsible for committingfraud. Only 35% of the respondents said that their companies take legalaction against any employee responsible for committing fraud.Some possible reasons:►Lifestyle not commensurate with income►Young people more tech-savvy, and tend touse their knowledge for fraud vulnerabilities► Lack of controls in rapidly growingorganizations, and fraud over-looked as cost ofdoing business►For faster career growth and image projectionin a sluggish economy►Employee handling multiple responsibilities,esp. conflicting►Employee being a star performer in financialtargets but not in compliance►Compensation is linked to short termperformance►Low morale and motivation among employees
  15. 15. Areas of concern
  16. 16. Page 16Technology frauds: a changing worldSource: Technology frauds: a changing world, Ernst & Young, 2011―74% of the respondents strongly perceiveIT fraud as a serious risk for theorganization‖―One-third of the respondents wereunaware of the IT Act 2000 and itsamendments. We also observed minimalawareness of the Indian Evidence Act andthe new data privacy law.‖―An alarming number of respondents (61%)revealed that their companies rely onbasic spreadsheet software for IT fraudinvestigations‖―31% of the survey respondents are awarethat IT data breach investigation and itsprevention gets covered in the overallcompliance audits in a company‖
  17. 17. Page 17Management overriding controlsPressure on earningsAccording to 15% of the respondents, management conflict of interest poses the highest fraud risk.Inability to achieve the projected levelManagement over-ride of ControlsMis-statement of FinancialsOn achieving projected levelsManagement over-ride of ControlsDiversion of FundsOverstatementofAssetsUnderstatementofLiabilitiesInflationofIncomeInflation ofExpenses/DeferralProject unrealisticCAGR & futurecash flows
  18. 18. Bribery and corruption – the perpetualchallenge
  19. 19. Page 19Increased awareness of local laws, but lowawareness of global onesAre you familiar with the following acts or regulations??After the recent scams, there seems to be an increased awareness of anti-graft laws, and nearlythree-fourth of the respondents indicated that they were aware of anti-corruption legislation inIndia — the Prevention of Corruption Act. However, although three-fourth of the respondentsrepresented MNCs, less than half of them were aware of important anti-graft legislation such asthe US FCPA and the UK Bribery Act, both of which have extraterritorial reach.70%49%35% 32%0%10%20%30%40%50%60%70%80%Prevention of Corruption ActForeign Corrupt Practices Act (FCPA)UK Bribery Act (UKBA)OECD regulationsMultiple Answers Allowed
  20. 20. Page 20What corporate think about bribery andcorruption risk?Cash seems to be the most popular mode ofpaying bribes.Around 33% of the respondentssaid that lack of an effectiveregulatory and compliancemechanism, and weak lawenforcement are equallyresponsible for facilitatingcorruption.Perceptionsand groundrealitiesKickbacks to win or retain businessTo get routine approvals fromgovernment agenciesInfluence people in making favorabledecisionsNearly 40% of the respondents indicated that theinherent nature of the industries in which theircompanies operated was responsible forfacilitating corruption; 34% respondents said thatit was due to the ―weak tone at the top.‖Continuing bribery and corruptionrisk
  21. 21. Changing regulatory scenario
  22. 22. Page 22Changing Indian Regulations*Regulator/ Law Salient featuresThe Public Interest Disclosure (Protectionof Informers) Bill, 2010• Expected to encourage disclosure of information in public interest, but the private sector isexcluded• Provides limited protection to whistleblower• Investigation not time boundThe Prevention of Bribery of ForeignPublic Officials (FPO) and Officials of PublicInternational Organizations (OPIO) Bill2011 (India’s FCPA equivalent)• Criminalizes acceptance or solicitation of bribes by FPOs and OPIOs• Criminalizes offers or promises to give bribes to FPOs and OPIOs for obtaining or retainingbusinessThe Prevention of Corruption AmendmentAct, 2011(proposed amendment to the PCA, 1988)• Includes new sections that empower the Act to deal separately the offence of violating the normsof the Constitution, for using undue influence on public servants, misusing official powers andcausing loss to the government exchequer• Empowered to seize, attach and confiscate the property of convicted persons, who haveamassed ill-gotten moneyCompanies Bill 2011 • Serious Fraud Investigation Office (SFIO): has powers to probe companies suspected of fraud• SFIO’s report filed in a court for framing charges to be equivalent to a police report under theCode of Criminal Procedure, 1973• To have the power to arrest persons for suspected fraud; SFIO to coordinate its operations withthose of other investigating agencies such as the Central Bureau Of Investigation or EnforcementDirectorateData privacy laws • To prevent use or gathering of personal information without the knowledge of the concernedpersons• To protect personal information, financial information such as bank accounts, credit or debit cardor other payment instrument detailsThe Competition Act • Anti-competitive agreements• Abuse of dominant position.• Regulation relating to combination* This information is intended to only provide a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for makingdecisions, nor should it be used in place of professional advice.
  23. 23. Tools for fighting fraud
  24. 24. Page 24Proactive fraud risk managementRole of technologyIs your company familiar with any of the following fraud-prevention/detection tools??Less than 50% of the respondents are aware of fraud-prevention and detection tools46%43%34%26%38%0%5%10%15%20%25%30%35%40%45%50%Software for continuous monitoringof business transactionsIT-based tools for retrospectiveidentification of fraudulentpayments or other abusive activitySoftware for continuous monitoringof business communications (i.e.,key words within emails toaddresses external to the company)IT-based tools for identification ofunethical behavior based on socialnetwork analysisCannot sayMultiple Answers Allowed
  25. 25. Page 25Whistle-blowingWhat makes whistle-blowing ineffective in Indian companies?Nearly 50% of the respondents representing Indian companies revealed that their organizationsdo not have a whistle-blowing mechanism, while 75% of the respondents from Indian MNCsclaime to have one.Absence of a telephone (hotline) as reporting mediumLess than 50% of the respondents reported that their companies have a telephone (hotline)for whistle-blowing.Operating hotline internallyAround 90% of the respondents, who reported that their companies had a whistle-blowingmechanism, revealed that these hotlines are operated internally.Lack of awareness71% of the respondents said that only 10% of the complaints received through themechanism require further investigation.
  26. 26. Page 26Fraud response planWhich of the following, if any, apply to your companys response to the first reporting of a possible case of fraud,bribery or corrupt practice??According to 63% of the respondents, their companies have well-defined roles within theirinternal audit, compliance, risk and legal functions in the event of investigations, and 55%said that their companies had in place a clear procedure for reporting incidents, butonly 32% have documented response plans.63%55%46% 44%32%16%7%0%10%20%30%40%50%60%70%We have well-defined roles for different groupssuch as internal audit, compliance, risk andlegal in any investigation.We have a clear process for reportingincidents.We have a clear process for determiningconsistent disciplinary outcomes ofinvestigations.We have a clear process for conducting root-cause analysis to understand how an incidentoccurred.We have a documented response plan thatinvolves those parts of the business with therequisite skills to handle an investigationCannot sayNone of the aboveMultiple Answers Allowed
  27. 27. Page 27Third-party due diligenceDoes your company conduct background checks on third-parties (vendors, consultants and suppliers, forexample) it engages??Nearly two-third of the respondents said that their companies conduct due diligence onethics and integrity for third parties. This positively reinforces the fact that globalization andthe regulatory “push” is driving companies to proactively manage their fraud risk.68%32%YesNo
  28. 28. Thank YouArpinder SinghPartner and National DirectorDirect: +91-22-6192 0160Email: arpinder.singh@in.ey.comAbout Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment toquality. We make a difference by helping our people, our clients and our wider communities achieve their potential.Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK companylimited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com© 2011 Ernst & Young Pvt. Ltd. Published in India. All Rights Reserved.This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailedresearch or the exercise of professional judgment. Neither Ernst & Young Pvt. Ltd. nor any other member of the global Ernst & Young organization can accept any responsibility for lossoccasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.Ernst & Young Pvt. Ltd.Assurance | Tax | Transactions | Advisory
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