5 minute read 25 May 2020
How to mitigate fraud risks

How can companies integrate ethics in CSR programs to mitigate fraud risks?

By Arpinder Singh

EY Global Markets and India Leader, Forensic & Integrity Services

Leading forensic accountant and veteran expert witness. Advising global clients on compliance, anti-corruption and corporate governance. Disruptive thinker. Technology aficionado. Author.

5 minute read 25 May 2020

The survey conducted among key corporate social responsibility (CSR) executives highlights India Inc.’s high dependence on third-party implementation partners to lead and execute CSR programs.

Corporate social responsibility has evolved in India over the last few years from being voluntary, philanthropic and unsystematic, to organizations instituting structured and strategic programs to contribute toward causes that enable the welfare of society as a whole. The focus and effort made around CSR was enhanced by the amendments to the Companies Act 2013 that defined the scope for organizations above a certain size and threshold. Key amendments included the introduction of Section 135 that outlines mandatory spends, a defined program and a dedicated committee to administer and monitor the program. Recent data released by the government highlights significant amounts being spent for the development and management of CSR initiatives, with a reported spend of close to INR12,000 crore in 2018-19, the highest since the Act became mandatory in 2014-15.

With the prevailing COVID-19 pandemic, CSR teams and initiatives have had to step up and be at the forefront as the world faces turbulent and unprecedented times. Organizations are re-aligning priorities, ongoing projects are being reviewed for efficacy, while fostering new programs aimed at relief activities for wider community building and engagement. The impact of social initiatives is paramount, especially during times of crisis. But measuring the performance and impact of CSR initiatives can be challenging, particularly as it is aimed at delivering long-term value for communities at large. Instituting governance and compliance programs from an initial stage can strengthen the supervision and the outreach, minimize any waste or leakage and deter unethical practices. Integrity needs to be at the heart of CSR initiatives to make a real difference.

Against this backdrop, EY’s report Corporate social responsibility in India: re-engineering compliance and fraud mitigation strategies – in which we surveyed over 100 CSR executives in India – found India Inc.’s high dependence on third-party implementation partners to lead and execute these programs. However, the level of governance in identifying vulnerabilities and understanding the authenticity and credentials of third parties tends to be very rudimentary.

Other aspects emerging from the survey findings were low involvement of management and limited monitoring over the implementation process, including understanding if the allocated funds were utilized for the actual purposes as described in the CSR plan. 

Understanding the third-party challenge in CSR programs

45%

of the respondents indicated a struggle to find the right implementation partner

Corporate India’s dependence on third party vendors or specialists has increased over time. However, one of the most common challenges that persists is a lack of readily available and transparent information on these specialists. Attempting to estimate the social impact of the organization’s initiatives can be a daunting task, making the threat of misrepresentation, fraud and unethical practices a reality. In the current pandemic stage, wherein corporates are mobilizing resources to support the Government address the immediate threat, the need of diligence cannot be over emphasized.

Governance and oversight of CSR programs – is it optimal?

75%

of the respondents shared that their businesses did not have a governance structure or a definite policy to address any ethical lapses or fraud in CSR programs

Successful businesses tend to have a robust governance structure and internal controls for all departments. For CSR, the role and responsibilities of the committee members are crucial to create and run programs (with or without implementation partners) effectively and bring any issues to the forefront. Boards and CEOs should provide the overarching guidance, while the responsibilities of the committee should focus on granular matters.

56%

of the respondents shared that there was no involvement of the board in the CSR committee

Senior management commitment where the leadership has a high involvement in devising the right strategy, design and execution of strong CSR programs can help maximize the program’s success and minimize associated risks. From the organizational perspective, this helps fortify the company’s CSR engine, scale up competencies and gives management greater insights and control.

COVID-19 caught the world off-guard - unaware and unprepared. In the new normal, many countries went through a state of lockdown and remote working operations lacked a personal, on-ground and tangible way of business which everyone is accustomed to. For corporates, it is important to become willing and flexible when embracing the new way of working in their CSR efforts to support the ecosystem.

Addressing risks in implementation

33%

of the respondents cited financial misrepresentation of CSR funds as the most critical unethical practice demonstrated by implementation partners

Merely handing over the CSR program and its implementation to an external partner is not the answer. In addition to identifying the right implementation partner and conducting third-party due diligence, organizations need to make sure that the process of execution by the implementation partner during the entire life cycle of the CSR program is conducted with integrity. The overall approach, steps involved, and mechanisms should be outlined categorically, firmly put in place and periodically monitored to determine the progress and identify any gaps along the path.

With separate and substantial budgets being earmarked for CSR and the amount of funding expected to augment with time, it is critical for organizations to setup safeguards against fraud and other vulnerabilities. Enhancing internal controls and streamlining processes to mitigate potential financial and reputational risks would be crucial.
Arpinder Singh
EY Global Markets and India Leader, Forensic & Integrity Services

37%

of the respondents conducted conflict of interest checks to assess possible linkages with employees

There is an equally large internal implementation risk that can increase fraud vulnerabilities including employee and management-led fraudulent practices. Human behavior can be very complex, so organizations need to understand and manage employee issues before they commit any unethical act. An internal breach by an insider can be very damaging as it can shake the very foundation of what the company stands for, its culture and purpose

Monitoring and reporting to detect and deter fraud

37%

of the respondents shared that regular monitoring and evaluation of projects was a key challenge

The key to success for CSR committees will be maintaining compliance with the law, conducting due diligence and regular monitoring of the CSR activities and seeking guidance from senior management and the board.
Saguna Sodhi
EY India Partner, Forensic & Integrity Services

Measuring the effectiveness of an organization’s CSR engine rests on the soundness of the CSR committee, the proper alignment of the policy, the strategy and the mechanisms that have been put in place to regularly monitor the external and internal risks, especially the work performed by implementation partners. Additionally, organizations need to assess at an initial stage if the execution partner has the capabilities to achieve the project target and conduct regular reporting and impact measurement of the project itself to make sure it is on track.

A systematic approach to conduct periodic reviews and a robust monitoring framework would be beneficial and cover the critical aspects.

(Saguna Sodhi, EY India Partner, Forensic & Integrity Services also contributed to the article.)

Summary

Identifying and addressing any vulnerabilities that may expose the CSR activities to fraud or leakage is key for the success of the program.

About this article

By Arpinder Singh

EY Global Markets and India Leader, Forensic & Integrity Services

Leading forensic accountant and veteran expert witness. Advising global clients on compliance, anti-corruption and corporate governance. Disruptive thinker. Technology aficionado. Author.