Decoding fraud while it is in the making
The Financial Express
Partner and Head - India and Emerging Markets, Forensic & Integrity Services, EY
The rising instances of fraud and the potential paralysing impact it could have on the business environment has prompted regulatory changes to curb this menace. Given the hidden nature of fraud, many organisations have unknowingly overlooked susceptible fraud-prone areas. This was a primary cause in rendering them incapable of rectifying concerns.
In 2013, the government placed a higher degree of accountability on corporates through the enactment of Companies Act 2013. By stipulating that auditors intimate the government about any indication of fraud uncovered during their audit process, the law set a precinct for fraud reporting to extend beyond the corporate realm. In correspondence with this stance, the Securities and Exchange Board of India (Sebi) too amended its listing norms to boost acknowledgement within its corporate sphere about the necessity of anti-fraud awareness and measures. Further, a recent clarification issued by the ministry of corporate affairs (in charge of enforcing the Act) introduced a threshold limit for reporting of such instances at R1 crore.
This overview of regulatory amendments showcases the government’s recognition of the issue as a serious business threat, and highlight a strong industry-level focus to promote change. While this reinvigorated effort has encouraged companies to re-evaluate their anti-fraud mechanisms with a focus on deterring it, the industry is yet to entirely grasp the fraud conundrum.
The impact of fraud
According to the Association of Certified Fraud Examiners 2014 ‘Report to the Nations on Occupational Fraud & Abuse’, a typical organisation loses 5% of its revenues to fraud each year. At its extreme, fraud can destroy entire companies, which makes the identification and management of fraud risks crucial components of an organisation’s business plan. During the research for this report, a few things got determined.
- More than 22% of the cases in the survey resulted in losses of at least $1 million;
- The median loss amounted to $145,000 and the frauds lasted a median of 18 months before being detected;
- The smallest organisations tend to suffer disproportionately large losses.
Though the propensity of the impact of fraud on each company may differ, it does pose a considerable business threat irrespective of its financial impact.
Cultivating a trained eye
As fraud can manifest itself in innumerable ways and is not limited to a specific role or function, it is a challenging task to implement anti-fraud mechanisms. Given its subjectivity, based on the organisational structure and dynamics, a one-size-fits-all strategy does not exist. Nevertheless, a common factor that companies would be served well to begin with is generating awareness. In fact, most instances of fraud go undetected due to lack of awareness among the company personnel and third-parties about the company’s approach towards fraud. This is a criterion that is extremely critical to the success of any anti-fraud initiative.
Another factor is equipping the finance and audit teams with the right skillset and tools to identify and detect red flags during audit/assessment. The need for a niche skillset for fraud detection has paved the way for an emerging set of professionals who specialise in forensic audit. Through a specialised set of techniques and advanced technologies, these individuals are able to go beyond accounting methodologies and decipher any traces of fraud that could be present within the company.
A certification to reckon with
The Certified Fraud Examiner (CFE) credential is gaining significant traction, given the current market scenario, with companies demanding a higher level of expertise on this front. This credential is enabling professionals globally to fine-tune their fraud-recognition skills and develop an enhanced approach to deal with such issues. CFEs are trained to identify red flags and warning signals which indicate evidence of fraud and related risks. This enables them to be better equipped to help protect the global economy by uncovering fraud and implementing processes to prevent fraud from occurring in the first place.
While in practice a utopian model for fraud prevention is yet to be found, in principle, ethical business acumen could prove to be the most effective way to safeguard businesses against fraud.
From a corporate perspective, periodic fraud-risk assessments, combined with robust policies and consistent monitoring, also add to the list of industry-leading practices in this domain. As with most of life’s challenges, in the case of fraud too, it is especially better to be safe than sorry.