CORPORATE FRAUD: THE HUMAN FACTOR
Maryam Hussain
Bloomsbury; 175 pages; Rs 399
Given the many frauds that have occurred in India in the recent past - for instance, those involving National Spot Exchange, Reebok India, First Leasing, Ranbaxy Laboratories, Lilliput, Fourcee, Arshiya and so on - it may be worthwhile to read this book to get a bird's eye view of fraud detection, investigations and mitigation. The Human Factor in the title of the book is intriguing because the human elements of fraud are scarcely discussed in most literature.
The first sentence of the book, " 'I just didn't expect it to be them' is the common reaction when fraudsters are uncovered", promises an emphasis on the human factors behind fraud. The book drives home the message that fraud is all about people - a human perpetrator deceiving human victims.
Trust in colleagues and business partners is an invariable element of business and managerial culture. This trust culture risk distracts managements from an objective interpretation of early warning signs. Also, there is a dichotomy between trust and accountability. The book distinguishes between corruption and fraud, and also tries to delineate the difference between ordinary and extraordinary fraud. The book says extraordinary people in the form of dominant leaders, flamboyant entrepreneurs, charismatic people or rogue employees perpetrate extraordinary frauds. Perhaps it is because these people are believed, trusted and often admired and acclaimed for their leadership that their frauds go undetected for long periods. The strong human element can act as a double-edged sword. All fraud risk management activities are also built on the trust that pervades the organisation. The only limit to the types and mechanisms for fraud is the ingenuity of people. Fraud is also an incredibly dynamic risk.
Fraud detection, fraud investigation and asset tracing to recover money are the three aspects on which companies need to focus. While monetary loss as a result of fraud is a concern, it is the loss of reputation or customer confidence that can persist. The book says no fraud deterrence programme will work if it can be switched off by and for the people trusted most. Employees are the eyes and ears for spotting fraud; information could come from unexpected sources. Early detection can be achieved by building an organisation sensitive to fraud. It is important to create the right environment in an organisation's culture that starts with the board of directors, non-executive directors, the audit committee, internal auditors and all employees. Whistle-blowers have become increasingly important and a growing number of countries, including the United Kingdom, the United States and India, are adopting legislation that enable whistle-blowing and protecting whistle-blowers. The US has led the way in providing financial incentives to whistle-blowers.
Corporate irresponsibility has been discussed in other books in the context of environment and social factors. However, this book points out that prosecutors are treating organisations as a single fraudster, which results in organisational fines and prosecution of board members. The books questions whether an entire organisation can become so riddled with fraud and corruption that it should be treated as a perpetrator of fraud. The chapter on corporate irresponsibility is the weakest one in this book; it seems to have been written as an afterthought with little detail.
Eight pages of the book are devoted to fraud in India, which is far too little. This section gives a glimpse into fraud in India, starting with the Satyam story. There are a few paragraphs describing the legislative response in India to fraud. There is also discussion on Africa, China and West Asia as well as contracts, information and official corruption. The few bullet points on bribery and anti-corruption due diligence are disappointing.
The book also looks into the challenges of cyber crime and some future possibilities of fraud. Cyber crime is a new ubiquitous challenge and is "manifested through incremental and innovative use of technology". Companies need to adopt the mantra, "Security is a process, not an event", while not reinventing the wheel to address the risk of cyber crime. The future of fraud is likely to be impacted by change agents such as technology, changing demographics, nature of organisations' leadership and changes in corporate responsibilities.
Corporate Fraud: The Human Factor would have been a good book on fraud had it offered detailed case studies, practical checklists and had deeper discussions on the various aspects of fraud. Case studies are few and far between; the preface lists only five cases of fraud in history. No single case study is discussed in detail. This book presumes that the reader is aware of the many financial frauds that have occurred in history, including the ones involving Bernard Madoff and Nick Leeson. Every chapter begins with an introduction and a promise to discuss specific aspects in detail; however, the discussion ends up being short and sketchy. A serious student of fraud would have to seek these details elsewhere. The book is a worthwhile read for someone new to the subject of fraud.
Maryam Hussain
Bloomsbury; 175 pages; Rs 399
Given the many frauds that have occurred in India in the recent past - for instance, those involving National Spot Exchange, Reebok India, First Leasing, Ranbaxy Laboratories, Lilliput, Fourcee, Arshiya and so on - it may be worthwhile to read this book to get a bird's eye view of fraud detection, investigations and mitigation. The Human Factor in the title of the book is intriguing because the human elements of fraud are scarcely discussed in most literature.
The first sentence of the book, " 'I just didn't expect it to be them' is the common reaction when fraudsters are uncovered", promises an emphasis on the human factors behind fraud. The book drives home the message that fraud is all about people - a human perpetrator deceiving human victims.
Trust in colleagues and business partners is an invariable element of business and managerial culture. This trust culture risk distracts managements from an objective interpretation of early warning signs. Also, there is a dichotomy between trust and accountability. The book distinguishes between corruption and fraud, and also tries to delineate the difference between ordinary and extraordinary fraud. The book says extraordinary people in the form of dominant leaders, flamboyant entrepreneurs, charismatic people or rogue employees perpetrate extraordinary frauds. Perhaps it is because these people are believed, trusted and often admired and acclaimed for their leadership that their frauds go undetected for long periods. The strong human element can act as a double-edged sword. All fraud risk management activities are also built on the trust that pervades the organisation. The only limit to the types and mechanisms for fraud is the ingenuity of people. Fraud is also an incredibly dynamic risk.
Fraud detection, fraud investigation and asset tracing to recover money are the three aspects on which companies need to focus. While monetary loss as a result of fraud is a concern, it is the loss of reputation or customer confidence that can persist. The book says no fraud deterrence programme will work if it can be switched off by and for the people trusted most. Employees are the eyes and ears for spotting fraud; information could come from unexpected sources. Early detection can be achieved by building an organisation sensitive to fraud. It is important to create the right environment in an organisation's culture that starts with the board of directors, non-executive directors, the audit committee, internal auditors and all employees. Whistle-blowers have become increasingly important and a growing number of countries, including the United Kingdom, the United States and India, are adopting legislation that enable whistle-blowing and protecting whistle-blowers. The US has led the way in providing financial incentives to whistle-blowers.
Corporate irresponsibility has been discussed in other books in the context of environment and social factors. However, this book points out that prosecutors are treating organisations as a single fraudster, which results in organisational fines and prosecution of board members. The books questions whether an entire organisation can become so riddled with fraud and corruption that it should be treated as a perpetrator of fraud. The chapter on corporate irresponsibility is the weakest one in this book; it seems to have been written as an afterthought with little detail.
Eight pages of the book are devoted to fraud in India, which is far too little. This section gives a glimpse into fraud in India, starting with the Satyam story. There are a few paragraphs describing the legislative response in India to fraud. There is also discussion on Africa, China and West Asia as well as contracts, information and official corruption. The few bullet points on bribery and anti-corruption due diligence are disappointing.
The book also looks into the challenges of cyber crime and some future possibilities of fraud. Cyber crime is a new ubiquitous challenge and is "manifested through incremental and innovative use of technology". Companies need to adopt the mantra, "Security is a process, not an event", while not reinventing the wheel to address the risk of cyber crime. The future of fraud is likely to be impacted by change agents such as technology, changing demographics, nature of organisations' leadership and changes in corporate responsibilities.
Corporate Fraud: The Human Factor would have been a good book on fraud had it offered detailed case studies, practical checklists and had deeper discussions on the various aspects of fraud. Case studies are few and far between; the preface lists only five cases of fraud in history. No single case study is discussed in detail. This book presumes that the reader is aware of the many financial frauds that have occurred in history, including the ones involving Bernard Madoff and Nick Leeson. Every chapter begins with an introduction and a promise to discuss specific aspects in detail; however, the discussion ends up being short and sketchy. A serious student of fraud would have to seek these details elsewhere. The book is a worthwhile read for someone new to the subject of fraud.
The reviewer is founder and managing director of InGovern Research Services, India's first proxy advisory and corporate governance research firm