Covering up crime

New surveys reveal Indian companies are ill-prepared "" and sometimes unwilling "" to deal with corruption

If you thought white-collar crime flourished only in the country's bloated bureaucracy, think again.

Like the government, India Inc does not have proper systems in place to detect crime, which leads to employees repeatedly defrauding their companies, say two recent surveys, one each by professional services firms KPMG and PricewaterhouseCoopers (PwC).

The corporate sector has poor economic crime detection systems and accepts certain crimes as a part of doing business, says the latest of the two surveys: Global Economic Crime Survey 2003, carried out by PwC.

Indian companies are ill-prepared to handle cases of fraud and corporate espionage, adds the 2003 Fraud and Misconduct Diagnostic Survey of KPMG released in March this year.

Privately, most businessmen admit that corruption is rampant in their companies. Yet, corrupt practices are grossly under-reported as it might result in loss of face for the company.

The PwC survey shows that though the perception about the prevalence of crimes like corruption and bribery and financial misrepresentation are high, the reported incidence of these crimes is much lower.

"It shows that companies have come to live with it and find no need to report it," Ashwani Puri, country head (corporate finance and recovery), PwC India, said.

Thus, while 53 per cent of the respondents perceived corruption and bribery as an offence, only 11 per cent of the respondents reported suffering corruption and bribery.

"This may perhaps be due to a fear of adverse implications and/or acceptance of corruption & bribery as an everyday cost/risk of doing business," the survey added.

The findings of the KPMG survey were no less alarming. As many as 58 per cent of the 196 respondents told KPMG that they have no policies and procedures to counter corporate espionage.

Fifty per cent of the respondents covered in the survey said that their company did not have in place a "conflict of interest" policy.

And as high as 72 per cent said that they were not required to sign annual conflict of interest declarations.

"Such declarations are the teeth of any conflict of interest policy," KPMG Forensic executive director Deepankar Sanwalka said. Clearly, India Inc does not have teeth to catch the fraudsters.

The survey also showed that companies do not have adequate screening processes to bar fraudsters from joining.

Only 48 per cent of the respondents believed that the recruitment procedures at their organisations have enough checks and balances to prevent a fraudster from joining.

Only 13 per cent of the respondents claimed to be extremely knowledgeable about which frauds can occur in their organisation, though 50 per cent said that they were somewhat satisfied that their organisation has a well-developed understanding of fraud risks.

And 14 per cent said that senior executives did not have the experience to identify fraud indicators during a review of financial results.

"It is worth noting that most of the big-ticket fraud are perpetrated by the senior management of a company," Sanwalka added.

Taking it forward, PwC said in its survey that during the last two years, only 7 per cent of the economic crimes were reported to be detected by risk management systems put in place by companies in India, as compared to 17 per cent in Asia-Pacific and 26 per cent across the globe.

"This is a worrying finding which suggests that Indian companies are placing too little attention on the development of effective controls and alternative checks and balances," the survey said.

"We can see a certain complacency amongst corporates. The actual crime detection mechanism is not very good, though they claim to have adequate systems in place," Puri told Business Standard.

As many as 85 per cent of the respondents in India reported taking measures to ensure that they are less exposed to economic crime as against 75 per cent in the Asia Pacific region and 78 per cent across the globe.

It also came across from the KPMG survey that companies do not have well developed channels of communication to report the occurrence of a fraud or corporate espionage.

While 10 per cent of the respondents said that the channels for reporting suspicions of a fraud were non-existent in their organisations, 51 per cent said that the channels needed improvement.

Again, 16 per cent said that the documentation and communication of fraud and ethics policies were non-existent in their organisations, as many as 46 per cent said that such policies needed improvement.

It's little surprise then, the extent of fraud or corporate espionage reflected in the KPMG survey did not seem to be very high.

Ten per cent of the respondents said that their organisations have fallen prey to corporate espionage, while 72 per cent said that their organisations hadn't.

While 25 per cent of the respondents in the survey were CEOs, another 35 per cent were CFOs. "The average size of the companies covered in the survey would be around Rs 250 crore with 12 per cent of the respondents having sales in excess of Rs 1,500 crore," Sanwalka said.

The PwC survey was carried out in India in two phases. In the first phase, over 100 companies were asked to give initial indications on the subject.

In the second phase, 85 companies were approached for a detailed analysis. In both the phases, the companies were drawn from the top 1,000 companies of the country.

While 55 per cent of the respondents were from the manufacturing sector, 37 per cent were from services and eight per cent from financial services.

Product piracy & counterfeiting (26 per cent) and asset misappropriation (19 per cent) emerged as economic crimes with the highest incidence in the country in the last two years in the PwC survey.

In fact, as per the survey, reported that product piracy & counterfeiting is significantly higher in India compared to the region and globally (both 8 per cent)."

Surprisingly, the perceived prevalence of product piracy and counterfeiting in India was considerably lower than the reported incidence, suggesting that corporates are unaware of the extent to which it is rampant.

"This may possibly be because while dealing with incidents of product piracy & counterfeiting, organisations tend to avoid publicity for fear of adverse implications, particularly effect on brand image," the survey added.