When a global pioneer of banking sector, which had survived the great depression, declares itself as bankrupt, and another worldwide financial service provider is also sold out, it defines dire straits for the world economy.
The recent downfall of some of the biggest names in the corporate world is not a mere indication, but actually a confirmation to an ubiquitous presence of the feared “R” word- recession. The confidence in the economy is discovering new depths with the rising inflation figures, plummeting share values and decreasing investment. In this scenario, companies are facing decreased resources, increased regulatory vigilance and enhanced share holder pressure.
It has been queer, how with recession one witnesses a sudden upsurge in the number of corporate rogues. The restrictive and uncomfortable characteristics of the slowdown period, like tightened economic conditions and resource crunch often abets the companies to give into the temptations to fraud. The cause for the temptation could be quite varied. In enhanced conditions of contained growth rate of the economy, the paucity of liquidity in the market affects profitability of the organisations.
Along with the reduced profits, the management of the companies also face a number of challenges like meeting the growth targets or ensuring buoyancy of the share value above certain levels. Many situations of similar nature hence give birth to masterminds of malice which leads to fraudulent practices being exercised by some members of a given organization.
Hence, in the process of number crunching and in the haste of demonstrating financial health in the scenario of weakening corporate profit a number of times management resorts to means which are unethical in approach and illegal in practice.
According to the KPMG Fraud Survey Report 2008, the members at the senior most management profiles, are the ones that are easily laced to indulge in these scandalizing deeds. The factors that strengthen senior management's prospects of carrying out the acts successfully are: inherent responsibilities and trust associated with these positions, ability to override controls, internal knowledge and access to confidential information that comes with senior positions. This gives them an advantage over other employees and places them in stronger positions. But as is said, minds of strong men too are easily corrupted.
The Enron Scandal, that was uncovered in October 2001, is a fine exponent of a scam involving high ranking officials of the organization, getting involved in illegitimate acts. This scandal was exposed during the time when the US was on the recovery path from last period of recession.
Homestore.com, Global Crossing, WorldCom, Xerox and many more corporate biggies were seen being named in a number of scams involving billions of dollars, all at the dawn of the current century, corroborating the claim that recession brings out the cheaters, conmen from a lot of executives.
There are three key ingredients of committing fraud, viz. motive, opportunity and rationalisation. Some of the many reasons can be organisations struggling to meet expansion & growth targets, challenge to cope with regulatory thresholds, inability to organise funds from investors or financial institutions and more. Under tremendous pressure to demonstrate financial well being of an organization management resort to the tactics which are not admissible by regulators.
This could be to maintain the share value in the stock market or to increase the valuation of the company or to ensure bonuses to senior management related to the profit of the firm. The ways in which frauds could be conducted are as diversified, if not more, as may be the reasons to conduct these frauds. The most popular modus operandi, opted by the corporate rogues for recession-time frauds is filing manipulated or concocted financial reports and overstating assets and liabilities, to make them appear stronger and optimistic.
Practices like collusions with external stakeholders such as customers or suppliers, misreporting and misrepresentations to regulators, building of superfluous business cases to enable investments in weak performing related parties and pressurizing on trading stock, which will increase market speculations and insider trading situations are other favourites when it comes to fraudulent practices in the corporate settings.
Some of the major corporate and economic scams have either happened during an economic slowdown in the past, or have led to one. Hence, recession and the rogues are inseparable. If recession is the villain, combating which is a major task in itself, the frauds and scams pop up like its grotesque, ugly sidekicks, which are not noticed or cared much for, until they begins to show their fangs and has one or more companies bleeding profusely from their coffers and/or brand image. So though the rogues are not conspicuous, but they can often start an economic avalanche, and hence need to be checked at the right time.
The author is Head - Forensic Services, KPMG , India
