Corporate Fraud: Can IT Blow the Whistle?

When Scott Thompson was hired as Yahoo’s CEO four months ago, no one could have anticipated the crisis that was to follow. The man who was going to drive a turnaround for the company instead led them into a bigger turmoil. Thompson fudged information in his resume and misled the company about his academic credentials. The case is not just a violation of ethics, but also raises a bigger question of corporate governance that the company needs to look into.
Thompson is not the only CEO to have manipulated information for personal gains. There have been several cases in the past where the most high profile corporate executives have misrepresented their companies’ performances or fudged records. Former CEO and co-founder of WorldCom, Bernie Ebbers was convicted of fraud and conspiracy in one of the largest accounting scandals in US in 2005. The company’s false financial reporting caused a subsequent loss to investors amounting to $11 bn. India witnessed one of its worst cases of corporate fraud when the multi-crore scam of Satyam was brought to light. The company, once the darling of investors, was immediately blacklisted by all.

The incidents of corporate scams and frauds seem to have suddenly risen in India over the last few years. In a recent survey conducted by Ernst & Young among 114 companies in India, almost three-fifths of the respondents said that their companies had been subjected to fraud during the last year. Moreover with the growing use of technology in business operations, instances of technology-led fraud have also increased significantly.

Almost all the business functions of a company, including procurement, finance, HR, marketing, etc, have moved to IT systems and now to cloud based applications. According to the E&Y survey, data or information theft is emerging as the biggest threat due to the proliferation of IT.

Who is the Culprit?

There is no doubt that use of technology across business processes has increased significantly. But it wouldn’t be fair to blame IT as a primary reason behind increase in frauds. While it is true that many organizations are not equipped to handle sophisticated technology-led crimes, the blame lies more on weak internal mechanisms and inability to take timely action against the culprits. Some of the key reasons cited by surveys done on corporate frauds include weak internal controls, eroding ethical values, oversight of senior management, inadequate audit and regulatory systems.

The E&Y survey describes the profile of a typical fraudster as a young middle level manager in his 30s who is ambitious and comfortable with technology, sitting at a remote location generally working in the procurement or sales departments of companies. The motive of committing a fraud now has shifted from ‘need’ to ‘greed’ making the perpetrator perform fraud to support opulent lifestyle.

The recent case of Thompson and several other high level executives who have been responsible for large scale scams show that frauds are not just restricted to the middle level managers. Many a times they are perpetrated by people in power and the key decision makers who are generally trusted by everyone. Therefore it is difficult to pinpoint any single culprit for the rising spate of scams in the corporate world. But most studies do indicate that a majority of all corporate frauds are committed by people who work for the company in some way. [image_library_tag 456/2456, class=”right” title=”corpfraud1" alt=”corpfraud1" ,default]

The Collateral Damage

The damage caused by corporate frauds usually goes way beyond the financial losses. A company may take several years to recover from the loss of reputation, destruction of shareholder value and loss of investor confidence that results from such cases. Leakage of critical company data can lead to irreparable long-term damage that may be difficult to assess.Deloitte’s India Banking Fraud Survey 2012 points out that frauds in the financial services industry pose a significant risk to institutions, as well as to the integrity of capital markets. The effect can be widespread, causing long-term financial and reputational damage. The results indicate that “banks are able to recover less than 25% of the losses in more than half the fraud cases”.

The increase in corporate scams in India is also affecting the country’s reputation as an investment destination. “Although India, witnessing rapid economic growth, is an attractive destination for foreign investors, they are wary of fraud, bribery and corruption risks,” says Arpinder Singh, partner and national director, fraud investigation & dispute services, Ernst & Young India. Therefore it is pertinent to take necessary corrective measures at all levels, and strengthen the regulatory framework of the country as a whole.

Preventing Fraud with IT

Most organizations are today aware of the need to take decisive steps to prevent frauds and improve their internal systems. But they have to realize that conducting regular audits and assessments is just not enough anymore. There is a need to take a more integrated enterprise-wide approach that can guard them at every step.

“A proactive approach to fraud risk management is the need of the hour. Technology and a robust whistle-blowing mechanism can play a large role in mitigating these risks. A positive sign is regulatory activism increasing in India with regulators proposing more stringent standards for prevention, detection and reporting of fraud,” says Singh. [ima[image_library_tag 458/2458, class=”right” title=”corpfraud2" alt=”corpfraud2" width=”540" height=”326" ,default]

 

 

 

Despite all regulatory activism, many organizations still don’t have clear policies or fraud detection systems in place. The E&Y survey shows that not even 50% organizations are aware of fraud-prevention and detection tools available.

Whether it is a result of policy changes, social activism or increased awareness, business organizations today are certainly more focused on corporate governance. The use of technology for fraud detection is also gradually gaining prominence. “Today, we see a rise in the number of companies wanting to incorporate proactive fraud risk management in their companies as compared to a year ago. This is an encouraging sign and indicates a brighter future for corporate governance in India,” says Singh.

Experts say that instead of using technology in a reactive manner, organizations can benefit more by proactively deploying IT tools for monitoring their internal business processes and systems. Analytical tools and intelligent systems can be deployed to regularly scan internal data and identify the gaps, if any.

A global study conducted by Economist Intelligence Unit in 2011 shows that North America has recorded the lowest average incidents of frauds. The survey respondents in the region reported investment in a broad array of anti-fraud measures, including IT security, IP controls, financial controls, and risk management.

As more and more companies increase their focus on corporate governance and start taking proactive measures, IT might just prove to be an effective whistle blower!

 

 

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