India a 'fraud haven,' says report

Terming the country as a 'fraud haven' with about 60 per cent of the firms having detected frauds in past two years, global consultancy major KPMG on Tuesday said that India Inc is still unprepared to handle this menace.

Making the situation even worse, at least 5 per cent companies have had losses exceeding Rs 10 crore (Rs 100 million) and more than double of them have estimated the hit on their bottom lines in the range of Rs 1 crore (Rs 10 million) to Rs 10 crore, KPMG said citing its 'India Fraud Survey Report 2008.'

According to the survey, over 70 per cent of companies believe that fraud in India would further increase in next two years, while over 80 per cent respondents recognised fraud as a problem in the corporate environment in the country.

Indicating about 54 per cent rise in the number of fraud occurrences since the previous survey in 2006, about 60 per cent of respondents confirmed having experienced fraud at their companies, as against just 39 per cent two years ago.

While noting that actual cost of fraud to business was difficult to estimate as not all are discovered, KPMG said that 31 per cent of those surveyed suffered losses of Rs 10 lakh (Rs 1 million) to Rs 1 crore, while 11 per cent put the losses at Rs 1-10 crore and another 5 per cent at more than Rs 10 crore. However, it was less than Rs 10 lakh for about 53 per cent.

The financial services sector has retained its position as the most susceptible to frauds, while real estate and infrastructure surpassed IT and ITeS as the second most risky business in this regard, the survey found.

The report further pointed out that threat of fraud comes mostly from within the organisation. Majority of those surveyed felt that 'employees pose the maximum threat to an organisation and the senior management is more likely to commit fraud as compared to other employees.'

According to other findings of the survey, over 75 per cent of companies believe that fraud remaining undetected is their biggest concern, followed by inadequacy of anti-fraud measures and unethical behaviour of their employees.

KPMG said that the dual impact of two concerns, unethical behaviour of employees and inadequacy of anti-fraud measures, leads to an environment where both inclination and opportunity co-exist. 'This could mean that organisations in India that remain passive in their approach to deal with fraud may be a perfect breeding ground for fraud,' it added.

KPMG said that over 80 per cent of respondents believed that corporate sector pay bribes or make facilitation payments to do business in India. However, 60 per cent did not have adequate knowledge about anti-corruption laws.

Among the respondents, close to 25 per cent were at the level of an executive director, managing director or chief executive officer, while 30 per cent were chief financial officers of companies.

The inherent responsibilities and trust associated with senior positions, ability to over-ride internal controls, internal knowledge and access to confidential information increases the risks, it noted.

After employees, the maximum threat is perceived from suppliers and service providers, KPMG said.

'With the increase in the number of business transactions combined with the lack of effective monitoring, frauds are a real time threat for most corporates in India. It comes as a surprise that even the larger companies operating in India do not have adequate risk management strategies,' KPMG India's Forensic Services head Deepankar Sanwalka said.