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Self-regulation is the strongest defense against fraud; one cannot regulate independence or governance, they are part of corporate culture: SEBI Significant period gaps spanning over years between occurrence of the fraud and detection because of vulnerabilities in corporate governance process: SFIO 65% respondents been a victim of corporate fraud in India; cyber threats, conflicts of interest, supply chain fraud largest source: CII Kroll India Fraud Survey 2021
Oct 07, 2021

Mr S. K. Mohanty, Whole Time Member, Securities and Exchange Board of India (SEBI) highlighted the importance of robust corporate governance and risk management systems to prevent frauds. Fraud destroys wealth and shakes the confidence of investors in the market and may even pose a systemic risk for the financial eco-system. Elucidating the approach of SEBI, he assured that the regulator is committed to address the concern of corporate fraud and a focused department CFID has been set-up for the same. SEBI is focussed on dealing with the fraud risk in an efficient and timely manner. He was addressing the Conference on Corporate Frauds Governance and Risk Management organized by Confederation of Indian Industry (CII).

Speaking on technology related frauds, Mr Mohanty said that use of technology as they make companies more efficient and robust, will also expose them to additional unknown risks. A large number of small investors are heading toward markets. Trades are being conducted online on interoperable system. This is giving rise to risk of online frauds. Sufficient checks and balances need to be in place for mitigating the fraud risk. While sharing his views on the office of Independent Directors, Mr Mohanty emphasised that independence has to come from within and organisations have to focus on building the culture of corporate governance. He emphasised that SEBI is committed to strengthen the eco-system by strengthening the LODR disclosures and related party transactions. Revised CARO is a significant step towards improving the quality of Audit report. KMP’s have a bigger role in ensuring that the process of governance is smooth and fair. Regulation is a continuous evolving process and will keep shaping up with the needs of the society, he said.

Mr Keshav Chandra, Director, Serious Fraud Investigation Office (SFIO) highlighted that Independent Directors and Audit Committee have responsibility to guide and observe the performance of the companies for avoiding the discrepancies in nature of fraud and for strengthening corporate governance. Strong Corporate Governance will preserve the health of the company and will also strengthen the economic eco-system. There are significant period gaps, spanning over years, between occurrence of the fraud and their detection because of vulnerabilities in the corporate governance process, which prevent the fraud from surfacing and being noticed.   In today’s time Corporate Governance is dynamic and evolving from the interplay of four crucial elements i.e., Board, Stakeholders, Management and Regulators. Each element has to come together and play its role for prevention of frauds. Fraud dents the confidence of investors, lending Institutions and impacts the confidence in economy. Regulators needs to work with single objective of preserving the health of the ecosystem by creating an enabling environment as well as prevention of Fraud. Serious Fraud Investigation Office (SFIO) is committed to make the process of investigation efficient and reduce the process timelines, he assured.

Mr Rajiv Sabharwal, MD & CEO, Tata Capital highlighted how challenges during pandemic has given rise to innovations and digitization. Some of the existing challenges include cash and liquidity, lower Interest rates and margins, Changes in regulations, re-orienting operations, health and safety of employees and asset quality stress. He suggested a five- pronged approach to handle these challenges to include enhanced focus on strategic risk, manage capital and liquidity, reduce cost and increasing effectiveness, integrated risk management capabilities and digitalization and automation. Talking of fraud trends, he said that while COVID has brought about a significant increase in digital adoption and transactions, it has also increased the risks associated with digital transactions. Talking of a combine of regulatory initiatives, compliance and guidances, he suggested taking a 360degree approach to be future ready to challenges of fraud. These include Know exposure of fraud risks or vulnerabilities; Detect gaps in existing prevention and control measures; treat fraud signals by remediating measures and tools; investigate signals and cases of fraud and fix gaps; report results and improve the process through corrective action. How early a fraud was detected and plugged is key, he enumerated.

Speaking at the Conference, Mr Tarun Bhatia Managing Director and Head of Forensic Investigations & Intelligence South Asia Kroll cautioned that fraud risk continues to affect significant proportion of companies globally and India is no exception. In 2019, Kroll launched the first edition of India Fraud Survey in partnership with CII to assess the types of frauds that corporate India grapples with and its impact. The second edition released earlier today validated the findings of the first edition and helps us understand how corporates have adapted to dynamic fraud risk scenario amidst the pandemic. The findings reflect that two out of every three companies In India are a victim of fraud. Cyber frauds and conflict of interest are the biggest threats despite companies investing heavily on IT security and internal processes. Sudden and unplanned migration to work from home, disruption in supply chain and lack of crisis management skills in corporate India also partially nullified the attempts made by companies to counter fraud. CII and Kroll have brought together the best minds in the industry to better understand the trends seen in the survey and identify best practices to mitigate these risks.

Delivering the welcome remarks, Mr Ajay Bahl Chairman, CII Task Force on Judicial Reforms & Co-Founder & Managing Partner AZB & Partners shared that good corporate governance has become a focal point of the global discourse involving deliberations and introspection between corporations and regulators. Governments are reviewing the score card of governance, for the purpose of enhancing and strengthening the same.  During the pandemic, corporate India was enabled in responding diligently in discharging the functions of compliance and governance with the support of the Government. Sharing his view on regulatory goals to tackle fraud risk, Mr Bahl highlighted that fraud risk can be minimised by the process of prescription, dialogue and deterrent. Regulators have supported industry by prescribing the robust set of standards. Industry and regulators need to have continuous dialogue for streamlining the overlapping regulatory architecture. Deterrent may be used in exceptional cases where required.

Confederation of Indian Industry (CII), in collaboration with Kroll released the second edition of the India Fraud Survey at the Conference. The findings highlight the rise of corporate fraud during the pandemic with 65% of respondents reporting they have been victims of fraud in 2021 compared to 57% in 2019. The findings also reflect a significant increase in conflict of interest and levels of supply chain and vendor fraud, which went from 10% to 26% and 5% to 14%, respectively. Any socioeconomic study carried out after the start of 2020 would have to count the impact of the COVID-19 pandemic; similarly, the results of the report are clearly conditioned by the pandemic. One of the findings highlights that cyber threats are now one of the largest sources of fraud in India, affecting around a quarter of all businesses in the last 12 months. This could be attributed to increased exposure as workers move beyond the firewall because of work from home policies. Reputational damage is cited as the biggest threat from fraud, with 57% of respondents, followed by financial loss (cited by 56%) and the loss of confidential data (cited by 52%). Given the rise of online threats, the most common steps taken to counter fraud are strengthening IT security (cited by 65%), increasing employee training (60%) and introducing a whistleblowing policy (49%). After the fraud is detected, 68% of the respondents said they would terminate the fraudster’s employment, ask them to resign or suspend them, and 25% said they would report the employee to law enforcement. An overwhelming number of respondents (70%) believe COVID-19 has increased the risk of fraud and that the risk will grow in the coming year.

7 October 2021

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