Fraud is back in news. And it's here in all its con-glory. Think secret warehouses, stolen goods, rigged records and conniving men in power.
The Adidas scandal has them all: a readymade scriptt for a corporate fraud blockbuster. But according to consulting firm Ernst and Young, just because it has not been in the news doesn't mean corporate fraud had taken a break. It was always lurking around in lesser headline-worthy ways.
In fact, according to the latest E&Y survey, three out of five Indian firms have been victims of fraud in the past year. That might include the one you are working for. The reason companies don't talk about it is that it shows them in poor light. Who wants stakeholders to know about illicit deals, siphoning off funds and information leaks?
But silence doesn't change the truth. Corporate fraud is on the rise: losses are mounting, the types of con jobs are multiplying and the profile of fraudsters is changing. The new face of fraud has most of India Inc stumped. How do companies prepare for an attack that has no playbook?
"It takes as much as 12 months or more to detect a fraud. Companies believed that internal audits and manual process controls are adequate to prevent one," says Neeta Potnis, senior director and national leader, forensic and dispute services, Deloitte India.
Experts insist on strategies and systems that make companies less vulnerable to fraud. But to go one up on the perpetrators, companies must be aware of the different ways of conning. ET on Sunday spoke to forensic and frauds specialists to collate this list of most common threats. And discover that old flimflam and new technology are set to give gumshoes many sleepless nights.
Tinkering with Procurement Bills
Possible fraudsters: Mostly junior to middle management officials
If there is something that tests an employee's integrity the most, it is a job in the supply chain department. Procurement is seen as one of the most vulnerable areas by companies. Procurement frauds could take the form of kickbacks from a vendor for orders, fake transactions or manipulating of quotations.
"Procurement teams get kickbacks to place orders for almost everything, from low-value purchases such as stationary to heavy equipment," says Arpinder Singh, partner and national director, fraud investigation and dispute services at Ernst and Young. "Instances of fraud always rise when there is a third party touch point because employees get influenced by the opportunity," says Rohit Mahajan, executive director, forensic services, KPMG.
Procurement frauds can involve goods or services. For instance, a company using a labour contractor can inflate the number of workers hired through him. Another way is to bring in a vendor instead of dealing directly with the original supplier or a manufacturer. The vendor marks up the price of supplies and shares a part of the mark-up with the procurement department.
Bribing for Special Favours
Possible fraudsters: Everyone
Most people don't think twice before paying petty bribes. For many companies, it is inherent in the nature of business they operate in. Employees at all management levels may be involved, including people right at the top. Even the army chief Gen VK Singh was not spared by the representatives of Tatra.
While in that instance, bribes were allegedly offered for additional orders for trucks, it can also be offered to gain regulatory clearances, to speed up government processes or to win new clients. Petty government officials are regularly bribed to access confidential government papers or competitive information of another company.
"There is significant lack of awareness about some of the anti-corruption and bribery laws in the country and elsewhere," notes E&Y's Singh. Companies with foreign exposure can get very badly hurt by charges of bribery because of laws such as the Foreign Corrupt Practices Act in the US.
Creating Fictitious Accounts
Possible fraudsters: Trusted employees
This one's an old trick: diverting money by opening bank accounts, often in cooperative banks, or by raising false invoices. Employees even conspire with outsiders such as vendors and the security providers to pull it off. This fraud may involve manipulating cash books.
Though large companies scrutinise transactions carefully, they are also susceptible to these frauds. Take the case of Wipro. In 2009, the IT major discovered an employee had been transferring money from Wipro's bank accounts to his personal account during several transactions over a period of three years.
"Many times, frauds take place when monitoring controls fail to detect deviations from set processes. Long serving employees who are familiar with the weaknesses in processes may be involved," says Deloitte's Potnis. For instance, in a chemicals company, an old employee who held an important position at a factory located away from the head office was found to be embezzling funds.
For years he carried on the fraud using vouchers in the name of regular and fake suppliers. The cheques issued by the company against these vouchers were encashed at a cooperative bank. The company sniffed a fraud when vendors complained of delayed payments.
Possible fraudsters: Senior management executives
It's the return of the biggest menace of all. Long ago, family-run companies were known to maintain two set of books of accounts, one for public consumption and another, which gave a true picture of the company's performance, for the promoters.
Today, there is a new motivation for cooking accounts. "Now that professional managers' compensation packages are being linked to business and stock performance, the senior management is under high pressure to deliver good results," says KPMG's Mahajan. So the temptation to fudge accounts to state higher profits is on the rise. Satyam is a classic example of accounting fraud.
More recently, private equity investors Bain Capital and TPG Capital have accused Lilliput Kidswear of accounting fraud. They suspect the company has overstated its sales and profit.
There are multiple ways that accounts of a company can be fudged. Revenues that are to accrue in future can be shown as current period's revenue, fake sales can be registered only to be reversed next year, lower provisions may be made for future liabilities such as gratuity and provident fund and relevant accounting principles may not be fully followed.
Possible fraudsters: Everyone
As technology makes it easier for ordinary employees to filch sensitive information, cyber crime involving data theft has become one of the top four economic crimes faced by companies. Sectors most vulnerable to the risk include financial services companies, banks, IT/ITeS companies and those creating intellectual property such as pharmaceutical companies.
Yet, a PricewaterhouseCoopers survey late last year found that senior management does not regularly review the threat of cyber crime. Data theft can take place at any level. A sales executive taking up a job with competitor may steal confidential sales and marketing data by copying it onto a pen drive or emailing it to a personal email id.
An employee in a bank can steal confidential customer information and sell it to third parties and an HR executive can take data on employees' remuneration to a competitor. Similarly, a scientist or designer can access information on products under development from a company. Tech savvy employees have also been known to hack into companies' servers to steal strategic data.
There is no way to draw up a comprehensive list of the types of frauds: they are limited only by the imagination of scammers. For instance, tax deducted at source from salaries may not be deposited with the tax department. This type of fraud falls under the regulatory non-compliance category.
Another kind of fraud companies now face relates to conflict of interest. For instance, an HR head of a company may run a recruitment agency on the side and hire most of the company employees through his agency. So unless companies build pre-emptive policies and robust detection mechanisms, expect Adidas-like stories to keep coming in.