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India has been amongst the fastest growing economies in the world in the last decade. It has
remained relatively unaffected by the global economic crisis, thanks to strong fundamentals
of the economic policy. However, despite this situation the confidence of international
investors and domestic entrepreneurs has been low in the last two years, thanks to the
various scams that have come to light during this period. The need for improving governance
and ethical culture across public and private sector companies has never been felt as acutely
as is being felt now.
While there is greater awareness of fraud and misconduct among corporate India, the
associated risks need to be considered at a strategic level. Investments need to be prioritised
to build a sustainable ecosystem that can mitigate frauds efficiently, including frauds of the
With the sophistication of fraud, companies need to take a long term view of fraud risk
management and adopt comprehensive frameworks to mitigate fraud. As organisations strive
to create a high performance culture, they must back these efforts by creating strong controls,
pro-active supervision through use of technology and independent monitoring of key
performance parameters to create deterrence for misbehaviour.
While one cannot deny the challenges in fraud prevention and detection from external factors
such as regulation/ law enforcement, one should realise that change comes from within.
Some companies have demonstrated this by showing that business can be done in India

Activities undertaken by an individual or company that are done in a dishonest or illegal
manner, and are designed to give an advantage to the perpetrating individual or company.
Corporate fraud schemes go beyond the scope of an employee's stated position, and are
marked by their complexity and economic impact on the business, other employees.
Fraud essentially involves using deception to make a personal gain for oneself dishonestly
and/or create a loss for another. Although definitions vary, most are based around these
Frauds committed by large organizations is known as corporate fraud. For example, if the
company overstates its profit then it amounts to corporate fraud. Corporate fraud usually is
the result of innovative business practices of overstating the profits and concealing debt
which increases the companies stock value and thereby allowing the company to borrow
more money and to expand. (Investopedia, 2004)
The term fraud commonly includes activities such as theft, corruption, conspiracy,
embezzlement, money laundering, bribery and extortion.
There are many types of corporate fraud, including the following common frauds:
Theft of cash, physical assets or confidential information
Misuse of accounts
Procurement fraud
Payroll fraud
Financial accounting mis-statements
Inappropriate journal vouchers
Suspense accounting fraud
Fraudulent expense claims
False employment credentials
Bribery and corruption. (Accountants, 2009)

There are three main categories of internal fraud that affect organisations. These are
summarised in the following diagram.

Internal Fraud










Indian Contract Act, 1872

Section 17 of the Act defines Fraud as "Fraud" means and include any of the following acts
committed by a party to a contract, or with his connivance, or by his agents, with intent to
deceive another party thereto his agent, or to induce him to enter into a contract.
the suggestion as a fact, of that which is not true, by one who does not believe it to
be true;
the active concealment of a fact by one having knowledge or belief of the fact;
a promise made without any intention of performing it;
any other act fitted to deceive;
any such act or omission as the law specially declares to be fraudulent
Indian Penal Code, 1860
Section 25 of IPC defines "Fraudulently as: A person is said to do a thing fraudulently if he
does that thing with intent to defraud but not otherwise. (Lamba, 2009)

Indian Contract Act 1872
Indian Penal Code
Prevention of Corruption Act
Prevention of Money Laundering Act
The Companies Act 1956
Clause 49 of Listing Agreement
CARO 2003
Sarbanes Oxley Act
Foreign Corrupt Practices Act
Patriot Act
OECD Guidelines
IIA Guidance


The last decade has seen significant coverage of corporate fraud in the Indian media. While
the Indian government has passed several laws aimed at curbing fraud, poor enforcement has
diluted the intended impact. With the rise of new business models backed by technology,
fraud has spawned new variants and seems to be on the rise.

Types of Fraud in India

Internet and/ or Cyber

Regulatory noncompliance

Financial statement

Intellectual property

Bribery and corruption

Money laundering
Corporate espionage

Diversion/ theft of
funds or goods
Regulatory non-compliance

Bribery and corruption

Diversion/ theft of funds or goods

Corporate espionage

Money laundering

Intellectual property fraud

Financial statement fraud

Internet and/ or Cyber fraud

(Survey, 2014)

Despite the extensive adoption of technology by organizations to build global business

models, corporate. India continues to face challenges in mitigating traditional fraud schemes.
Insufficient mechanisms to prevent and detect fraud, as well as limited enforcement of
internal controls are likely to be the reasons that organizations continue to experience
traditional fraud. Specifically in the area of bribery and corruption, organizations have, in the
past, considered bribery as the cost of doing businesses, and hence demonstrated a degree
of acceptability towards this practice. But with increased scrutiny by foreign regulators, and
the Indian government taking a tough stand on bribery by enforcing legislations like the
Prevention of Corruption Act while passing judgments on cases, we are seeing several
companies taking efforts to address the risk of bribery and corruption. (KPMG, 2012)

The perception levels for frauds like money laundering (47%), internal reporting related
frauds (44%) and intellectual property fraud (40%) too are significantly higher (compared to
our 2010 survey). These frauds today rely on technology to increase their impact. For
instance, money laundering is no longer a risk limited to the banking industry. Thanks to
widespread misuse of technology to launder/ circulate money, sectors like insurance and
mutual funds also provide conditions for such activities to be perpetrated. Consequently,
regulators have extended anti-money laundering controls to cover insurance and mutual
funds sectors. Recently, the Registrar of Companies was asked to probe the involvement of
13 companies in these sectors over allegations of money laundering and money circulation.
In case of intellectual property (IP) theft/fraud, technology is a convenient and inexpensive
channel to execute fraud. A single email can transfer confidential IP to unauthorised parties
without raising any suspicions or violating any internal controls. Theft or fraud of IP is
extremely difficult to track as the original information remains on the computer of the
creator. It is also difficult to indicate what truly constitutes IP as most of the data gathered is
still in an early stage with unknown potential. In such a case, parts of the data can be easily
obtained and sent to unauthorised parties such as competitors. What this can do is speed up
the go-to-market strategy of a competitor. (Das, 2015)
For many years now, MIS related frauds (internal reporting) have featured among the top five
business concerns. With increased adoption of technology, although rudimentary controls are
established, fraudsters can cleverly manipulate data such as sales commissions (mainly
percentage figures), expenses (forged bills) and assets to ensure that results are consistent
with expectations, while still siphoning off money. Understanding the modus operandi of the
frauds mentioned above and detecting them is not easy, and 94 percent of our respondents
agreed that frauds had become sophisticated in the last two years. Investigators too are
constantly challenged by the sophistication of frauds.
A case in point is the Telecom industry that has had its share of losses due to sophisticated
technology aided frauds. Globally, telecom frauds are estimated to cost the industry USD 40
billion, despite significant efforts made by operators and their software/ hardware vendors
to limit theft. Operators' billing systems and network vulnerabilities are always the key target
areas for most fraudsters who exploit any weaknesses in these areas. (Young, 2014)
Thus, type of fraud and its degree of sophistication tend to be sectorial in nature. Certain
technology intensive sectors such as financial services and IT or ITES are more vulnerable to
cyber related frauds, whereas, sectors such as real estate and infrastructure are more prone
to conventional frauds such as bribery and corruption and diversion of funds/ goods.


In the below figure, we can clearly the sector which has been affected by frauds the most.
IT sector has seen the most number of frauds and is followed by Real Estate, Telecom and
Infra. With the advent of IT, number of cyber frauds has gone up.
In todays day and age technology has become a mainstay for all industries, irrespective of
sector or size. Our experience indicates that even fraudsters are becoming technology savvy
and are finding newer ways of perpetrating frauds. In the past, technology driven frauds were
reported to have much lower incidence compared to frauds of a conventional nature such as
diversion/ theft of goods. However, today there is increased awareness about technology led

Frauds in Various Sectors







Real Estate




Consumer Products

This awareness can be attributed to the increased media coverage of such frauds. A case in
point is the recently unearthed sophisticated bank fraud that originated in Italy and spread
globally, initiating the transfer of almost USD 78 million from around 60 financial institutions.
Perpetrators attacked the computers of wealthy individuals and carried out these fraudulent
transactions from their bank accounts. These transactions were hidden by an additional layer
of malware to delay discovery. The malware circumvented the two-stage authentication and
other fraud prevention and detection methods employed by the banks. The manner in which
the fraudsters had beaten the complex banking controls points towards the rising
sophistication of fraud. (Economist, 2010)
The last few years have seen increased number of frauds reported in India as well as globally.
From Satyam, Adidas-Reebok, the Commonwealth Games and OnMobile in India to LIBOR
manipulation, securities trading, over-riding international sanctions on the global front, we
have seen some of the more sophisticated and large frauds coming to light. With reports
indicating that as much as 5 percent of annual revenues could be lost to fraud, organisations
today are required to be more cognizant of the damage that fraud can do.

This increase can be attributed to several aspects. The ongoing economic slowdown for one
puts pressure on individuals to perform and tempts them to commit fraud. It is also in a
downturn that frauds are most likely to be discovered (even though perpetrated much
earlier), as that is when managements increase their scrutiny in a bid to protect margins and
profits. Thirdly, greater awareness of fraud and its impact can result in companies becoming
more sensitive to noticing frauds, which otherwise tend to go unnoticed or are deliberately
overlooked. (KPMG, 2012)

Financial services and information and entertainment sectors have been identified as most
vulnerable to fraud by respondents. Interestingly, both sectors identified are heavy users of
technology implying that while technology can be a great facilitator for the business, it can
also offer an equally potent platform for committing frauds like cybercrime, phishing and data
theft. Despite having a strong regulator, the financial services sector has emerged as the most
susceptible sector to fraud. Possible misuse of technology in the banking sector includes use
of banking access for overpayments to vendors/ self-bank account, sharing of potential
confidential information and misuse of companys technology resources for unauthorised
activities including conflicting business relationship. Additionally, providing services on
mobile and social media platforms with limited knowledge of the security requirements,
poses threats to customers as well as financial institutions. In case of the information and
entertainment sector, despite functioning as global entities and complying with stringent
foreign legislations, they have been identified as the second most fraudulent sector in India.
Thus, organisations need to be more proactive and adopt a zero tolerance approach towards
fraud risk management. (Young, 2014)

While incidences of newer types of frauds are on the rise, from a process perspective they
continue to be targeted towards the same business processes. It is thus important to
understand the operational characteristics of each sector to identify functions vulnerable at
a sectorial level. These areas being characterised by large number of stakeholders, multiple
touch points, increasingly complex processes involving a significant proportion of
organisations funds, it is not surprising to see this finding. Additionally, these processes
involve a high degree of interaction with external stakeholders like vendors and customers
where collusion can override certain internal controls. Despite the widespread
acknowledgement of the vulnerability of these processes, organisations have failed to
implement basic controls. Due diligence of vendors before selection, involvement of
representatives from multiple departments in the vendor selection process, and adequate
segregation of duties and controls over access rights, are some of the controls which may help
organisations in managing these risks better. (KPMG, 2012)


Employees are often central to frauds as they either perpetrate the fraud or assist an external
team to do so. Hence, the larger threat of fraud lies within an organisation itself. However,
most organisations tend to ignore or merely warn respective employees upon discovery of
small value frauds (such as faking personal bills or fudging of expense reports). Therefore,
when employees collude with external parties to commit fraud (such as processing fake
invoices submitted by vendors), organisations often tend to blame external parties first and
not employees.
Among employees, senior management is considered the most susceptible to committing
fraud by virtue of their ability to override existing controls. According to the ACFE 2012 Global
Fraud Study, the position held by the fraudster within an organisation is directly related to
the loss incurred on account of the fraud committed. Losses caused by senior management

were approximately three times higher than the value of fraud loss due to managers;
managers in turn caused losses approximately three times higher than junior employees. In
such circumstances it becomes imperative for organisations to provide a safe, robust channel
for employees to report suspicions of malpractice. It is also important that an organisations
Board comprise of individuals with utmost integrity who would engage themselves with the
management. The Board needs to take a lead by setting the tone at the top and facilitate a
zero tolerance approach towards fraud. (Das, 2015)


Discovery of Fraud-Methods & Techniques







Whistle Blowing Mechanism

Internal Audit

Proactive Fraud Risk Management

Automated Detection/Survelliance Systems

Rotation of Duties/Personnel

External Audit

By accident


Numerous fraud surveys have indicated that internal stakeholders are highly susceptible to
committing fraud. However, these surveys have also indicated that most frauds are unearthed
from tips or complaints by sources internal to an organisation. This fact is reiterated in our
survey with respondents identifying whistleblower hotlines as the most effective way to
detect fraud. An effective mechanism providing comfort to the complainant that their identity
would remain anonymous and that the information disclosed would be handled in a safe and
confidential manner have resulted in a number of fraud related issues being reported on such
channels. It has been observed that such hotlines also become preventive tools over a period
of time. Most multinational companies have whistleblower hot lines as mandated by
regulators in their home countries. However, we have seen an increase in the number of
Indian business houses opting for such hotlines. Both Indian and multinational companies are
reviewing their business code of conduct, whistleblower policies and putting in place
committees, rather than individuals, to receive such complaints and to act on them.
Complaints received are tracked and the progress on each complaint is discussed in
committee meetings. The critical success factors for a whistleblower hotline include an

independent, anonymous and confidential mechanism that is easy to access. This, backed by
a well-defined and structured committee empowered to act on complaints received can help
build whistleblower confidence in the entire mechanism. Besides whistleblower hotlines,
survey respondents have also highlighted data analytics as one of the effective ways to detect
fraud. Considering most companies today deal with vast and complex data, real time analytics
and dashboard tools can be adopted to highlight any red-flags and capture any deviation from
the routine, which could be an indication of a fraud. These tools are very effective in detecting
fraud at an initial stage. However, in our experience we have observed that, barring few
organisations, not many make use of the data available to them on their Enterprise Resource
Planning (ERP) systems. Apart from technology, it is also important to ensure having basic
controls in place, especially those highlighted in the internal audit (IA) reviews, if one has to
prevent fraud. For instance, lack of control in access logs reported in IA review, if not
corrected, could result in several challenges. (Survey, 2014)
Global surveys by organisations like the ACFE have highlighted that presence of formal
management reviews, employee support programmes and hotlines is inversely related to the
extent of financial losses suffered due to fraud. Organisations lacking these controls
experienced a significantly higher level of fraud loss.
When one looks at the relationship between the presence of a preventive control and the
duration of the fraud, the perpetrators perception of detection plays a vital role. The
duration of frauds is considerably reduced when the perpetrators perceive that robust
detection mechanisms are in place. Specifically, organisations that utilise job rotation and
mandatory vacation policies, rewards for whistle-blowers and surprise audits detect their
frauds more than twice as quickly as organisations lacking such controls. As a result, the
incidence of fraud among such companies is low as fraudsters feel the likelihood of them
being caught is high.


Comprehensive legislation combined with strong enforcement can be a big deterrent to
fraud. The majority of the survey respondents agreed that the potential for prosecution and
enforcement is a strong deterrent against fraudulent conduct. In this context, Indias position
on legislations to curb corporate fraud is still evolving. The Companies Act 2013 is a significant
development in the evolution of Indias regulatory environment. This law is the first in the
country to focus comprehensively on fraud risk management and prescribes stringent
punishment upon the violation of its provisions. The Act includes specific provisions to
address the risk of fraud, alongside prescribing greater responsibility and increased
accountability for independent directors and auditors. It goes beyond professional liability for
fraud and extends to personal liability, prescribing penalties for directors, key management
personnel, auditors and employees.
Effective enforcement of this legislation can reduce fraud significantly, according to 88
percent of the survey respondents. Among the provisions in the Act, survey respondents
identified the mandatory establishment of a vigil mechanism for listed companies, and a

greater degree of accountability placed on the Board of Directors, as the most effective
provisions in tackling wrongdoing
The Companies Act 2013 calls for the establishment of a vigil mechanism for directors and
employees to report concerns about unethical behaviour, suspected fraud or violations of the
companys code of conduct or ethics policy. However, the effectiveness of a vigil mechanism
is not guaranteed by its mere existence, but by the confidence that stakeholders place in its
functioning. As per the Deloitte Indias Whistleblowing Survey 2014, survey respondents felt
that a whistleblower program, should necessarily have the following key characteristics. a)
Anonymity and confidentiality b) Adequate whistleblower protection c) Transparency and
Independence, as required by the legislation, and to provide for an objective view d) A
dedicated team to handle whistleblower complaints (third party or internal) e) A welldocumented process of addressing complaints, feedback and communication. (Lamba, 2009)
From an operational standpoint, a robust whistleblowing mechanism should feature multichannel accessibility and multi-lingual support. Close to 38 percent of respondents to Deloitte
Indias Whistleblowing Survey 20146 identified the need for multiple reporting methods, such
as a dedicated phone number, an exclusive email address or website, and the ability to receive
complaints by post or fax. A comprehensive solution would be to engage a 24-hour response
center staffed by multi-lingual officers to receive information, as well as analysts to prepare
incident reports from disclosures received through any of these channels. Whistleblower
reports are sensitive and not being able to use ones preferred language can adversely impact
a reports completeness and accuracy. For many companies, whose operations span national
and linguistic borders, the ability to take reports in many different languages is absolutely
essential. Lastly, support from senior management is crucial to making whistleblower
programs successful. For instance, senior officers at a company known to us, sent an email to
all employees, sharing their experience of testing the whistleblower hotline, helping reassure
their staff about how easy and confidential the whole process was. Subsequently, the
company saw higher number of employees use the hotline. Given the limited success that
Indian companies have had in the past with their whistleblower programs, we would
recommend a well-planned campaign to create awareness about the whistleblower program
and its features to all stakeholders.


1) Satyam Computers Limited Scandal
On January 7, 2009, Mr. Raju disclosed in a letter to Satyam Computers Limited Board
of Directors that he had been manipulating the companys accounting numbers for
years. Mr. Raju claimed that he overstated assets on Satyams balance sheet by $1.47
billion. Nearly $1.04 billion in bank loans and cash that the company claimed to own
was non-existent. Satyam also underreported liabilities on its balance sheet. Satyam
overstated income nearly every quarter over the course of several years in order to
meet analyst expectations. For example, the results announced on October 17, 2009
overstated quarterly revenues by 75 percent and profits by 97 percent. Mr. Raju and
the companys global head of internal audit used a number of different techniques to
perpetrate the fraud. Using his personal computer, Mr. Raju created numerous bank
statements to advance the fraud. Mr. Raju falsified the bank accounts to inflate the
balance sheet with balances that did not exist. He inflated the income statement by
claiming interest income from the fake bank accounts. Mr. Raju also revealed that he
created 6000 fake salary accounts over the past few years and appropriated the
money after the company deposited it. The companys global head of internal audit
created fake customer identities and generated fake invoices against their names to
inflate revenue. The global head of internal audit also forged board resolutions and
illegally obtained loans for the company. It also appeared that the cash that the
company raised through American Depository Receipts in the United States never
made it to the balance sheets. Greed for money, power, competition, success and
prestige compelled Mr. Raju to ride the tiger, which led to violation of all duties
imposed on them as fiduciariesthe duty of care, the duty of negligence, the duty of
loyalty, the duty of disclosure towards the stakeholders. The Satyam scandal is a
classic case of negligence of fiduciary duties, total collapse of ethical standards, and a
lack of corporate social responsibility. It is human greed and desire that led to fraud.
This type of behavior can be traced to: greed overshadowing the responsibility to meet
fiduciary duties; fierce competition and the need to impress stakeholders especially
investors, analysts, shareholders, and the stock market; low ethical and moral
standards by top management; and, greater emphasis on shortterm performance.
According to CBI, the Indian crime investigation agency, the fraud activity dates back
from April 1999, when the company embarked on a road to double-digit annual
growth. As of December 2008, Satyam had a total market capitalization of $3.2 billion
dollars. Satyam planned to acquire a 51% stake in Maytas Infrastructure Limited, a
leading infrastructure development, construction and project management company,
for $300 million. Here, the Rajuss had a 37% stake. The total turnover was $350
million and a net profit of $20 million. Rajus also had a 35% share in Maytas
Properties, another real-estate investment firm. Satyam revenues exceeded $1 billion
in 2006. In April, 2008 Satyam became the first Indian company to publish IFRS audited
financials. On December 16, 2008, the Satyam board, including its five independent

directors had approved the founders proposal to buy the stake in Maytas
Infrastructure and all of Maytas Properties, which were owned by family members of
Satyams Chairman, Ramalinga Raju, as fully owned subsidiary for $1.6 billion. Without
shareholder approval, the directors went ahead with the managements decision. The
decision of acquisition was, however, reversed twelve hours after investors sold
Satyams stock and threatened action against the management. This was followed by
the law-suits filed in the US contesting Maytas deal. The World Bank banned Satyam
from conducting business for 8 years due to inappropriate payments to staff and
inability to provide information sought on invoices. Four independent directors quit
the Satyam board and SEBI ordered promoters to disclose pledged shares to stock
exchange. Investment bank DSP Merrill Lynch, which was appointed by Satyam to look
for a partner or buyer for the company, ultimately blew the whistle and terminated
its engagement with the company soon after it found financial irregularities. On 7
January 2009, Saytams Chairman, Ramalinga Raju, resigned after notifying board
members and the Securities and Exchange Board of India (SEBI) that Satyams
accounts had been falsified. Raju confessed that Satyams balance sheet of September
30, 2008, contained the following irregularies: He faked figures to the extent of Rs.
5040 crore of non-existent cash and bank balances as against Rs. 5361 crore in the
books, accrued interest of Rs. 376 crore (non-existent), understated liability of Rs.
1230 crore on account of funds raised by Raju, and an overstated debtors position of
Rs. 490 crore. He accepted that Satyam had reported revenue of Rs. 2700 crore and
an operating margin of Rs. 649 crore, while the actual revenue was Rs. 2112 crore and
the margin was Rs. 61 crore. In other words, Raju: 1) inflated figures for cash and
bank balances of US $1.04 billion vs. US $1.1 billion reflected in the books; 2) an
accrued interest of US $77.46 million which was non-existent; 3) an understated
liability of US $253.38 million on account of funds was arranged by himself; and 4) an
overstated debtors' position of US $100.94 million vs. US $546.11 million in the books.
Raju claimed in the same letter that neither he nor the managing director had
benefited financially from the inflated revenues, and none of the board members had
any knowledge of the situation in which the company was placed. The fraud took
place to divert company funds into real-estate investment, keep high earnings per
share, raise executive compensation, and make huge profits by selling stake at inflated
price. The gap in the balance sheet had arisen purely on account of inflated profits
over a period that lasted several years starting in April 1999. What accounted as a
marginal gap between actual operating profit and the one reflected in the books of
accounts continued to grow over the years. This gap reached unmanageable
proportions as company operations grew significantly, Ragu explained in his letter to
the board and shareholders. He went on to explain, Every attempt to eliminate the
gap failed, and the aborted Maytas acquisition deal was the last attempt to fill the
fictitious assets with real ones. But the investors thought it was a brazen attempt to
siphon cash out of Satyam, in which the Raju family held a small stake, into firms the
family held tightly.
Additionally, the Satyam fraud went on for a number of years and involved both the
manipulation of balance sheets and income statements. Whenever Satyam needed

more income to meet analyst estimates, it simply created fictitious sources and it
did so numerous times, without the auditors ever discovering the fraud. Suspiciously,
Satyam also paid PwC twice what other firms would charge for the audit, which raises
questions about whether PwC was complicit in the fraud. Furthermore, PwC audited
the company for nearly 9 years and did not uncover the fraud, whereas Merrill Lynch
discovered the fraud as part of its due diligence in merely 10 days. Missing these redflags implied either that the auditors were grossly inept or in collusion with the
company in committing the fraud. PWC initially asserted that it performed all of the
companys audits in accordance with applicable auditing standards.

Lessons Learned from Satyam Scam

The 2009 Satyam scandal in India highlighted the nefarious potential of an improperly
governed corporate leader. As the fallout continues, and the effects were felt
throughout the global economy, the prevailing hope is that some good can come from
the scandal in terms of lessons learned. Here are some lessons learned from the
Satyam Scandal:
Investigate All Inaccuracies: The fraud scheme at Satyam started very small,
eventually growing into $276 million white-elephant in the room. Indeed, a lot of fraud
schemes initially start out small, with the perpetrator thinking that small changes here
and there would not make a big difference, and is less likely to be detected. This sends
a message to a lot of companies: if your accounts are not balancing, or if something
seems inaccurate (even just a tiny bit), it is worth investigating. Dividing
responsibilities across a team of people makes it easier to detect irregularities or
misappropriated funds.
Ruined Reputations: Fraud does not just look bad on a company; it looks bad on the
whole industry and a country. Indias biggest corporate scandal in memory threatens
future foreign investment flows into Asias third largest economy and casts a cloud
over growth in its once-booming outsourcing sector. The news sent Indian equity
markets into a tail-spin, with Bombays main benchmark index tumbling 7.3% and the
Indian rupee fell. Now, because of the Satyam scandal, Indian rivals will come under
greater scrutiny by the regulators, investors and customers.
Corporate Governance Needs to Be Stronger: The Satyam case is just another
example supporting the need for stronger CG. All public-companies must be careful
when selecting executives and top-level managers. These are the people who set the
tone for the company: if there is corruption at the top, it is bound to trickle-down.
Also, separate the role of CEO and Chairman of the Board. Splitting up the roles, thus,
helps avoid situations like the one at Satyam. The Satyam Computer Services scandal
brought to light the importance of ethics and its relevance to corporate culture. The
fraud committed by the founders of Satyam is a testament to the fact that the science
of conduct is swayed in large by human greed, ambition, and hunger for power,
money, fame and glory.

2) Saradha Group Financial Scandal

The Saradha Group financial scandal was a major financial scam and alleged political
scandal caused by the collapse of a Ponzi scheme run by Saradha Group, a consortium of
over 200 private companies that was believed to be running collective investment
schemes popularly but incorrectly referred to as chit funds. In Eastern India. The group
collected around 200 to 300 billion (US$46 billion from over 1.7 million depositors
before it collapsed in April 2013. In the aftermath of the scandal, the State Government
of West Bengal where the Saradha Group and most of its investors were based instituted
an inquiry commission to investigate the collapse. The State government also set up a
fund of 5 billion (US$75 million) to ensure that low-income investors were not
bankrupted. The central government through the Income Tax Department
and Enforcement Directorate launched a multi-agency probe to investigate the Saradha
scam and similar Ponzi schemes. In May 2014, the Supreme Court of India, citing interstate ramifications, possible international money laundering, serious regulatory failures
and alleged political nexus, transferred all investigations into the Saradha scam and other
Ponzi schemes to the Central Bureau of Investigation (CBI), India's federal investigative
agency. Many prominent personalities were arrested for their involvement in the scam
including two Members of Parliament (MP) - Kunal Ghosh and Srinjoy Bose, former West
Bengal Director General of Police Rajat Majumdar, a top football club official Debabrata
Sarkar, Sports and Transport minister in the West Bengal Government.


The 176-point Sensex crash on March 1, 2001 came as a major shock for the Government
of India, the stock markets and the investors alike. More so, as the Union budget tabled a
day earlier had been acclaimed for its growth initiatives and had prompted a 177-point
increase in the Sensex. This sudden crash in the stock markets prompted the Securities
Exchange Board of India (SEBI) to launch immediate investigations into the volatility of
stock markets. SEBI also decided to inspect the books of several brokers who were
suspected of triggering the crash. Meanwhile, the Reserve Bank of India (RBI) ordered
some banks to furnish data related to their capital market exposure. This was after media
reports appeared regarding a private sector bank having exceeded its prudential norms
of capital exposure, thereby contributing to the stock market volatility. The panic runs on
the bourses continued and the Bombay Stock Exchange (BSE) President Anand Rathi's
(Rathi) resignation added to the downfall. Rathi had to resign following allegations that
he had used some privileged information, which contributed to the crash. The scam shook
the investor's confidence in the overall functioning of the stock markets. By the end of
March 2001, at least eight people were reported to have committed suicide and hundreds
of investors were driven to the brink of bankruptcy. The scam opened up the debate over
banks funding capital market operations and lending funds against collateral security. It
also raised questions about the validity of dual control of co-operative banks. (Analysts
pointed out that RBI was inspecting the accounts once in two years, which created ample

scope for violation of rules.) The first arrest in the scam was of the noted bull, Ketan
Parekh (KP), on March 30, 2001, by the Central Bureau of Investigation (CBI). Soon, reports
abounded as to how KP had single handled caused one of the biggest scams in the history
of Indian financial markets. He was charged with defrauding Bank of India (BoI) of about
$30 million among other charges. KP's arrest was followed by yet another panic run on
the bourses and the Sensex fell by 147 points. By this time, the scam had become the 'talk
of the nation,' with intensive media coverage and unprecedented public outcry. Ketan
Parekh [KP] was a chartered accountant by profession and used to manage a family
business, NH Securities started by his father. Known for maintaining a low profile, KP's
only dubious claim to fame was in 1992, when he was accused in the stock exchange scam.
He was known as the 'Bombay Bull' and had connections with movie stars, politicians and
even leading international entrepreneurs like Australian media tycoon Kerry Packer, who
partnered KP in KPV Ventures, a $250 million venture capital fund that invested mainly in
new economy companies. Over the years, KP built a network of companies, mainly in
Mumbai, involved in stock market operations. The small investors who lost their life's
savings felt that all parties in the functioning of the market were responsible for the
scams. They opined that the broker-banker-promoter nexus, which was deemed to have
the acceptance of the SEBI itself, was the main reason for the scams in the Indian stock
markets. The SEBI's measures were widely criticized as being reactive rather than
proactive. The market regulator was blamed for being lax in handling the issue of unusual
price movement and tremendous volatility in certain shares over an 18-month period
prior to February 2001. Analysts also opined that SEBI's market intelligence was very poor.
Media reports commented that KP's arrest was also not due to the SEBI's timely action
but the result of complaints by BoI. A market watcher said ,"When prices moved up, SEBI
watched these as 'normal' market movements. It ignored the large positions built up by
some operators. Worse, it asked no questions at all. It had to investigate these things, not
as a regulatory body, but as deep-probing agency that could coordinate with other
agencies. Who will bear the loss its inefficiency has caused?"An equally crucial question
was raised by media regarding SEBI's ignorance of the existence of an unofficial market at
the CSE. Interestingly enough, there were reports that the arrest was motivated by the
government's efforts to diffuse the Tehelka controversy. Many exchanges were not happy
with the decision of banning the badla system as they felt it would bring the liquidity in
the market. Analysts who opposed the ban argued that the ban on badla without a
suitable alternative for all the scrips, which were being moved to rolling settlement, would
rig the volatility in the markets. They argued that the lack of finances for all players in the
market would enable the few persons who were able to get funds from the banking
system - including co- operative banks or promoters - to have an undue influence on the
markets. (Inamdar, 2013)

From the above research it clearly indicates that although there is an increased awareness
about fraud, corporate India is still hesitant to accept it as a strategic risk. It continues to be
viewed as an operational risk and hence the mitigation strategies tend to be more generic
rather specialist. This could be one of the key reasons for under-investment in creation of an
ecosystem promoting a culture of ethics and integrity. Further, increased performance
pressure both on employees as well as organisations in the current economic environment
and rising aspirations have a leading role to play in the increased occurrence of fraud in most
organisations. The pressure to perform in the current economic environment has never been
higher and it is a fact that one needs to work much harder to get the same results. The survey
responses point out that today organisations are faced not only with the risk of traditional
frauds but also substantial risks from emerging frauds. Organisations need to adopt more
robust fraud risk management measures in order to mitigate the rising risk of emerging
frauds. A strong technology enabled platform to provide early warning signs; adoption of
ethical code of conduct amongst employees and all stakeholders; technology driven controls
and a robust whistleblower mechanism are some of the ways in which organisations can
mitigate the risk of fraud. While we are seeing more and more organisations showing
willingness to adopt comprehensive fraud prevention strategies, these attempts continue to
be half-hearted on account of underinvestment from respective organisations. In this regard,
the proposed Companies Bill 2011 is a key legislation. If enacted, it is likely to prompt
companies to think about having a fraud risk management policy in place. The Bill places onus
on independent directors to ascertain and ensure that the company has an adequate and
functional vigil mechanism. This in turn may result in companies considering controls around
accounting procedures and mechanisms to prevent and detect fraud, including undertaking a
formal fraud risk assessment. The most significant aspect of the Bill is the proposed stringent
penalties for those perpetrating fraudulent activities. While the enactment of the Bill may
happen in due course, it would be important for companies to start earlier and not wait for
the regulatory push. Fraud prevention is to be treated like a journey and not a destination

Miles to go before Corporate India sees fraud as a strategic risk


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