Rise in financial frauds sour point with foreign investors, says ASSOCHAM

New Delhi: A rise in financial frauds over the past few years has emerged as one of the sour points for foreign investors in India and if not checked by a global standard regulatory framework coupled with strong internal corporate prevention mechanism, the menace could take disastrous proportions in corporate India, an ASSOCHAM-Grant Thornton paper has cautioned.

“With the increased prevalence of fraud and the negative consequences associated with it, there is a strong argument that companies should invest resources and time to tackle it. ..cases of financial fraud have risen in India over the last few years and have become one of the main factors deterring foreign companies from investing in India. As the economy is growing, increasing corporate frauds will prove to be disastrous for India,” the paper said.

It said while entering India would be a critical component of growth for many international organisations, understanding the risks in India is also critical for the survival of business operations. It is not to suggest as if there are no financial frauds taking place in rest of the world; in fact, the paper has enumerated several big time scandals which had hit the international headlines. These included Lehman Bros which triggered the 2008 global financial crisis and USD 74 billion Enron scam of 2001.

Listing several challenges on the issue, the joint ASSOCHAM-Grant Thornton paper expressed concern over the fact that “financial managers and accountants at organisations who understand the limitations of an audit and standard auditing procedures are deliberately trying to deceive external auditors and investors by cooking the books”.

Noting inability to perform an effective fraud risk assessment, the paper said technology is a double-edged sword. “As technology is advancing, fraudsters are able to find ways to use it and perpetrate a fraud. Tech-savvy fraudsters are using technology in a variety of ways to commit frauds. Some include creation of false or misleading information accounting records…

“Putting restrictions on what your employees have access to will limit the potential of misappropriation of assets but if an employee has access to all aspects of an organisation, the potential for fraud is significantly increased”.

ASSOCHAM President Sunil Kanoria said “Devious ingenuity of the human brain is now leveraging technology to indulge in more sophisticated methods of crimes which are very much capable of creating systemic instability”.

Vidya Rajarao, Partner, Grant Thornton India said, the initiative to stop frauds must come from the top. “The responsibility of preventing, detecting and investigating corporate and financial frauds rests squarely on Board of Directors and this requires board members to adopt preventive steps. Also the BoD and the top management should jointly agree and define their anti-fraud strategy, establish appropriate fraud mitigation steps and train their employees to combat financial and corporate frauds”. (ANI)