Corporate fraud threat in India

As the country continues to recover from the global downturn, the opportunities for and concerns over big-business corruption could hold back commercial development in the world's second-most populous nation.

B Ramalinga Raju, second left, the founder of Satyam Computer Services,  admitted concocting key financial results of the company for years.
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As the country continues to recover from the global downturn, the opportunities for and concerns over big-business corruption could hold back commercial development in the world's second-most populous nation. When the Satyam accounting scandal erupted in January last year, after the chairman Ramalinga Raju confessed that the company's accounts had been falsified, India confronted a daunting reality it had often shied away from: many such white-collar frauds were simmering undetected.

A survey released this month by the audit and consulting company KPMG revealed many feared corporate fraud in India was growing unabated. Of the 1,000 companies that responded to the survey, 81 per cent said fraud, especially involving financial statements, was a "major threat". And 75 per cent said fraud had grown in the past two years, 87 per cent said they suffered financial losses of at least 1 million rupees (Dh83,000) due to fraud last year. Only 47 per cent complained of the same in KPMG's 2008 survey.

"Volatile economic conditions and increasing business and technological complexities have led to increased opportunities for fraud," said the latest report. "Diminishing ethical values and a failure on the part of managers to act against deviations from established policies and processes were cited as reasons for the increase in fraud." The increasing amount of white-collar fraud, analysts say, is symptomatic of India's weak regulatory environment, poor whistle-blowing mechanisms and the government's lackadaisical attitude towards law enforcement in the corporate sector, all of which hold back economic development.

"Control mechanisms are not in place in most organisations and hence, the need for risk mitigating strategies is unquestionable," the report said. The risks of fraud has also grown as India's buoyant economy surges. The report cites eroding ethical values among employees desperate for pay rises. "Executives vying for higher pay, weak internal controls and increasing competition ? for market share" are some of the reasons cited in the report. "It is time that India Inc sits up and ends its tolerance of unethical behaviour, bribery and corruption."

An "encouraging sign" is that a large number of Indian companies have started hiring forensic accountants to detect misreporting in accounting ledgers, KPMG notes. "The need of forensic accountants is prevalent across industries," Deepankar Sanwalka, KPMG's executive director, said last month. "The current availability of industry specific forensic accountants is quite low and there exists a gap between demand and supply."

These mechanisms for detection of fraud through internal audits have improved, especially since the Satyam scandal, dubbed "India's Enron", came to light. Mr Raju, the founder of Satyam Computer Services, admitted concocting key financial results of the company "for years" while overstating revenues and bank balances by US$1 billion (Dh3.67bn). He resigned his position and was subsequently arrested.

The magnitude of this fraud - the worst in the history of corporate India - sent shock waves across the country. Particularly unpalatable was the fact that Mr Raju was the chairman of one of India's largest outsourcing companies, which had boasted of being the "back office" of more than 185 Fortune 500 companies and having a network spanning 66 countries. Before he fell from grace, Mr Raju was lionised by investors as a business visionary who shepherded his company to post profit margins exceeding 20 per cent every year. Buoyantly declaring a 28 per cent growth in revenue in the second quarter of last year over the same period the previous year, he told the media: "We achieved this despite a challenging global macroeconomic environment."

It turned out that Satyam's revenues had been overstated by 76 per cent and profits by some 97 per cent. The stated operating margin of 24 per cent actually stood at 3 per cent. The fraud-damaged company was acquired last April by Tech Mahindra, in a joint venture between British Telecom and Indian conglomerate Mahindra and Mahindra. But the company had to endure a painful and wrenching phase of restructuring and transition.

The Satyam scandal exposed the reality that fraud posed an existential threat to companies, said Mr Rohit Mahajan, the executive director of KPMG's forensic services. "Companies are now willing to talk about it more openly." After news of the scandal broke, the prime minister Manmohan Singh grimly warned that widespread corruption in the country was tarnishing India's image as an outsourcing powerhouse and could cost the country much-needed foreign investment.

But corruption in Indian business is endemic and greasing the palms of business associates is the norm. An estimate by CK Prahalad, a management expert at the University of Michigan, puts the cost of corruption to the Indian economy at up to 2.5 trillion rupees a year. According to the latest report by Transparency International, a UK-based anti-corruption organisation, India ranks 84 out of 180 countries in terms of corruption.

The government has vowed to tighten laws to curb white-collar fraud. In February, Salman Khurshid, the minister for corporate affairs, said the government was working on passing a new companies bill to enforce stricter corporate governance rules, protect the rights of the minority shareholders, and bring about responsible self-regulation with adequate disclosure and accountability. Mr Khurshid said his ministry was studying ways to keep a check on vanishing companies and prevent price manipulation in initial public offerings (IPOs). Indian companies raised a staggering 467.78bn rupees through IPOs in the current fiscal year, almost 23 times the sum gained in the previous year, according to a study by Prime Database, a New Delhi-based information services company.

Since the Satyam scandal, the government has also initiated action against some companies for fudging their accounts. Last October, India's serious-fraud investigation office began an enquiry into Sesa Goa, the country's biggest exporter of iron ore, for "mismanagement, malpractices, financial and other irregularities". In the same month, it also began investigating the finances of three companies owned by the Reliance Anil Dhirubhai group. At the time, A Raja, India's telecommunications minister, alleged in parliament that Reliance had under-reported revenues to the tune of 10bn to 15bn rupees from 2006 to 2008. "We are taking considerable steps forwards so that we can avoid something like Satyam happening again," Mr Kurshid said.