Rise of Fraud Inc

Corporate-backed corruption is costing India over Rs 500 cr every year
Wednesday, November 27, 2013
Devil wears the suit.

The CBI FIR against Hindalco group chairman Kumar Mangalam Birla in the coalgate scam riled businessmen and politicians alike. Many voices said that such a move can affect the morale of our industrialists, who may leave the country along with their investments. That such cases are increasingly being reported seemed to have been lost on them.

Earlier, Anil Ambani and Videocon's promoter Venugopal Dhoot were grilled in the 2G Spectrum scam. The Supreme Court has also asked the CBI to probe the involvement of various corporates in 14 issues of criminal dimensions featuring in lobbyist Nira Radia's conversations with industrialists, middlemen and politicians.

All these instances point to emergence of a corporate world which is not only flouting rules but also influencing governance. According to Transparency International 's 2011 Corruption Perceptions Report, private sector is no more a victim of corruption in India. Officials from public sector undertakings frequently join hands with the private sector, particularly in the power, mining and oil sectors. Liberalisation has provided greaters opportunity to corporates who are more than willing to use both fair and unfair means of winning favours of the government.

Thought Arbitrage Research Institute did an analysis of fraud cases reported in last 15 years which points out that though there is a decrease in petty corruption since 1991, it has been more than compensated by grand corruption as recent scandals have shown. The average scam size reached Rs 502 crore post 2009 which was almost double that of Rs 282 crore average size recorded before that.

Though there is a decrease in petty corruption since 1991, it has been more than compensated by grand corruption as recent scandals have shown. The average scam size reached Rs 502 crore post 2009 which was almost double that average size recorded before that.

While the number of fraud cases have zoomed, the techniques remain the same thus underscoring the fact that fraud detection has not improved all these years. So, why a corporate fraud is not detected while it's taking place? One of the main reasons is that either the auditors are not efficient enough or they are also in league with the offenders.

 

The same old accounts trick

The fraud corporates mostly put a higher than fair value to assets, embezzle money through a web of book entries or through related party accounts and file false claims for expenses to cheat on taxes. The Satyam scandal is a case in point in which its chairman Ramalinga Raju manipulated the accounts by $1.47 billion. Nobody got a wind of the scam till Raju himself revealed the details. Pricewaterhouse Coopers (PwC), a big name in auditing sector, would have pointed out the discrepancies had it followed the required standards while auditing Satyam. The US Securities and Exchange Commission slapped a fine of $6 million on PwC for the lapses.

However, the rot is not limited to Pricewaterhouse. The Thought Arbitrage study found that around 57 per cent of the total fraud amount reported in last 15 years belonged to corporates audited by the big four: Ernst & Young, KPMG and Deloitte Haskins & Sells and Pricewaterhouse Coopers.

 

Public spending the best bet for corrupt

The Thought Arbitrage study found that around 56 per cent of the reported scams were related to public limited companies since public procurement system is prone to prevailing malpractices including cartel formation accompained by collusive bidding and rigging.

Public procurement is an activity by which governments procure goods or services required in the country for the citiaens. In India, estimates of public procurement vary between 20% to 30% of GDP. There are ministries where approximately half of the total budget is spent on public procurement alone. Goods and services are procured from private sector through regular channels. However, the General Financial Rules 2005, followed for public procurement by government departments and ministries, do not have the status of legislation and violations do not attract much penalty.

Around 56 per cent of the reported scams were related to public limited companies since public procurement system is prone to prevailing malpractices including cartel formation accompained by collusive bidding and rigging.

Governments, both at the Centre and the states, are increasingly procuring services through public private partnerships (PPPs) which are prone to delays, poor quality and embezzlement of money. In December 2012, there were around 758 PPP projects worth Rs 3,83,332 crore running in India. Of these, over 53 per cent pertained to roads while 20 per cent were urban development projects.

Currently, there are no clear rules for regulating PPP projects. Each company has its own set of policies and codes which create challenges of accountability. The draft Public Procurement Bill 2012, which seeks to address these gaps, is pending with the Parliament. The bill also contains Draft Rules for PPP 2011.

Public-private partnerships to embezzle

In a survey done by United Nation's Office on Drugs and Crime United Nation's Convention Against Corruption, the difference of perception between government and private players with regard to roadblocks in PPPs came to fore. While private sector termed bribery as the biggest form of corruption, government officials said misrepresentation of facts by private players to avoid revenue sharing was the most common form of corruption.

Influence of a few corporates on the government functioning can be gauged from the fact that both private sector and government sector respondents thought that pre-qualification criteria for bidding is made in a way to suit favoured companies. Hiring independent consultants for monitoring of projects is not helping either as most of the consultants are found to be colluding with private partners.

Pre-qualification criteria for bidding of PPP projects is made in a way to suit favoured companies. Hiring independent consultants for monitoring is not helping either as most of the consultants collude with private partners.

The report also offers some ways out. A need to broaden the definition of public official to include private sector officials operating under PPPs is required so that they can be made accountable and liable to legal provisions currently applicable only to government officials. To avoid conflict of interest, the retired government officers should not be allowed to work with private contractors without permission from the concerned department or for at least two years from the retirement.

All government officials involved in procurement should be asked to declare their assests.Though such provisions are in place, they should be strongly implemented. 

Government officials at positions especially vulnerable to corruption should undergo regular appraisals, confidential reporting, registration and declaration of interests, assets, hospitality and gifts. E-procurement is another way to enhance transparency in procurement processes but should not be the only measure. A regulatory mechanism for a PPP contract, strong audit process and tender evaluation committee with multiple stakeholder participation can also go a long way in ensuring corruption-free environment.

What's the govt doing

In response to the report on corporate frauds, Minister of Corporate Affairs Sachin Pilot told the Lok Sabha that “Fraud” is being treated as a substantive offence in the recently passed Companies Bill, 2013. The bill also has stricter norms of corporate governance, amendments are being made to securities laws to enable SEBI deal effectively with violations of laws by companies and individuals including those running Ponzi schemes. Technical solutions like data mining and foresic audit are increasingly being applied for easy detection of frauds. 

Comments

not only in corporate..corruption is every where. But yes in corporate huge money is there.

Its just a way were people who are incompetent try to achieve professional competence by taking to bribery . Bribery indicates the impotential nature of the organisation or person. Nothing comes to an end unless people themselves understand ill effects of corruption which has the potential to ruin any healthy economy.

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