Jul-Sep 2012

The Vicious Cycle of Corporate Fraud

The Srini Raju Centre for Information Technology and the Networked Economy (SRITNE) at the ISB brought together experts from industry and academia to discuss innovations and emerging trends in the digital media at the ISB Digital Summit 2012 that was, co-hosted by Jigserv Digital.

The Ethics in Business Forum at the ISB has organised several events in the last year aimed at generating interest among students regarding the importance of ethical leadership and the need to debate dilemmas in ethical decision making. The forum’s first two sessions, Inciting Authenticity and The Dean’s Dilemmas (presided by ISB Dean Ajit Rangnekar) were important steps in this direction.

In its third session, the forum welcomed Sandeep Baldava, Partner and Head of Fraud Investigation and Dispute Services at Ernst & Young, to lead a discussion on “Understanding Corporate Frauds.” A veteran in his field, Baldava has conducted over 200 investigations across various industries, government agencies and NGOs. His vast and diverse experiences formed the bedrock of his talk, which helped the ISB community grasp the minutiae of fraud, such as the context underlying fraud, the profile of fraudsters, and the role of ethics in fraud prevention. Poor judgement can escalate small indiscretions to frauds of alarming magnitude, and these are perpetuated over time due to enabling mechanisms and the involvement of multiple individuals.

Baldava explained the enabling mechanisms in terms of the fraud triangle of opportunity, pressure, and rationalisation – a person under pressure when given an opportunity would rationalise and commit a fraud. This formed the basis of a discussion in which he described the nature of the vicious circle of frauds, where everyone – from the government to corporate executives and creditors – defrauds one another. An interesting paradigm highlights the increased cost of corruption resulting from an increased risk to corruption in India due to the recent anti-corruption campaign. Another interesting fact that Baldava presented from his personal research suggested that 80% of individuals are vulnerable to committing fraud. A typical fraudster’s profile is that of an intelligent and educated individual with no prior criminal record, who appears normal in every other way and who believes that the act would go unnoticed.

Speaking about the impact of fraud on an organisation’s finances, Baladava stressed that globally, the monetary impact of fraud is as high as 4% to 5% of an organisation’s revenues and has an even bigger direct impact on the company’s bottom line. Industries, such as retail where the average revenue is only 5% suffer the most due to such fraud. To dismiss the misconception that regulation and the public sector are the breeding grounds for fraud, Baldava also presented research data from the private sector and NGOs. He discussed several intriguing case studies that included details of frauds in top IT companies, innovative cyber-crimes and land mining scams.

The theory of culture and its role in corruption was discredited as Baldava presented evidence that established the importance of jurisprudence delivery in inhibiting the incentives of committing fraud.

He concluded his talk with an apt quote from Albert Einstein: Relativity applies to physics,  not ethics.

Abhishek A Hemarajani of PGP Class of 2013 compiled this report for ISB Insight.

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