Wednesday, January 28, 2015

Know How Employee Frauds

vFacts Research Services

Harshad Mehta – the name immediately brings back the memories of the most popular scam of India. The fraud cost 5.5 billion to the 10 major commercial banks of India. An employee fraud is not a new concept or term for India. The annual survey by KPMG (a leading management consultant) has provided many interesting insights to the recent scenario concerning employee frauds. The sample of the survey covered more than 1000 public and private organisations in India. According to the survey, 47 percent of the frauds in the organisations have been done by either the employees or the senior executives with a decision making authority.

Types of frauds:
The most common fraud reported by the organisations is the magnified or the inflated expense account by the employees. In these types of fraud, the expenses incurred by the employees are exaggerated and false invoices are submitted to the organisation for re-imbursement. Such frauds account for almost 50 per cent of the total losses incurred by the organisations because of employee frauds.

Other types of frauds faced by the organisations are:
  • Keeping a secret share of commissions from suppliers for self
  • Counterfeiting or faking the company cheques
  • Purchase of goods for personal use on company expense
  • Manipulating customer’s accounts
  • Using official information for personal benefits
  • Forging financial statements
  • Misappropriation of other company resources
  • Corporate espionage

Frauds related to manipulating and misusing the power to access the confidential information about the customers and the organisation and theft of data were also found to be more common than the rest.

Dimensions of frauds:
Any or every employee/ executive fraud, has the following magnitude or dimensions:
  • The human dimension - There is always a human mind behind every executive fraud. It has been found to be of an internal employee or management in 90 per cent of the cases. Employees use their power and intelligence for corporate espionage.
  • The technology dimension - Technology has emerged as a very important dimension to the employee frauds. New technologies have given way to unethical practices like hacking etc. On one hand, where the information technology can be effectively used to check frauds, it can and is giving opportunities and assistance to the people in planning and executing frauds.
  • The legal dimension – The last dimension is the legal dimension that the legal framework and the institutional system regarding the frauds. It also includes organizational practices and policies regarding frauds.

Detection of frauds
According to the survey report of KPMG, a majority of the frauds were exposed by internal controls or check measures. Whistle-blowers or, many a times, anonymous notifications received also help to detect frauds. What follows the detection is the investigation by the management of the organisation , a review of the entire situation, followed by actions like firing the concerned employee, formal police investigation, and sometimes – letting the employee resign. 

The study by KPMG also sights the fact that most of the Indian organisations are unprepared to detect, handle or deal with fraud. Also, shocking was the fact that as much as 77 per cent of the respondents do not even conduct or has fraud diagnostic review systems in their organisations; nor do 84 per cent of the respondents have a written fraud policy. Assured of their security and internal control systems, 52 percent of the respondents (corporate heads) did not consider frauds as a threat or major problem.

Scenario in Indian sectors
The percentage of risk from corporate espionage of the information communication and entertainment sectors, and financial sector of India (including all the financial service providers) is as high as 84 and 81 per cent respectively. But the sector which is facing the frequent brunt of the problem is the emerging BPO sector in India. Cases of frauds in BPO sector, employees using the customer’s confidential information, manipulation in accounts are getting common. The reasons being quoted for the increasing number of frauds are:
  • Weakening of society's values,
  • The growing economic pressures,
  • More sophisticated technologies to assist criminals
  • Urbane and intelligent criminals and
  • Inadequate punishment for those who are caught

The first and the foremost solution to the problem are the reference checks and affirming the employee details of the employees before their confirmation in an organisation. To reduce the possibilities of frauds, it is advisable to design and incorporate the fraud diagnostic systems in the organisations creating internal detection systems. Also, regular periodic rotation of the staff can help reduce the possibilities of the employee frauds. There are also 185 certified fraud examiners (as on Jan’06) in India. There information is available on the website of Association of Certified Fraud Examiners. (

It is also being planned to create a common database for an industry vertical by all organisations of all employees who have been identified and have been proved as fraudsters in the past. This would help the other companies to check for them before hiring them for their organisation.

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