Earnings Pressure Encouraging Corporate Fraud in India: Survey

April 6, 2010

The incidence of corporate fraud, particularly financial statement fraud, is rising in India, largely due to pressure to meet earnings targets and weak internal control systems, a survey by consultancy KPMG showed.

More than 60 percent of respondents said meeting market expectations and performance based remuneration were the main motives for fraud, with others also citing tax evasion as key.

The survey of senior managers at nearly 1,000 firms in India showed bribery and corruption are viewed as an inevitable aspect of doing business in the country, particularly while seeking routine regulatory approvals and to win new business.

Awareness of fraud in India has been rising since its largest ever corporate fraud in software services firm Satyam Computer Services Ltd., whose founder and chairman quit in January 2009 after revealing profits had been overstated for years.

Recent volatile economic conditions and increasing business and technological complexities led to greater opportunities for fraud, said Rohit Mahajan, executive director of KPMG’s forensic advisory practice in India, at the launch of the report.

“In a recessionary environment, cost reduction initiatives increase the potential for internal control breakdown and frauds, especially financial statement fraud,” he said.

“Therefore, with signs of economic recovery, it is imperative for companies to re-evaluate their cost reduction initiatives.”

Indian Prime Minister Manmohan Singh has been campaigning hard against what he calls “pervasive corruption”, which he says affects India’s image and reputation, at home and abroad.

Eighty-seven percent of survey respondents said their firms had incurred losses of more than 1 million rupees ($22,471) due to fraud, with bribery and corruption, intellectual property fraud, e-commerce and supply chain fraud also seen as big risks.

“We treat bribery as an acceptable practice, an integral feature of doing business,” said Mahajan.

“But as Indian companies become more global and more global firms do business in India, that perception will change. There will be a bigger push for a zero-tolerance attitude to bribery and corruption and greater disciplinary action for perpetrators.”

(Reporting by Rina Chandran; Editing by Bappa Majumdar and Jerry Norton)

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