Prevention and Control of Corporate Frauds: A Socio-Legal Study of the Financial Market in India

Oct 8, 2020

Corporate Fraud - A term popularized by TV and Film Media, it refers to the Illegal activities undertaken by an individual or a company while promoting unethical and dishonest ways to gain advantages. It mostly emphasizes on companies taking dishonest paths for profit-making. These frauds may include falsifying accounts, misrepresenting products, services etc. The Enron scandal is one leading example of corporate frauds. The dazzling befall of Enron Corporation was witnessed when its share value fell drastically for $90.75 to a meagre $0.26 just before it declared bankruptcy. The impact was so drastic that it shook Wall Street, and one of the most powerful businesses in the entire United States had to, unfortunately, dissolve overnight. The major cause of this downfall was fake holdings and of the book account keeping. Enron is one perfect example of contemporary companies, by firstly replacing the traditional accounting and adopting a market to market (MTM) accounting system, that majorly focused on analyzing the real assets as well as the fair value and long term assets. It also created Enron Online in 1999, for online trading of commodities. Enron continued to push forward the idea of “The American Dream” and to receive great laurels for its ambitious ways and its expansion strategies. It was named as ‘America’s Most Innovative Company’ by Forbes for six consecutive years directly! And yet when it saw its downfall, it crumbled under its weight. And considering that it had an estimated size of companies like Microsoft and Dell, it only points to the fact that any company, irrespective of all the heights it reaches, can turn into dust in mere seconds if not proceeded cautiously.

About the working of corporate frauds, it can be extremely tricky to trace them until a very firm and rigid system of security are in place. The most important and frequent way of corporate fraud is gaining access to confidential information and using it to one’s advantage. This frequently happens when corporate stakeholders themselves get involved in fraudulent practices and get their hands dirty by altering accounts and assets to display high revenue and profits, concealing the hefty losses, slow revenue and declining sales. This false image, in turn, attracts potential buyers and investors. However, when the deceptive accounting continues, the investors also fall prey to the vicious web of corporate fraud. There are majorly three types of corporate frauds, asset misappropriation being the most widely occurring, followed by financial statement frauds and corruption.

However, a systematic strategizing and avoiding corporate deceits is one step away. Every day in the corporate world, significant decisions are made that can either benefit or prove detrimental. Businesses, as well as investors, are always vulnerable to defrauds while dealing with the corporate world. One way of safeguarding this is to keep privacy policies updated and to not engage with unknown creditors before analyzing their credit reports and financial assets. Risk factors need to be recognized beforehand, and strategies should be made to avoid them efficiently. Every business, be it small or large, new or established, is always at a risk of asset misappropriation, corruption and financial statement frauds.

And to prevent these, a few safeguards and measures need to be taken by every corporate entity. Certain strategies can help in doing the same. Firstly, knowing the employee is of utmost importance, as a report by ‘Nation to Occupational Fraud and Abuse’ suggests that employee fraud makes up to at least 5% losses per annum. Hence constant observation and conversation along with motivation and anonymous feedback help in decreasing employee vulnerability. Secondly, implementing a reporting system, in case an employee is approached by a fraudulent customer or investor. Creating awareness and having an open reporting system free of duress encourages employees to feel free to report incidents or mischief or fraud, and things can be stopped/prevented before they get worse. Thirdly, internal controls can be intensified by segregating duties and enhancing secure accounting techniques like a proper documentation of receipts and bank statements, to avoid or detect any fraud or theft in its very initial stage. Further, constant checking and revision of internal controlling can help to patch up loopholes.

Fourthly, hiring fraud experts is a vital step, as the expertise of Certified Fraud Examiners, Certified Public Accountants etc. helps in the development of professional anti-fraud strategies, and their expert vigilance also decreases the probability of committal of fraud. This helps corporates to be sure about the credibility of audits, financial analysis and business consultations being provided by the experts.

Fifthly, establishing a fair and healthy work environment increases employee loyalty towards the company. Even though it might seem a futile step superficially, but having a fair environment with proper policies for fair practices in place makes the employees happier and in turn reliable and prevents them from involving in any unethical activities directly or indirectly.

Sixthly and most importantly, it is imperative to have certified fraud controls in place. Having revised and updated security policies and aftermath in place governs the behavioural aspects of not only the employees but also the customers as well as the investors. Having strong disciplinary actions in place, and communicating them thoroughly throughout is bound to make any associate re-think before indulging in fraudulent activities.

Hence, a person who has an evil intention does not discriminate between companies’ size, nature and geographic location. This particularly makes all companies prone to fraudulent practices by an inner member or an outer entity else. Therefore, in this delicate situation, companies need to be vigilant and should keep implementing and updating means of security regularly, to keep the foundations as well as the entire structure strong. Having fair employment structure, enhanced communication, and equal opportunities within the working environment also plays an extremely crucial role in deterring the employees from losing their loyalty towards the company.