Corporate frauds in India – perceptions and emerging issues

Author:P. K. Gupta, Sanjeev Gupta
Position:Centre for Management Studies, JMI University, New Delhi, India; Corporate Consultant and Researcher, New Delhi, India
Pages:79-103
SUMMARY

Purpose - The purpose of this paper is to examine the nature and perception of corporate frauds in India and their consequences in the business and economic systems, and it highlights the emerging issues so that existing legal and regulatory obligations can be redefined and structured. Design/methodology/approach - An exploratory research was conducted through a combined mode of literature review; case studies; structured questionnaires from 346 sample companies; and 43 interviews with the corporate professionals, ... (see full summary)

 
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Corporate frauds in India –
perceptions and emerging issues
P.K. Gupta
Centre for Management Studies, JMI University, New Delhi, India, and
Sanjeev Gupta
Corporate Consultant and Researcher, New Delhi, India
Abstract
Purpose – The purpose of this paper is to examine the nature and perception of corporate frauds in India
and their consequences in the business and economic systems, and it highlights the emerging issues so that
existing legal and regulatory obligations can be redened and structured.
Design/methodology/approach – An exploratory research was conducted through a combined mode
of literature review; case studies; structured questionnaires from 346 sample companies; and 43 interviews
with the corporate professionals, management, investors, government ofces and authorities having wide
experience.
Findings – It was found that the regulatory system is weak, and there is dire need to redene the role of
auditors. Coordination among different regulatory authorities is poor, and after every scam, there is a blame
game. Reporting of fraud and publication of fraud prevention policy are missing. Banks and nancial
institutions are ineffective on due diligence, and there is a lack of professionalism on the board and other
executive levels in companies.
Research limitations/implications – This study assumes that fraud could be mitigated by proactive
and conscious action by auditors, and corporate executives are willing to avoid perpetrating nancial fraud
despite pressures from investors, government securities regulators and exogenous market uctuations. The
authors relied on the honesty of the respondents during the sample collection and recorded semi-structured
interviews. A minimum level of ve years’ work experience relative to preventing, detecting or investigating
fraud has been considered a valid determinant in selecting the purposive sample.
Practical implications The study suggests mandatory publication of fraud prevention policy;
constitution of special purpose corporate offence wing; recognition to companies for improved corporate
governance; true adoption of International Financial Reporting Standards; due diligence by banks and
nancial institutions; compulsory appointment of professionals by shareholders and xation of
responsibility on independent professionals; intellectualisation of audit committee; and more powers to the
regulators, especially Securities and Exchange Board of India.
Social implications – Prevention of corporate frauds reduces anxiety, improves corporate image and
builds up condence of the investors, which is essential for resource channelling in nancial markets.
Originality/value – The research work is based on a thorough analysis of regulatory framework and
fraud case studies and primary data collected from companies, banks and other government and
developmental institutions.
Keywords Regulation, Fraud prevention, Corporate fraud, Due diligence, Fraud propensity,
Fraud inducements, Scam, Offence
Paper type Research paper
JEL classication – K4, G17, G28, G38, P48
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
Corporate
frauds in
India
79
Journalof Financial Crime
Vol.22 No. 1, 2015
pp.79-103
©Emerald Group Publishing Limited
1359-0790
DOI 10.1108/JFC-07-2013-0045
Introduction
A corporation, being a congregation of various stakeholders at the micro and macro
levels, must be fair and transparent to its stakeholders in all its transactions
(Ramachandran, 2008). In a globalised scenario, corporations need to access resources
and compete in a global marketplace that essentially requires that it must embrace and
demonstrate ethical conduct to grow and prosper in the long run. Recent decades have
witnessed the sharp increase in the greed of individuals and organisations and have
acquired an inevitable presence in our lives and society. Corporate frauds and
misconduct remains a constant feature posing a threat both from the macro and micro
prospectives of the economy. Liberalisation process in developing economies has
typically witnessed a series of scams almost with sickening regularity. Corporate frauds
have become a global phenomenon with the advancement of commerce and technology.
In recent decades, fast-growing economies observed an enormous increase in corporate
frauds, posing serious questions before the academicians, researchers and professionals
on the effectiveness of corporate governance mechanisms, government regulation
mechanism and the role of corporate and individual ethics. Recently, a number of studies
in the nance, economics and law literature have been conducted on the understanding
of incentives and monitoring deterrents of corporate frauds and the loopholes in the
government control systems.
After every scam, the government and regulatory machinery have been strengthened
to reduce the number of frauds that essentially impose a check on the nexus between the
company and professionals and between banks and bureaucrats, which may be
achieved through more disclosures, by putting and xing responsibilities on each party
involved in the fraud.
Similar to other developing and some developed countries, India is in the grip of
fraud, implying the need for a transparent, ethical and responsible corporate governance
framework. The global nancial crisis during the recent past, along with some of the
large corporation failures and frauds, has convincingly revealed that while the corporate
governance super structure in India is fairly durable (ICSI, 2007), there are certain
weaknesses that may have their roots in the ethos of individual business entities. KPMG
Survey of 2006, 2008 and 2010 reveal a continued persistence of corporate frauds and
warn the presence of fraud risk in the business structures of large- and medium-sized
organisations including banks.
Corporate frauds have increased at a high pace in India (Vivian Bose Commission of
Inquiry, 1963; KPMG, 2010). Tables I and II present a summary of the Indian and Global
corporate frauds.
The Securities and Exchange Board of India (SEBI) introduced (Prohibition of Insider
Trading) Regulations, 1992, which was later amended in 2002 but does not have
transnational jurisdiction. SEBI should be given more powers and has to be worked
as the Securities Exchange Council. It must acquire the nature of a criminal court to
enforce criminal sanction against directors of foreign companies listed in the domestic
exchange, who are actively involved in insider trading. Apart from SEBI, we have a
multiplicity of regulations dealing with a variety of fraud types and perspectives.
Despite adopting corporate governance and with the existence of numerous
legislations and regulatory authorities, corporate frauds have become rampant
throughout the country. We attempt to examine the perception of corporate frauds in
India and highlight the emerging issues so that existing legal and regulatory obligations
JFC
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