ASSOCHAM-Ernst & Young Report Reveals Whistle-blowing not used by Corporates for Fraud Prevention

New Delhi: Whistle blowing mechanism as a tool for fraud risk management is not used much by Indian corporates and in its absence most employees use informal channels to report any unusual incident as a last resort, an ASSOCHAM-Ernst & Young report has pointed out.

“Most frauds result in some form of business disruption as well as reputational and financial losses. Whistle blowing is still at a nascent stage in India, and most Indian companies do not use it as an effective tool against fraud,” the report said.

It said an effective whistle-blowing mechanism comprises an independent review conducted by an audit committee. In the absence of a mandatory and effective whistle-blower mechanism, most employees in India use informal channels to report any unusual incident as a last resort. “The ground reality is that most such cases are eventually investigated due to issues being raised by employees, business partners or vendors,” the ASSOCHAM-E&Y study commented.

While a number of Indian companies have whistle-blowing policies, most of them use these more as a ‘good to comply with’ measure. However, once the new Companies Bill gets passed, the corporates will have to put in place effective whistle-blowing mechanisms and make these an important part of their strategic agenda.

However, it is only a start and the mechanism only works as an effective tool if it is supplemented with policies and practical fraud response plans.  Moreover, to achieve desired benefits from such a mechanism, it is important for an organisation to have a cross-functional committee and sub-committees that evaluate complaints, decide on follow-up action and initiate disciplinary action and report incidents.

“In the immediate scenario, it may be challenging for a company to bring about a change in its operations, but in the long run, its doing so will demonstrate its seriousness in detecting misconduct and its intention of complying with the law,” the report said.

It said technology can help organisations detect fraud by using various applications and databases in a structured manner to identify duplicate procurements, related parties doing business, ghost vendors, split purchase orders, inflated expense statements etc.  It also enables restriction of access to the function of copying and transferring data to prevent employees from gaining access to companies’ and their customers’ confidential and sensitive information and thereby help in preventing fraud, the report said.

A survey incorporated in the report said that around 62 per cent of the respondents were in favour of stringent disciplinary procedures, while 73 per cent held that the companies should adopt a zero tolerance approach to bribery and corruption.

“A zero tolerance approach helps to inculcate in an organisation an affirmative approach to strict compliance with its ethical corporate governance norms. It is also a deterrent to fraud risks,” the study said.
The report said that previously, organisations and employees were hesitant to comply with anti-bribery policies, but today there is a change in their outlook.

“A strong law enforcement is required for the implementation of an effective regulatory and compliance mechanism to mitigate fraud. It helps organisations proactively set up anti-bribery and corruption frameworks and adopt a dynamic approach to counter fraudsters” adds the study.

Around 33 per cent of the respondents in the study indicated that the absence of an effective regulatory and compliance mechanism and weak law enforcement are factors that are both equally responsible for facilitating bribery and corruption practices within organisations.


Source: Assocham

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