CSR spends and the menace of ghost beneficiaries

Frauds related to procurement, construction, and end-use of funds have had companies engaging forensic auditors to keep tabs on how money is spent, revealed conversations with those involved in such investigations.

Illustration: Dominic Xavier/Rediff.com

A company was funding health care spends under its corporate social responsibility (CSR) initiatives.

It later engaged a consultancy to conduct a review of its programme, only to discover that some of the funds went to patients that didn’t exist.

Such ghost beneficiaries aren’t the only kind of issue companies face during a period of unprecedented CSR spending, touching nearly Rs 12,000 crore in 2018-19 (FY19).

Frauds related to procurement, construction, and end-use of funds have had companies engaging forensic auditors to keep tabs on how money is spent, revealed conversations with those involved in such investigations.

Firms are also increasingly strengthening their own capabilities to better implement their programmes.

"In the beginning in FY15, it took a while for organisations to put in place strategies on how they wanted to spend the CSR money.

"Over the last year and a half, more and more firms are trying to get some expenditure reviews and governance systems in place," said Jagvinder Brar, co-head forensic services at KPMG in India.

Rajat Vig, partner, forensic (financial advisory) at consultancy firm Deloitte India, said companies often turn to experts to find the truth after a tip-off.

“Almost 50 per cent of our investigations work will come through the whistle-blower channel,” he said.

The investigations can be of varied kinds of projects.

A listed company was funding water cooler facilities for primary schools in Delhi around 2017.

Each unit and surrounding civil construction was to cost around Rs 2 lakh.

The company later found that intermediaries had pocketed some of the CSR capital, spending only Rs 50,000-60,000 per unit.

In other cases, the units were missing entirely.

In another instance, a company allocated capital for livelihood creation.

The money was spent on a well, which was said to be helping farmers’ irrigation needs.

The well was there when they visited with water at a depth of 20 metres.

The pipe that was said to have been used for irrigation was only 18 metres long, leaving it 2 metres short of the water surface.

This also meant that it could not have been in use for irrigation purposes as was being claimed.

There were no farms in the vicinity.

Many companies still have gaps to plug.

"The maker checker controls are not very strong in CSR because they want to keep the headcount very lean," said KPMG’s Brar.

An analysis of data from corporate tracker nseinfobase.com shows that administrative expenses have gone up as a percentage of the total CSR expenditure by companies, suggesting that firms are growing more serious about building capacity when it comes to the implementation of such activities.

They were around 1.55 per cent of the total expenditure between 2014-15 and 2017-18.

This has since risen to 5 per cent in 2018-19.

The absolute amounts have risen from Rs 98.4 crore to Rs 593.9 crore in the same period.

It is up over 500 per cent over the past four years.

Better systems are put in place generally once violations are detected.

For example, the company funding water cooler facilities in Delhi subsequently put in place stronger monitoring and supervision controls for the units to ensure that the leakage of funds was mitigated.

Arpinder Singh, partner and head, India and emerging markets, forensic and integrity services, EY, said the firm also has seen significantly more traction in recent times as companies look to curb fraud and misappropriation.

“I find the risk increases at the end of the year.

"There is sometimes panic in March to disburse the funds in keeping with the rules laid out in the Companies Act.

"A proper plan put in place at the beginning of the year can help avoid last-minute decisions, which sometimes may not be the right ones,” he said.