Bribery, corruption hit India's manufacturing sector

Bribery and corruption are the most common economic crimes that India's manufacturing sector faces, says the PwC Global Economic Crime Survey.

Over 25 per cent of Indian manufacturing sector respondents have been victims of economic crime in the past year as against 21 per cent of the global manufacturing sector respondents.

Further, 33 per cent of manufacturing company respondents in India cited accounting fraud to have affected their business in the past year.

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Accounting fraud encompasses a variety of fraudulent actions including accounting manipulations, fraudulent borrowing or raising of finance, fraudulent application for credit and unauthorised transactions or rogue trading.

About 17% of respondents from the manufacturing sector in India reported having suffered asset misappropriation.

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In this sector, asset misappropriation is more likely to include fraud schemes, including fraudulent disbursements such as payments to ghost employees, fictitious vendors, pay-and-return schemes, overbilling schemes, unauthorised overtime schemes, and expense report schemes.

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Indeed, manufacturing companies should closely monitor weaknesses or loopholes in their supply chains to ensure that suppliers are complying with:

a) agreed quality standards and
b) financial covenants.

The fraud triangle links three conditions fraud experts say are always present whenever fraud occurs:

1. Opportunity

2. Incentive/pressure

3. Justification to commit fraud

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Pressures to commit economic crime in the manufacturing sector were much higher globally (60%) in the last 12 months as compared to India (29%).

In comparison, rationalisation to commit economic crime was much higher in manufacturing companies in India (42%) as compared to the global level (15%).

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The trigger points for fraud, indicating that the top factors contributing to higher opportunities of risk of fraud in India include:

1. Internal audit being asked to do more work and/or with less staff

2. Transfer of operations to new territories

3. Reduced regulatory oversight

4. Weakening of IT controls making the organization more vulnerable

Similarly, the top factors contributing to pressures or incentives to commit fraud in the manufacturing sector in India were:

1. Targets more difficult to achieve

2. Fear of job loss

3. Employees want to make their numbers in order to earn performance bonuses

4. Senior management's intention to report a desired level of financial performance

5. Pressure to maintain financial performance to ensure lenders do not cancel debt facilities

Entities may resort to fudging of financial statements to reflect healthy financial state; they may hide or understate the underlying debt covenants and continue obtaining working capital based on such fraudulent statements.

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The top factors contributing to increasing people's ability to rationalise fraud in India include:

1. Maintaining an existing standard of living

2. Others do it and so it is okay

3. Reported bonuses earned by high earners being perceived as unfair

4. Allegations of fraud within the organization are not fully dealt with

Senior executives responsible for mitigating the risks of fraud in their organisations should carefully consider the implications of these three factors specifically pressure to maintain financial performance to ensure access to capital markets, weakening of IT controls and internal audit being asked to do more work and/or with less staff.

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Reality vs perception of fraud in the manufacturing sector in India

Respondents in the manufacturing sector in India tended to be overly optimistic regarding the future of economic crime, despite the actual incidences of economic crime being much higher.

When asked about the most likely fraud threats in the next 12 months, the respondents primarily indentified accounting fraud (including one or more categories of accounting fraud), money laundering, bribery and corruption and asset misappropriation.

Additionally, the respondents perceive tax fraud and illegal insider trading to be an emerging threat in the coming year, though not experienced in the last 12 months.

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Given the current economic environment and historical trend of actual incidences of fraud, it is likely that the manufacturing sector in India may witness far greater levels of economic crime than perceived by respondents.

Organisations that are vigilant, aware of the fraud risks and conduct periodic fraud risk assessments will be better prepared to address the risk of fraud.

Similarly, organisations need to follow a more holistic and integrated approach to manage business risks.