Most Indian organizations lose 5% of their revenue due to fraud
Most Indian organizations are on the journey of digital transformation. Some claim they are ready, some claim they are halfway, and some are still in the planning stage. But the most important aspect to this journey should be around clarity of outcome and results expected post the transformation. Various CXOs have shared different reasons for undertaking digital transformation – enhanced productivity, cost efficiency, expansion and future readiness. But very few talk about controlling internal frauds and expenses, as most of the leaders believe that this area has been well managed for years already. But the reality is that most of the organizations in India still follow manual forms or filling of excel sheets for reimbursements. ACFE 2018 Global Study on Occupational Fraud and Abuse suggests that 50% of fraud in a typical organization is due to internal control weaknesses.
Inaccurate tracking and reporting of expense-related data costs every company, this has either been ignored or not observed, but the impact on the top-line is significant. Outside of payroll, the second largest controllable area of business spend is employee expense. According to an Oversight Systems 2017 Spend Analysis Report, the typical organization loses 5% of annual revenues each year to fraud – 89% of which, according to a 2018 ACFE global study, are asset misappropriation which includes expense reimbursement schemes.
Fraud cases – a risk for companies
Fraudulent activities can land companies in potentially unfavourable situations. There have been many instances of businesses experiencing considerable monetary blows due to various types of internal frauds. In 2019, RBI imposed a collective penalty of Rs 8.5 crore on eleven commercial banks for violating norms on fraud classification and reporting.
Not only in India, but companies on a global level have been taking the brunt of fraudulent activities. Under Foreign Corrupt Practices Act (FCPA), a European telecommunications company and a multinational technology company paid $965 million and $800 million, respectively, as penalties for violations. Losses of this magnitude can prove to be disastrous for companies. Fraud takes on another dimension as it can hurt the image and reputation of a company that can prove to be far more damaging than just the financial loss.
A threat to reputation
The goal to remain relevant for customers and ahead of the competition is what every organisation strives for and success in this regard is built on the foundation of trust and reputation. The reputation of a company depends highly on what the stakeholders perceive and believe about it.
It is a well-known fact that marketing is a key focus area for companies and a large part of budget is also committed to related activities. A GroupM report expects the advertising expenditure in India to be more than Rs 91,600 crores in 2020 and it is set to grow at the rate of 12-13% year-on-year till 2024. However, all this investment can be in vain if an organisation is not able to generate positive sentiment amongst its customers and build a positive image in the market.
Fraud cases can lead to massive reputational risks tarnishing a company’s image and losing the confidence of its shareholders, employees, media and other stakeholders. The public opinion of a company can often be a crucial factor in deciding the future of the business. Hence, fraud proves to be an enterprise risk, just like economic, disaster or regulatory risks, that calls for heightened attention to prevent and manage it.
According to ACFE Global Fraud Study, 40.7% of organisations decided not to report their fraud cases for fear of bad publicity. This shows the grave implications that a reported fraud case can have on the image of an organisation. Given the extent of damage that fraud can cause, organisations need to gear up to minimize the occurrence of such cases and safeguard the high-risk areas.
Power of insight and technology
According the Worldpay Fraud Trends Report 2016, 85% of businesses need greater insights to fight fraud. The following three simple yet effective measures can help every finance leader in gaining control over total spend, spotting the red-flag of fraud and cultivating a culture of compliance:
- Introduce robust policies and technologies to manage travel and expenses
- Catch spend anomalies before they happen
- Carry out audits to check adherence to policies
In addition to enhanced control for the business, it is equally important for companies to make it easy for employees to make compliant transactions and follow best practices.
In a nutshell, reducing fraud and improving compliance can happen with crystal clear and near real-time visibility of organisational spends. So, the first step towards adopting technology should be to transform old and legacy systems and processes that may impact the bottom-line immediately. Only then, the true power of digital transformation can be realized and utilized to bring in better control in the organisation.