How Independent Directors Can Help Mitigate Rising Fraud Cases

About 63% independent directors believe fraud cases will rise in the next two years, according to a report by Deloitte Touche Tohmatsu India in association with the Institute of Directors.

The growing focus on ethics and corporate governance within organisations has increased the importance of the role of independent directors, who are the key in the overall governance of the organization and are becoming vital in organization’s efforts to mitigate fraud and associated risks.

These sentiments are primarily due to large-scale remote working arrangements and cash flow crunch, leading to business considerations and sustainability of operations taking priority over other matters.

According to these directors, cyber crimes (24%) and financial statement fraud (21%) are amongst the most likely frauds to be experienced in the near future. Around 36% independent directors believe that organisations should focus on fraud prevention techniques to improve their FRM framework and minimize fraud risk.

“Over the years, the role of IDs has been evolving and enhancing, and regulators are placing increasing dependence on the vital role of IDs in good governance. IDs are chairing or are members in a majority of board committees, including the Internal Audit Committee. In the survey, IDs have shown keenness to take on a greater role in being an effective deterrent to fraud, mismanagement, and lapses in corporate governance. Of course, we will need to suitably prepare them for this additional role”, said Lt. Gen. J. S. Ahluwalia, PVSM (Retd.) – President, IOD who had written the foreword of the report.

For example, three-fourths of the respondents also believe that they could play a significant role in preventing, detecting, and responding to fraud. Around 54% indicate the need to be better equipped to discharge their duties, which included specific trainings on Fraud Risk Management (FRM).

While nearly 57% independent directors responded that their board had established an effective FRM framework, over one-fifth indicated the need to increase awareness amongst employees on ethics, integrity, and reporting fraud or misconduct issues to improve the FRM framework.

Nearly half of them also suggested that their organizations had a well-defined and clear incident response protocol to ensure swift actions upon fraud detection and its reporting.

Over the years, occurrence of large-scale corporate frauds in India has heightened the need to overhaul and strengthen the corporate governance framework to make India more competitive in the globalized world. This resulted in a series of legislation being enacted which enhanced regulatory requirements in dealing with and reporting on corporate fraud. The Companies Act, 2013, and the revised corporate governance norms of the Securities Exchange Board of India (SEBI) for listed companies, have placed significant accountability for fraud risk management on the Board of Directors and audit committee (including IDs).

“Although there are multiple priorities for those charged with corporate governance, in our view, there is a need for IDs to reflect upon the level of their organisations preparedness to meet the challenges of fraud and misconduct in the current environment and accordingly should empower themselves to preserve organization value and fulfill their fiduciary responsibility,” said Nikhil Bedi, said Partner and Leader – Forensic, Financial Advisory at Deloitte Touche Tohmatsu India.

The report shows that Covid-19 has significantly disrupted business environment and has led to numerous challenges that have exposed corporates to fraud related vulnerabilities. A remote workforce also led to greater exposure to cybercrime, including data theft, breach, and intellectual property frauds.

In such a scenario, the study recommends independent directors need to:

• Re-evaluate data protection policies – reassess technology and infra-structure solutions from security perspectives and ensure secured and resilient operations
• Regularly monitor fraud and cyber-security threats
• Deploy crisis management response mechanism
• Be vigilant for financial statement fraud schemes
• Board audit committee to have an effective anti-fraud and misconduct detection mechanism

IDs can play a significant role in pushing the agenda for periodical detailed assessment of organization’s risk management system to control cybercrimes, promote fraud risk management framework, knowledge and training, proper reporting protocol of whistle blowers. In safeguarding organisations against fraud, they need to act with the highest standards of vigilance and prudence,” sums up Atul Dhawan, Chairperson, Partner at Deloitte India.

To conclude, the extensive and widespread use of technology in business today while enhancing efficiencies has also provided openings for frauds and associated risks. In this environment, it is important that Independent Directors remain vigilant, prudent, and understands the risks of a virtual work environment. This responsibility, heightened in the post pandemic world and the evolving regulatory framework, will compel these directors to play a significant role in overseeing the fraud detection and prevention mechanisms, and also equip themselves with the knowledge of key risks and effects that such incidents could have on their organisations.