Every human being for his livelihood has certain needs and desires while the core human needs for each human is his biological needs, safety needs and love needs .Once these needs are fulfilled, a human go for more needs, such an esteem needs and self-actualization needs and in order to fulfil his / her needs, a person generates money by his act. The person has two options to generate the money, i.e., either todo service or do business. Service as well as business needs acts of a person and the acts to generate money may be legal or illegal acts. The money generated by illegal act in business may be termed as fraud while in service is known as bribery or corruption.
Fraud or intentional deception is a strategy to achieve a personal or organisational goal or to satisfy a human need. Competitive survival can be a motive for both honest and dishonest behavior because a goal can be satisfied by honest as well as dishonest means. The white-collar crimes are not often committed by hardcore criminals, these are often committed by moral people who are under financial strain and distress. The fraud triangle developed by Donald Cressy explains three factors that are present in every situation of fraud which are motivation, opportunity, and rationalisation and these three important factors are connected with committing a fraud. Motive comes from financial pressure; opportunity occurs through weakness in internal control and rationalisation is the fraudsters’ internal justification for his or her act. Competitive and economic survival can be a motive to commit a fraud.
The techniques/schemes used by financial fraud perpetrators are changing day by day as the information and technology is changing frequently. In most of the financial crime cases, it is found that the persons, like senior officers of different departments, delinquent directors who are entrusted with powers to safeguard the interest of the stakeholders and unscrupulous professionals who have been assigned duties to check the financials of a business entity are indulged in the fraudulent activities.
Anyone can commit fraud and fraudsters cannot be distinguished from other people by their characteristics. From the ingredients, one may conclude that fraud is caused mainly by factors external to the individual: economic, competitive, social and political issues, and poor control mechanism. The most trusting people are also the most gullible and victims of fraud. The frauds are committed by owners, employees and by even outsiders. Many cases of the most serious frauds and corruption are committed by the people at the top who have the power to conduct fraudulent transactions and cover them up. There are several things which suggest someone is abusing his position and could be committing fraud. As the bribery and corruption is one of the type of frauds where bribery refers to offering, giving, receiving, or soliciting anything of value to influence an ‘official act’, where ‘official act’ means the payments made to influence the decision of government agent or employee. Simply, the bribe means to give, offer, or promise to give money or something to a person in power to induce that person to do a certain act. Corruption is a wider concept which includes bribery also. Corruption can be categorised as bribery, economic extortion, illegal gratuity, and a conflict of interest. Corruption is dishonest or illegal behavior of powerful people. illegal gratuities also amount to a kind of bribery but in such case, intention is not present to influence some decision. No direct money is involved in these cases, rather some benefit is offered to a person.
As provided in the preamble to the constitution of India, the Government must secure to all its citizens social, economic, or political justice. The Directive Principles of State Policy are fundamental in the governance of the country and they enjoin upon the state to apply these to direct its policy to sub serve the ‘common good’ and to see to it that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment [Article 39 (b) and (c)].
Financial crimes have potentially devastating impacts on an economy. The manipulation of financial statement is one of the topmost types of fraud which is perpetrated by the organisations to evade taxes and siphon the money taken from banks or financial institutions. These type of manipulation affects the industrial growth of an economy which results in loss of customers (existing and future) due to negative publicity by media , adverse effect on banker’s attitude in respect of granting of loans and other credit facilities, loss of Net worth, loss of Reputation/Goodwill of the company, loss of dedicated and experienced employees, more government regulations, decrease in value of shares, loss of confidence of investors (Indian and Foreign), and Non-payment to bankers against working capital facilities availed leads to Non-Performing Assets (NPA). The major consequences of frauds on an economy are imposition of increased government controls, higher cost of projects and loss of confidence of foreign investors, which in turn lead to slower growth of the economy.
An economy cannot be a fraud free economy but it is sure that we can mitigate the fraud risks in our economy by adopting few practices in the corporate sector as well as in the regulatory mechanism, like, strengthening of the Internal Audit Department and Audit Committees by appointing qualified and experienced personnel and the Audit Committees should be given the freedom to act independently from the executives, and at least one of the members of the Internal Audit Committee should have recent and relevant financial knowledge and relevant experience.; regulations for scrutiny of auditor’s role and provisions for rotation of auditors in every company to avoid the nexus between the auditors and the management of the company; implementation of corporate governance in small and medium enterprises (SMEs) to provide a way for the companies to grow or attract additional investors as alternatives to borrow from Bank at high cost and to improve internal control system, better accountability and higher profitability; adoption of international financial reporting standards (IFRS) so that proper disclosure in the financial reports may be given on globally accepted disclosure standards; conducting of due diligence by banks and financial institutions to safeguard their interest by effective due diligence by independent professionals and agencies before sanctioning the working capital facilities or other financial assistance to the companies or investors; appointment of independent professionals by shareholders and fixing of their responsibility to ensure giving of proper disclosures in structured deals where money flows from one end to another; setting up of corporate offence wing with criminal powers on the parallel line of economic offence wing to prevent and detect the corporate fraud and to punish the offenders and conspirators who are involved in committing corporate frauds; provisions for approval of related party transactions by specific committee as these related party transactions are camouflaged by raising debit/credit note to give a favourable price to related party; publication of fraud prevention policy and publicised it among the employees and stakeholders of the company and make mandatorily to report suspected frauds through a well-structured mechanism and co-ordination among different regulatory authorities.
Efforts have to be made by all concerned to prevent frauds and alienate the pain and agony of investors and stakeholders. India has one of the oldest legal systems in the world. The fountain source of law in India is its Constitution which, in turn, gives due recognition to statutes, case law and customary law consistent with its dispensations. Statutes are enacted by Parliament, State Legislatures and Union Territory Legislatures. There is also a vast body of laws known as subordinate legislation, in the form of Rules, Regulations made by the Central and the State Governments and local authorities. Moreover, there are large bodies of cases decided by the Supreme Court of India and various High Courts and tribunals which serve to interpret and elaborate the relevant constitutional and legislative provisions. The government has to do investigation of fraud cases in an integrated regulatory and preventive mechanism as number of authorities under different statutes are regulating, preventing or detecting the fraud cases. so more and more coordination among various authorities should be developed as to mitigate the fraud cases and to save the resources of the nation so that the economy of India may grow and become self-dependent economy, that is ‘Aatam Nirbhar Bharat.’
Dr. Sanjeev Gupta is the President of La-SIYA Socio Economic Care Foundation, based in Delhi. He may be contacted at smittal98@gmail.com and more details are available at www.drsanjeevgupta.net.
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