Catching fraudsters early

If you remember names like Enron and Satyam from the recent past, or even Goldman Sachs today, you will know corporate fraud and white collar crime are just the offshoots of the new global market environment. Nor are they specific to any demography or territorial boundaries. The number of cases in Southeast Asia, the Middle East and the Asia-Pacific region are just as alarming as those in the US or Europe. Indeed, corruption is even more prevalent in the immediate area. According to the 2009/2010 Global Fraud Report, by international research firm Kroll, the Asia-Pacific region accounts for the highest levels of corporate fraud in the world. On average, 84% of companies have suffered from some sort of fraud in the past three years – with as many as 96% in one jurisdiction (Mainland China) reporting experience with corruption.

Needless to say, the serious repercussions and adverse impacts of a corporate scandal can have multiple ripple effects on an organisation’s brand image, its credibility and reputation. Often, the aftermath extends much after the case has been dissolved or resolved through the courts. For instance, PricewaterhouseCoopers’(PwC) global reputation as one of the top audit assurance and management consultancy firms has been greatly affected by the recent Satyam scandal in India – and the HR department has been dealing with many of the symptoms. PwC reportedly witnessed one of the largest mass exits of employees from any company in the months following the fraud allegations last year. The attrition was across all hierarchies in the professional services firm and, according to people connected with the development, it all started when authorities probing the Satyam fraud filed a supplementary charge sheet that named two PwC partners.

Prevention is better than cure

It is imperative that organisations learn to handle corporate fraud cases with the utmost seriousness, experts note. They say an effective compliance system that works to prevent potential violations and misconduct is one of the basic keys to modern fraud prevention. HR needs to take an active role in improving compliance and communicating the consequences of violation across all levels.

Minimising exposure to fraud, one expert shares, involves four separate disciplines: preventing, detecting, investigating and recovering. ,” Tapan Bhattacharya, General Manager (Projects), Globe EL Projects says it’s the first of these that tends to have the greatest long-term impact on an organisation. And prevention is also the one area that HR can be most actively involved in. “The rest are governed by the external forces and HR’s role at best will be restricted to monitoring and making changes in the system,” he says. Further, HR is able to consider and often address the ethical fabric of employees as they first enter the organisation, Bhattacharya adds.

But not all fraud can be picked off so easily, and HR needs to work in partnership with senior leaders to develop and maintain a fraud-free culture. In particular, both sides need to consider the possibility of fraud committed in the organisation’s interest, not the individual’s. In many recent corporate scandals the perpetrators received very little personal reward for their misdeeds. “This second kind of non-conformance is neither known, nor controllable by HR,” Bhattacharya says.

Ultimately, the onus of protecting against fraud has to start from the top. Jim Burke, CEO, Global Compliance, an organisation that provides whistle-blower hotlines and anti-fraud software solutions, says HR plays a very important role in this process, no matter how big the organisation is. “Where once outsourced compliance solutions were only required in the high-end financial services sector, today all organisations need to address these issues to some extent,” he says. “We are seeing over time that compliance programmes are pushed down to privately-run companies and smaller companies who participate in the supply chain of those large companies.”

Even family-run businesses that are so dominant in this particular region are not out of this loop. They may not wish to have a compliance programme but may be required to in order to maintain supplier relationships and do business with various corporations, agencies and governments, Burke points out.

Burke says an effective compliance programme will have three important factors. Firstly, employers need to accurately assess their risk. “The first thing in a compliance programme is to understand your risk of having bad things happen,” he says. Secondly, employers need to train their staff on how to identify and avoid those risks. Beyond that is the issue of management capability, which is where hotlines and case management software can intervene. “Above all, as employers, you should be able to benchmark your compliance function against the industry standards. You have to see where you measure up. HR plays a role in all this.”

Spotting the red flags

Communication is also a necessary component. Burke urges HR to create a culture of free and open feedback across all functions of an organisation, giving staff the power and means to report fraud if and when they identify it. Bhattacharya says not having this kind of support can cost an organisation dearly over the long term. “There was a case where heavy-duty equipment was supplied by an overseas supplier with inferior fitments. When the equipment was put through the rigorous installation procedure it failed to deliver the required output. An enquiry revealed that not only were the company’s rules flouted with impunity at the supplier’s end, but this done with the complete knowledge and concurrence of the senior management,” he tells. “However, what actually shocked us was the fact that it was known to some persons in our organisation as well and they were waiting to blow the whistle after it was installed and paid for to settle some inter-department scores.”

When it all goes wrong

When a fraud is identified in a company, what must HR do to strike a balance between confidentiality and transparency? Bhattacharya says the rules should be simple. “Rule number one – the organisation’s interest come first, always and every time.” He says HR will have to consider appointing previously unknown professionals such as forensic accountants and money-laundering specialists, as well as lawyers to help them nagivate the toxic spin-off effects.

“HR never functions independent of the organisation’s interest and its moral watch dogs never have functional ascendency over their financial or business bosses,” he says. “HR’s role in this environment is limited to fire fighting in the aftermath of the debacle or, worst still, face the wrath of not having chosen the right person for the right job.”