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How independent directors can help prevent corporate frauds

How independent directors can help prevent corporate frauds

Although there are multiple priorities for independent directors, there is a need for them to push senior management to understand the latest developments in the technologies/tools that can help organisations enhance their anti-fraud controls framework.

Independent directors should be vigilant and seek to play a larger role in fraud risk management initiatives. Independent directors should be vigilant and seek to play a larger role in fraud risk management initiatives.

Over the years, the occurrence of large-scale corporate frauds in India has nudged organisations to relook at and strengthen (in some cases overhaul) their corporate governance framework. 

These incidents have also resulted in a series of legislative and regulatory requirements in dealing with and reporting corporate frauds. Further, the business disruption caused by the pandemic has underscored the need to be vigilant and strengthen governance frameworks. 

Historically, data shows business disruptions tend to be followed by a rise in the discovery of fraudulent practices as well as new types of fraud risk vulnerabilities. 

Given the current economic climate, it is likely that some organisations may inadvertently choose to focus on sustaining operations, improving growth and profitability while placing compliance on the back burner. 

Also Read: Govt to soon clear list of independent directors for various banks, say sources
 
Today, regulatory requirements place the accountability of effective fraud risk management on the board/senior management. Coupled with the growing focus on ethics and current dynamic business environment, this has also increased the importance of the role of Independent Directors (IDs) in being effective deterrents to fraud, mismanagement, and lapses in corporate governance. 

Under such circumstances, IDs should be vigilant and seek to play a larger role in fraud risk management initiatives. They should also take the time to stay up to date to understand the changes across the fraud risk landscape, and the best practices/ latest technologies in preventing/ fighting fraud.  
 
As per Deloitte India's latest survey report titled "Corporate fraud and misconduct: Role of Independent Directors", approximately 75 per cent (of IDs) agreed that they could play a significant role in preventing, detecting and responding to fraud. 

This is quite encouraging as there is growing realisation within the community to strengthen fraud risk management. However, close to 54 per cent (of IDs) expressed their need to be better equipped to fulfill their fiduciary responsibilities. 

Also Read: Sebi overhauls rules to empower independent directors
 
According to a majority of the IDs who responded to the survey, specific training on fraud risk management, understanding the organisation's fraud risk profile, independent screening of high-risk areas and increased visibility on the review and continuous monitoring mechanisms (put in place by the organisations for timely detection of unusual activities) will empower them to discharge their responsibilities better.  
 
IDs can also help in building a robust fraud monitoring mechanism (within an organisation) by promoting the adoption of latest technologies to address corporate frauds. 

Given the current scale and magnitude of business transactions, technology is not only a key enabler from an operational perspective but can be a great differentiator to proactively manage (predict/ prevent/detect/ respond) the potential risk of fraud. 

This can be facilitated through an array of tools and a combination of data analytics, artificial intelligence, and machine learning. For example, using technologies/tools to screen unstructured data (such as emails, user files, network data/documents etc.), and structured data (transactions, management reports, financial information etc.) can help identify outliers/red flags in real-time or a near real-time basis; helping organisations to take prompt action to minimise the risk of fraud. 

In addition, the new remote working environment has also helped elevate the role of technology to protect the business - both from intentional misdeeds and unintentional errors.  
 
Further, technology can help organisations with their fraud reporting obligations to regulatory bodies or seek legal recourse. In our view, the rapid adoption of new-age technologies/tools has also resulted in generating complex and voluminous organisational data which can lead to difficulties in discovering relevant sets of information and actionable insights. 

In other parlance, the process resembles 'finding a needle in a haystack'. Therefore, depending on the discovery mechanism deployed, the types of data-driven insights can vary.  
 
In order to better equip themselves, IDs should also gain specific trainings on emerging technologies/tools that can help organisations oversee the integrity of financial information and monitor the business effectively to predict issues before they become systemic in nature. 
 
Although there are multiple priorities for IDs, there is a need for them to push senior management to understand the latest developments in the technologies/tools that can help organisations enhance their anti-fraud controls framework and continuous monitoring efforts. At the end of the day, these should be integrated within the organisation's corporate governance framework to help safeguard the interests of all stakeholders and fulfilling their fiduciary responsibility. 
 
(Rohit Goel, Partner, Financial Advisory, Deloitte India and Tushar Hambir, Director, Financial Advisory, Deloitte India.)