White-collar crimes: CFO as protector and trustee of the organisation

An area that has widely come into limelight recently is the white collar crimes that needs attention of the new age CFO. As finance leaders are at the centre of the financial implications in any organisation, they need to be prepared against these crimes.

The role of CFO as the conscience keeper of the company and the trustee of the shareholder makes this even more relevant for them. He has to ensure strong corporate governance and mitigate any risk in an organization — where white collar crimes are under fraud risk management.
Moreover, as the new age CFO, he plays a crucial role in linking business strategy to shareholder value, decision making and performance objectives. In addition, the board and senior management are responsible for implementing a formal fraud risk management process in their organization, beginning with a formal fraud risk assessment.

In fact, the fraud risk assessment should be updated annually and should be able to identify fraud schemes that could potentially occur. Also, the controls that are in place should avoid frauds by raising red flags and assisting the CFO in designing risk assessment procedures.

Additionally, related party transactions need to ensure complete transparency and corporate governance irrespective of the size of the transaction.

This would require company’s internal control system to scrutinize data and highlight signals of possible non confirmations, unauthorized actions, missing documents, unavailable originals, backdated documents, alterations in documents, unreconciled areas or delays in reconciliations, inadequate segregation of duties and lack of clear management position about conflicts of interest and the list goes on.

How, then the new age CFO is required to be prepared against the white collar crimes?

White-collar crime refers to non-violent crimes committed through deceptive practices, for the purpose of financial gain committed by individuals, businesses, and government entities.

The actual term “white collar crime” coined byEdwin Sutherland, Professor of Sociology described them as “crime committed by a person of respectability and high social status in the course of his occupation.”

Therefore, the perpetrators often hold respectable positions in their communities or businesses, until the illegal activities committed by them are discovered. The laws concerning white collar crimes vary, depending on the exact nature of the crimes committed, and many fall under federal authority.

However, white collar crimes can often be difficult to prosecute, as the perpetrators take sophisticated steps to ensure their illegal activities are difficult to detect.

We have seen banking frauds in the recent times, such as, PNB fraud of Rs 11,346 crore in February 2018 and Andhra bank’s Rs 5000 crore fraud in January 2018 and so on.

As can be seen from the above instances the internal control system were not robust enough to identify the issues and report the same. Even the internal whistle blower mechanism seems to be absent and in most cases escalation of the issue is not seen, even though multiple people could have the knowledge of the deviation which never gets reported. The reason being, there is no secure mechanism to get these reported and action taken against defaulters.

Therefore, the CFO’s can go a long way in building this environment of trust and governance to ensure that information of all deviation passes freely through them so that any such deviation is highlighted early before it takes on larger proportions.
Hence the types of frauds CFOs should keep a check on are: Impersonation, Counterfeiting, Wrong weighing and measurement, Misappropriation, Criminal breach of trust, Cheating, Dishonest dealing in property, Mischief, Forgery, Falsification, Possessing stolen property, Concealment.

Beside that there are other issues like insider trading. Directors and substantial shareholders have to disclose their holding to the company periodically. The New Regulations have added relatives of connected persons, as well as, the companies, firms, trust, etc.in which relatives of connected persons, bankers of the company and of persons deemed to be connected persons holding more than 10%.

Bribery, a practice of offering, giving, receiving, or soliciting something of value for the purpose of influencing the action of an official in discharge of his/ her public or legal duties.Forgery, is the altering, making,possession, or use of a falsified document, such as a check, contract, or other document, with the intent to defraud or injure the recipient of the document. This includes such crimes as passing forged checks, and creating, possession, or selling falsified art.

Indian Government over the last few years has been implementing changes in various acts to bring these crimes under scrutiny. Some examples of the changes are: Prevention of Money Laundering Act, 2002 , Central Vigilance Commission Act 2003, Right to Information Act 2005, Companies Act 2013, Lokpal and Lokayuktas Act, 2013, Whistle Blowers Protection Act, 2011,Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, Insolvency and Bankruptcy Code

But have the penalties acted as deterrent for white-collar crime to happen?

The criminal penalties for white collar crime vary greatly, depending on the type of crime committed, and the circumstances surrounding the case. Most individuals facing criminal charges for a white collar crime have never faced the criminal justice system, and the process is frightening.

Typically, penalties for white collar crime include any combination ofimprisonment,restitution, fines,probation, and community service. Such crimes that are serious enough to face prison time may place the perpetrators behind bars for many years.

In fact, US Congress passed theSarbanes-Oxley Act of 2002, which increased oversight in corporateresponsibilityand mandated financial disclosures, in an attempt to stem large scale white collar crime. As a result of the Act, penalties for white collar crime involving wire ormail fraudincreased.

In addition to any criminal penalties imposed on a perpetrator, civil penalties may be imposed for white collar crime, as the victims can file acivil lawsuitagainst the perpetrator. Criminal conviction is not required for a financial crime victim to be successful and be awardeddamagesfor his financial losses in a civil lawsuit.

CFO implementing controls

In meeting their responsibility to identify gaps and develop fraud controls, CFOs must take special care to avoid complacency. Don’t assume that if fraud occurs “the auditors will catch it.”

Only external auditor as a control is not acceptable. Sometimes by the time the external auditor uncovers fraud it is usually too late to prevent significant financial damage, and almost always too late to prevent the reputational damage that will follow.

An effective and empowered audit committee is essential. The committee should be completely independent from management and authorized to hire outside counsel and other advisers. At least one audit committee member should be an audit committee financial expert, but individuals with nonfinancial skills and expertise are also needed to provide different perspectives.

CFOs should establish and enforce a robust system of effective controls, both internal and external. Internal controls will ensure there are no opportunities to hide the fraud trail. This should be followed with right directions and focus from the top.

Further, they need need to actively and visibly promote an ethical environment that resonates throughout all levels of the organization and embolden honest employees and encourage self-policing. There should be a formal whistle-blower program or ethics hotline; employees should be familiar with corporate protocol so they know where to turn if they suspect fraud.

Board members should be required to complete a conflict-of-interest statement annually. Finance executives need to develop a response plan for frauds which should cause least reputational damage.
They also need to design the protocol for dealing with various levels of white collar crimes. The action to be taken with an employee suspected of cheating on an expense report is different from that for an executive involved in insider trading.

To avoid various unintended consequences, every organization should develop appropriate strategies — in advance — for dealing with specific types of fraud or other misconduct.

Further, CFOs should also act as the “Chief Ethics Officer”: Good Business ethics is critical for good business. Ethical climates improve employee morale, recruitment and retention, as well as instill a more positive environment.

Companies with a reputation for fairness and integrity have loyal customers and suppliers — and are able to attract investors as well. CFOs need to establish an environment in which ethical behavior is expected.

CFOs by understanding how white-collar criminals look at the world differently can begin closing the gaps in internal controls, develop a proactive fraud risk assessment and response program and significantly reduce the financial and reputational risks associated with fraud.


Vikas Chadha

Group Chief Financial Officer at Vibgyor Group

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