Professional Documents
Culture Documents
DEFINITION
In the broadest sense, a fraud is a deception made for personal gain. The legal
definition of fraud varies by legal jurisdiction. Fraud is a crime, and is also a civil law
violation. In the criminal law of common law jurisdictions it may be called “theft by
deception”. The law distinguishes between actual fraud, which is intentional and
constructive fraud which is not deliberate.
INTRODUCTION
Cottrell and Albrecht (1994) point out that violent crime has clear physical
evidence whereas fraud often goes unobserved directly. Fraud is called white collar
crime in contrast to more violent crime.
Most of the time, the management misrepresents facts in its books for showing
higher profits for its companies. It is the duty of the auditors to catch these
irregularities but it has been observed that very often the auditors are not doing a very
good job at it.
The recent failure of U.S. energy conglomerate Enron is a case in point which
has shaken the American audit profession to its foundations. Congressional
committees, frustrated investors, regulators and even the FBI are asking a tough
question: “Where were the auditors?”
TYPES OF FRAUDS
Albrecht and Romney (1986) grouped frauds into two categories based on
motivation. One factor is that motivates some persons to commit fraud on behalf of a
company and those that motivate persons to commit fraud against a company.
There are three basic types of fraud: asset misappropriation, bribery and
corruption, and financial statement fraud.
The least common and most expensive type of fraud is financial statement
fraud. This type of fraud is done in the books of account by the management as it is
interested in showing a picture of the state of affairs of the company in such a way
that suits them. Usually done to
• Show less profit – this can be done by showing less receipts or by showing
less expenses and the objective of such actions could be to save tax or to
avoid take over bids.
• Show more profit – this can be done by showing more receipts or by
showing fewer expenses and the aim could be to attract more investments,
loans or to attract shareholders etc.
COMPUTER FRAUD
• Wages in kind – the more dissatisfied the employee, the more likely he or
she was to engage in criminal behavior.
• For a fraud to occur the fraudster should be able to rationalize his offence
as something other than criminal activity.
1. Pre-planned fraudsters : this category includes people who start out from
the beginning intending to commit fraud. These can be short-term players,
like many who use stolen credit cards or can be longer-term, like
bankruptoy fraudsters.
2. Intermediate fraudsters : these are people who start off honest hut turn to
frauds when times become hard or when there is dishonesty in personal
life.
• At time not enough emphasis is laid on audit quality. Audit reports mostly
point out on missing records or accounts that were not reconciled and miss
out on fraud related issues.
FRAUD PREVENTION
Attitudes within an organisation often lay the foundation for a high or low risk
environment. It is a known fact that where minor unethical practices are overlooked
larger frauds committed by higher levels of management may also be treated in a
similar lenient way. In this environment there may be a risk of total collapse of the
organisation either through a single catastrophic fraud or through the combined
weight of many smaller frauds.
It is important to sensitize people about risk management. It has been seen that
almost every time a major fraud occurs many people who were unwittingly close to it
are shocked that they were unaware of what was happening. Therefore, it is vital to
raise awareness through formal education and training programme as a part of the
overall risk management and staff operating in high risk areas, such as procurement
and bill paying and to those with a role in the prevention and detection of the fraud,
for example human resources and staff with investigation responsibility.
Whistle-Blowing
Very many frauds are known or suspected by people who are not involved.
The challenge for management is to encourage these innocent people to speak out to
demonstrate that it is very much in their own interest.
In this are there are many conflicting emotions influencing the potential
whistle blower.
2. disinterest/sneaking admiration
3. fear of consequences
IDENTIFYING FRAUDS
1. Warning signals
2. Fraud alerts
Warning Signals
Warning signals are organisational indicators of fraud risk. They have been
sub-divided into business risk, financial risk and environmental risk.
Business Risk
This has been sub divided into cultural issues, management issues, employee
issues, process issues and transaction issues.
Cultural issues
Management issues
• There are no steps from management in case of any deviations from the
code of conduct or the policies.
• No effective oversight by the management which is comprised of a small
group.
Employee issues
Process issues
Financial Risk
Environmental Risk
• Rapid technological changes taking place within the industry, which may
increase the potential for product obsolescence.
Fraud Alerts
Frauds alerts are specific events which may be indicative of fraud. A list of
possible fraud alerts is provided below.
INTRODUCTION
DEFINITION
Why do everything yourself, when someone else can do it at low cost? In the
current scenario, the theory sys exactly the same. The global market today is highly
competitive and continuously changing. A company must, thus, focus on improving
productivity and at the same time, cut down costs. This is the basic premise of
outsourcing. In brief, business process outsourcing can be seen as a process in which
a company delegates some of its in-house operations or processes to a third party.
Thus, it is a transaction through which one company acquires services from another,
while maintaining ownership and ultimate responsibility for the processes. The main
motive for business process outsourcing is to allow the company to invest more time,
money and human resources into core activities and building strategies, which fuel
company growth.
The controversy that outsourcing has resulted in job losses in the USA, is
largely seen as more political than economic in India. Ever since the US Senate
passed the Bill on banning government outsourcing to foreign countries in January,
2004, there has been a lot of resentment in India IT industry. By no stretch of
imagination can be estimated 245,000 employees, now working in business process.
Outsourcing in India, pose a threat to the 100 million workers in the US services
sector. American businesses themselves, do not want to be restrained in any way from
tapping cheaper sources outside the United States. The major US concerns comprise
of the prediction that by 2015, roughly 3.3 million US business-processing jobs will
have moved abroad. Research suggests that the number of US service jobs lost of off
shoring will accelerate at the rate of 30 to 40% annually, during the next five years.
Most of the jobs created in India are either in call centres or at IT firms. But
call centres companies in both Britain and US suffer from rising staff turnover and
struggle to recruit more people. In fact, ‘not moving work abroad’ would make the
companies of developed countries less competitive. By focusing on creation of jobs,
they could miss the chance to raise their productivity.
There are roughly 200 Fortune 500 companies, which outsource work to India.
According to NASSCOM (National Association of Software and Service Companies)
estimates, over 50% of the Fortune 500 companies have incorporated offshore
outsourcing into their strategies, and around 80% of these now use India as their
development base. The leading companies in India, in both the IT and BPO industries
are fighting hard to win a broader variety of work, particularly higher value activities.
Examples include EXL Services, carrying out a broad range of insurance work for
British and American firms. ICICI One Source, another Indian BPO Company
provides research services for consultants and investment bankers. Wipro and EXL
services are applying the same management disciplines that GE applies to its
industrial businesses to the way they provide services.
The overseas markets for the US that might be considered as “taking away our
jobs” are product markets in themselves. Out of India’s one billion population, 300
million is classified as middle class. This is larger than the entire US population, and
represents an enormous marketing opportunity. In China, with a population of 1.2
billion, only about 5% (65 million) economy this is a significant potential market.
Sweetening the pot, India and China offer preferential treatment to companies that
participate in their local economies, such as reduced entry barriers, lower taxes 0
tariffs, and better currency exchange rates.
PROCESS OF OUTSOURCING
Deciding to outsource
Supplier competition
A competition is held where the client marks and scores the supplier proposals.
This may involve a number of face-to-face meetings to clarify the client requirements
and the supplier response. The suppliers will be qualified out until only a few remain.
This is known as down select in the industry. It is normal to go into the due diligence
stage with two suppliers to maintain the competition. Following due diligence the
suppliers submit a “best and final offer” (BAFO) for the client to make the final down
select decision to one supplier. It is not unusual for two suppliers to go into
competitive negotiations.
Negotiations
The negotiations take the original RFP, the supplier proposals, BAFO
submissions and convert these into the contractual agreement between the client and
the supplier. This stage finalizes the documentation and the final pricing structure.
Contract finalization
Transition
The transition will begin from the effective date and normally run until four
months after service commencement date. This is the process for the staff transfer and
the take-on of services.
Transformation
This is the execution of the agreement and lasts for the term of the contract.
Termination or renewal
Near the end of the contract term a decision will be made to terminate or
renew the contract. Termination may involve taking back services (in sourcing) or the
transfer of services to another supplier.
Cost Savings : The lowering of the overall cost of the service to the business.
This will involve reducing the scope, defining quality levels, re-pricing, re-
negotiation, cost restructuring. Access to lower cost economies through offshoring
called “labor arbitrage” generated by the wage gap between indsutrialized and
developing nations.
CRITICISM OF OUTSOURCING
(i) Outsourcing work that was previously done in house results in a large
number of workers being displaced and losing their jobs.
(ii) Companies tend to overstimate the savings to be had from going abroad
and fail to recognize the problems, such as dealing with inventory,
obsolescence and currency exchange rates.
The practice of outsourcing has, of late, been the subject of intense debate. The
primary contention being, is outsourcing just a new way of doing international trade,
or is it something to fear as being fundamentally damaging to the economies of
developed nations? The forces of outsourcing are being blamed for the relentless
export of jobs from the rich to the poor countries, whereby outsourcing becomes a
shorthand for the process by which good jobs in America, Britain or Germany become
much lower paying jobs in India, China or Mexico.
Research suggests that the number of US service jobs lost to offshoring will
accelerate during the next five years. Several US states are considering legilsation to
prohibit or severely restrict their state governments from contracting with companies
that move jobs to low-wage developing countries, and labour unions are notably the
Communications Workers of America, are lobbying the Congress to prevent
offshoring.
The argument against outsourcing can be refuted through a consideration of
the following factors :
INDIA’S PERSPECTIVE
India has made a strong niche for itself in the Information Technology Enable
Services and Business Process Outsourcing sectors. The %3.6 billion outsourcing
industry in India has emerged as the single biggest employment generator in recent
years.
The BPO sector in India has been growing at almost 60 to 70 percent per
annum. According to NASSCOM, each day, nearly 200 people join the Indian ITES-
BPO industry. BPO offerings are becoming more comprehensive. As pointed out in
the McKinsey Institute study, the US economy benefits in outsourcing in more ways
than one. A NASSCOM report estimated 60 percent savings in costs for companies
outsourcing to India. There exist 185 Fortune 500 companies which outsource work to
India. Information Technology Enabled Services (ITES) provides opportunities for
MNCs to reap the surplus in the service sector that did not exist earlier.
The the short run, the gains from outsourcing might be concentrated, however,
in the long run; it holds promise for India and other developing nations. One of the
longer term potential benefits of IT industry development (and globalization
processes) is competency capacity building, which can spill over into other sectors,
boost the local economic dynamism and competitiveness, and thereby facilitiate
processes that impact poverty. Off shoring also has demonstration and empowerment
effects, and helps to inspire the country’s youth and people, both in urban and rural
areas.
Many Indian firms are rather good at being flexible, taking advantage of new
business opportunities, ramping up manpower, being responsive in terms of prices,
and improving in quality. They have also managed to form mutually beneficial
strategic alliances with multinational and their local subsidiaries.