Fiscal loss from fraud smaller problem than image dent: Study

NEW DELHI: The financial loss resulting from an actual or attempted payments fraud is a smaller problem as compared to the damage caused to the company's image, which is irreparably tainted, says a joint study by Assocham and Grant Thornton.

In about 39 per cent of organisations, the potential loss from fraud is estimated at less than USD 25,000, while for 37 per cent of organisations, the potential loss is between USD 25,000 and USD 2,49,999, it said.

For more for 17 per cent of organisations, the potential loss is USD 250,000, it added.

"While a business scandalised by fraud might never be the victim or perpetrator of another fraud, its public image might be irreparably tainted.

"As a consequence, the company may have to pay a higher price for credit, may be refused membership in trade associations or might not be considered for a strategic alliance," Assocham Secretary General D S Rawat said.

Many businesses are feeling the effects of the economic downturn and in their attempts to minimise losses, they often unknowingly open themselves to huge financial and reputational risks. This is due to the fact that when companies cut back on costs, they often increase their chances of being victims of fraud, the study noted.

It observed that the economic crisis has forced retailers to closely examine every aspect of their business for inefficiencies. This investigation has exposed the holes that exist in their e-commerce operations.

"Retailers are waking up to the realities of e-commerce fraud and are realising the inadequacies of their current fraud management processes. Fraud is fast becoming an area of concern for retailers as they gear up for further growth in online commerce," the study found.

Businesses that are subject to audit and have experienced fraud, especially if the fraud was perpetrated by the company management, are likely to be assessed as a high audit risk, which means auditors will scrutinise company books more closely before signing off on its financial statements, the study said.

When an auditor is required to perform more procedures, the cost of the audit will increase. This can often be mitigated by demonstrating that the offending managers or employees have left the company and the company has instituted strict procedures to thwart future attempts at fraud.

Moreover, the effect of fraud on a company's culture and morale can be shattering. Any association with a company that has perpetrated or suffered fraud can be troubling and embarrassing for the people who work there.

This may especially be true in a growing business setting where workers feel more connected with one another. Even if employees leave the company, they may carry an association with a fraudulent company into their next place of employment, even if they were not involved with the fraud at all.