Of late, the news has been abuzz with reports of numerous cases of corporate fraud. This involves cases of deliberate deception or misrepresentation, including in accounting and bookkeeping. The Securities and Exchange Board of India (SEBI) has started a series of crackdowns to identify the companies that have committed frauds. It has been investigating several cases, including listed companies cooking their books, making unsubstantiated claims about their finances, manipulating stock prices, and so on.
Corporate frauds and impact on stakeholders
Frauds have a ripple effect on the economy at large. Corporate frauds, in particular, have a widespread impact because of the huge number of stakeholders involved – customers, investors, Regulators, Banks, and lenders. This is why many corporate frauds eventually end up being banking/financial frauds;
Studies indicate the number of banking frauds in India increased significantly in FY21-22. When it comes to the financial services sector, India has been losing a staggering `100 crore every day over the last seven years to frauds. We can take some comfort in the fact that the total y-o-y figure has been reducing over the years, but is that enough? There is a tendency for fraudulent corporates to blame external factors for bank defaults, but regulators and the government need to differentiate between business failures and frauds.
If a bank has been involved in perpetrating the fraud, then at the very least, it is at risk of its reputation being tarnished. Not to mention the hefty monetary losses it faces in terms of higher provisions, NPAs, and loss of customers. For end customers of the bank, this may even lead to higher interest rates due to the higher credit costs. As banks struggle, the economy suffers and so do the investors.