Business disruptions or crises have historically been followed by a rise in fraudulent practices and corporate misgovernance. And Covid-19 has been the biggest business disruptor of our times.
A recent survey by Deloitte Touche Tohmatsu India LLP, in association with the Institute of Directors (IOD), has shown how Independent Directors (IDs) in the post-pandemic business world “perceive corporate fraud, their preparedness in addressing it, and the adoption of best practices to mitigate fraud and misconduct risks”.
Yet another survey titled Global Economic Crime and Fraud Survey 2022 by PwC has come up with an alarming finding: in the two years since 2020, over 95 per cent organisations in India have experienced ‘new fraud’ incidents.
Fraudulent practices most prevalent now
PwC reports that among organisations that had to deal with fraud in the last two years, 12 percent experienced environmental, social and governance (ESG) reporting fraud, 9 percent experienced anti-embargo fraud and 19 percent experienced supply chain fraud.
All these areas fall within the scope of corporate misgovernance and misconduct, which are the chief concerns of an ID, and the more companies face fraud and other misconduct, the more they need impartial watchdogs like IDs.
But as we have already mentioned in an earlier mail, India Inc is struggling to find IDs because there simply aren’t enough candidates, as per Ministry of Corporate Affairs norms. Which is why you are 100 per cent guaranteed of being appointed to several company boards once you acquire the required qualifications.
New-age IDs are the need of the hour
IDs today have to be even more vigilant and careful, and anticipate the risks of a virtual and remote work environment, which has already given rise to multiple cases of digital fraud and other cybercrimes.
They also need to keep pace with evolving regulatory and governing frameworks, and play a significant role in overseeing fraud detection and prevention mechanisms. Naturally, they must also possess a knowledge of the key risks and effects which such incidents could have on their organisations.
In November 2021, news agency PTI reported that the Securities and Exchange Board of India (SEBI) had announced an overhaul in the rules regarding “the appointment, removal and remuneration of IDs to ensure their independence and effectiveness, after their role came under scrutiny for failing to detect and prevent corporate frauds and promoter mismanagement”.
In a notification dated August 3, SEBI announced that the new rules would be applicable from January 1, 2022.
Together with the Companies Act 2013, these revised corporate governance norms have placed a great deal more accountability for fraud risk management on boards of directors and audit committees, including IDs. But they have also been assured of better remuneration structures and other benefits.
The PwC survey found that the new types of fraud experienced by companies include misconduct risk (67 per cent), legal risk (16 per cent), cybercrime (31 per cent), insider trading (19 per cent), and platform risk (38 per cent).
Corporate misconduct in particular has become a huge challenge as businesses have begun collaborating and taking advantage of pandemic-related uncertainty and volatility.
There is another angle here, too. As a result of increased vigilance in the face of newer and increased fraud risks, there is every chance that routine fraudulent and bad business practices committed over the years will also now be discovered and have to be dealt with.
The role you will play as an ID
The Deloitte-IOD survey found that nearly 75 per cent of IDs felt they could play an important role not only in fraud prevention and fraud reporting, but in helping their organisations respond to instances of fraud.
The survey asked several IDs what can better equip them to fulfil their fiduciary responsibilities to mitigate fraud and corporate misconduct risks, and 18 per cent felt the answer was “understanding of the organisation’s fraud risk profile including high-risk areas which may have an impact on financial statements”.
Again, as our earlier mails have indicated, there is a lot more that IDs can and must do.
So a few points emerge from all this discussion:
- The increased need for vigilance and reporting will make the role of IDs even more critical
- India needs more IDs now than ever before, but the supply pool is limited
- Both listed and unlisted public companies are looking for IDs not merely to comply with government regulations, but to effectively counter the threat of corporate misconduct and fraud
- Therefore, you have an assured opportunity to sit on the board of a large company, because there is such little competition
Needless to add, this is the perfect time to begin your career as an ID by registering with the Independent Directors’ databank, maintained by the Indian Institute of Corporate Affairs (IICA), and clearing the online self-assessment proficiency test that they conduct.
The test poses certain challenges, yes, but for a professional of your stature, just a little guidance would be enough to overcome them.
That guidance is what we will provide at LawSikho. So I invite you to connect with us. You can contact our counsellors on +91 98186 78383 (10.00 am-8.00 pm IST) or email us at counselling@lawsikho.in. We will show you how best to approach the test and crack it.