Procurement fraud, bribery and corruption are the biggest fraud risks that infrastructure companies face, revealed a Deloitte survey.
There was apprehension in the mind of Amit Bansal, Head of Infrastructure/ Real estate sector, Forensic services, Deloitte in India, when he and his organisation decided to conduct a survey on frauds in the infrastructure sector. ¨We were skeptical if we will get qualitative and quantitative responses. But to our surprise we got good responses from 29 top executives - C-level professionals - from as many mid-size to large infrastructure firms,¨ Bansal said. The survey started in August 2014 and focused on a sector that has been under focus for a number of reasons.
The survey results revealed that procurement fraud, bribery and corruption are the biggest fraud risks that infrastructure companies face. ¨This clearly reflects the current sentiments prevalent after the cancellation of the coal blocks,¨ added Bansal. One of the key reasons for the prevalence of these frauds is the operating model in the sector, which has inter-dependencies on several third parties as well as the government. The report states that large infrastructure projects rely on large scale procurement of goods and services. Even after centralising procurement for multiple projects, companies continue to have significant dependence on local third parties for sourcing material, equipment and labour. As the project progresses and faces deadline pressures, exceptional approvals for procurement become frequent, with little focus on internal controls or due diligence.
For companies that have multiple projects running simultaneously, these exceptional approvals further reduce the span of control, effectively increasing the risk of procurement fraud. Around 70 per cent of the survey respondents backed this view by stating that insufficient internal controls at project sites was one of the major causes for fraud cases. Rising project delays owing to companies seeking multiple clearances further raises the chances of companies resorting to bribery to get project clearances fast tracked. 50 per cent of the survey respondents revealed that companies can feel compelled to resort to back channels, bribery and facilitation payments to ensure that such delays do not befall them, as indicated by 50 per cent of our survey respondents. Further, 60 per cent of survey respondents indicated that at least 15 per cent of their total investments in projects were delayed due to regulatory clearances, underlining the sentiment that business cannot go on without paying bribes and those who did not pay, were denied clearances.
Bansal shared that according to most of the respondents changes in regulations in these two areas - land acquisition and environmental clearances - would help in reducing fraud and misconduct in the sector. Around 70 per cent of respondents said streamlining and improving transparency in environmental clear¡ances was the most important step while 65 per cent expect the Land Acquisition Act 2013 to be an effective measure in tackling frauds. However, certain provisions of the Act need to be amended to make the Act more effective. Respondents in the survey rated revenue leakage and misappropriation of cash as the least important fraud risks impacting the sector. This can be attributed to the fact that the number and size of projects in India under construction today are far higher than those under operations.
In the operational phase of infrastructure projects, ¨fraud schemes¨ involve revenue leakage at toll plazas, under-reporting of revenues by lessees at airports, malls or duty free outlets and leakage in container demurrage charges. Moreover, there could leakages in metering and billing at power distribution companies where there could be collusion between employees and consumers to pocket the differential amount. Also, there could be cash theft at counters of courier companies when the amount on receipt is recorded lower than actual and balance is pocketed.
Having identified such fraud risks, interestingly 70 per cent of respondents preferred to have whistle-blower hotline for vendors, customers and employees as a preferred mechanism to prevent frauds.
- Team IT