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The Board’s Role in Preventing Corporate Fraud and Strengthening Ethical Governance
Corporate fraud have been rampant globally despite of enactments of various Laws, rules, strict norms, regulations and guidelines and it seriously harms a company’s trust, financial health, and long-term sustainable growth. The complexity of a corporate fraud comes when the complete edifice of a company has collapsed and suddenly surprises that a company has cheated the gullible investors and shakes the confidence of stakeholders.
The Corporate fraud involve intentional fraudulent activities such as manipulation of financial record, bribery and corruption, misappropriation of assets, abuse of position and infringement of intellectual property rights which not only weakness financial discipline, harm investors and stakeholders, and disrupts governance mechanism but also adversely affect the economy and corporate reputation.
The major financial scams, such as Harshad Mehta Securities Scam (1992), Enron (2001), WorldCom (2002), Satyam (2009), Nirav Modi (2018), and Gensol (2024) have demonstrated how governance failures can lead to significant financial fraud, loss of employment, adversely affect stakeholders trust and failure of banking system.
Board, being the custodian of ethical governance, play a critical and decisive role in preventing corporate fraud and strengthen ethical governance and also ensure that a company/organization operates with integrity, transparent and with accountability. Hence, the primary obligation of the board is to ensure that organisations transactions as are fair and transparent.
In India, inefficient corporate governance is due to non-presence of independent Board, since a board comprises of diverse and skilled members can prevent fraud by creating effective governance mechanism and by encouraging and protecting whistle blower in such a manner that will encourage timely reporting of suspicious transaction and activities.
The Audit Committee of the Board plays a pivotal role in preventing fraud as it is entrusted with the responsibility of reviewing financial statements, overseeing internal and external audit processes, critically reviewing related party transactions and evaluating the adequacy and effectiveness of internal control systems. Through diligent scrutiny and periodic review, the Audit Committee may identify potential risks, irregularities, or inconsistencies at an initial stage and can recommend appropriate corrective measures, to prevent frauds.
The Board must promote continuous risk assessment, proactive monitoring, and the adoption of advanced tools like data analytics, forensic auditing techniques, and automated compliance systems to detect and mitigating risk effectively. Board is also required to exercise due diligence and review compliance reports regularly to prevent manipulation of financial record and mis-appropriation of assets and to insist on accurate financial reporting and transparent disclosures, to ensure violations and irregularities are reported quickly and investigated immediately and consecutive actions are taken promptly to strengthen stakeholders confidence, enhances regulators trust and strengthen corporate governance framework.
Hence, the Board by developing a good governance mechanism, internal control mechanism, protecting whistle blowers, accountability mechanism and a culture of integrity and transparency and by ensuring strict legal and regulatory compliances, can substantially mitigate corporate fraud’s risks as well as can sustain growth and long-term value of an organisation.
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Dr. Sanjeev Gupta
Company Law Advisor He holds M. Com and LL. B degrees from Delhi University and has been awarded a Ph.D. degree from MD University, Rohtak, on his thesis, titled “Corporate Frauds in India-Nature, Consequences and Regulation”. He became an associate member of the Institute of Company Secretaries of India (ICSI) in the year 1994 and has been a Fellow Member of the ICSI since 2001.
Owned by: Institute of Directors, India
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