Assessment of Risk Factors in Misappropriation of Assets ...

Assessment of Risk Factors inMisappropriation of Assets - Evidence

from the Indian Banking Sector

Dr. K. Bhavana Raj*Dr. Srinivas Kolachina**

Dr. B.Ravi Kumar***G.D.V.Kusuma****

*Assistant Professor Finance & Banking,Department of Management Studies,

KL H (Koneru Lakshmaiah Hyderabad),RVS Nagar, Aziz Nagar (PO), Moinabad Road,

Hyderabad, R.R. Dist. 500 075, Telangana, India.Corresponding author: E-mail: bhavana raj [email protected] ,

bhavanaraj [email protected]**Associate Professor HR & Banking,Department of Management Studies,

KL H (Koneru Lakshmaiah Hyderabad), RVS Nagar, Aziz Nagar(PO), Moinabad Road, Hyderabad, R.R. Dist. 500 075,

Telangana, India. Co-author: E-mail: [email protected]***Department of MBA, Amrita Sai Institute of Science and

Technology - 9949418650****Research Scholar, Rayalaseema University Kurnool.

April 26, 2018

Abstract

Asset misappropriation (AM) cases in the Indian Bank-ing Sector have been increasing at an alarming rate since

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International Journal of Pure and Applied MathematicsVolume 118 No. 24 2018ISSN: 1314-3395 (on-line version)url: http://www.acadpubl.eu/hub/Special Issue http://www.acadpubl.eu/hub/

the last decade which was the cause for the collapse of manyBanks. The fact that many Banks were unable to achievetheir goals and many businesses were liquidated cannot beignored. Past few decades, AM is rampant in the service sec-tor especially Banking and Finance. Besides, the employeefraud became the most common fraud type experienced bythe organizations. Hence, the main purpose of this studyis to provide an in-depth view on the handling of assets byBank employees in India. This exploratory study adoptsthe quantitative techniques to understand reasons on Bankstaff committing fraud. The sample size consists of 200(two hundred) which includes the Bank managers and theemployees from the top three Banks in the Indian BankingSector. All the respondents were chosen based on stratifiedsample selection method based on two common character-istics, first, being informed about the details of fraud in theBank, and second being the decision-making capacity. Thisresearch paper is useful for the policy makers, the managersin Banks and for the practitioners to improve the safetymechanisms of the Indian Banking Sector.

Key Words:: Indian Banking Sector, Fraud, Misap-propriation, Managers, Employees.

JEL Classification: E00, E50, E58, E59, G20, G21,G29.

1 INTRODUCTION

Sameer (2003) noted that the Asset misappropriation (AM) has re-cently received significant attention from the regulators, investors,public, press and the financial community. The reason being thewidespread report on fraud in large corporations by both the de-veloped countries and developing countries such as Koch Indus-tries, Tenens Crop, Ayer estate, Koss Crop, Minnesota Vikings andLloyds Bank in Europe (Christopher & Marquet., 2011). Warfield(2012) said that 75 (seventy-five) % of the Global staff will perpe-trate workplace fraud at least once, and half of those who steal fromemployers will embezzle constantly. The recent fraud cases, in mostparts of the World, for example, Societe Generale, Enron, World-Com, Adelphia etc. have exposed the growing greed of the humanbeing and the art of camouflaging the accounting facts by deceiving

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International Journal of Pure and Applied Mathematics Special Issue

and manipulating based on the position held (Wells, 2001).India has faced a number of corporate scandals highlighted by

the media (Rezaee & Davani, 2013). RICK (2011) explained thecase involving forged documents to obtain credit from at least 7(seven) different Banks. Beasley, Carcello, Hermanson, Lapides(2000) and Holton (2009) said that the most common tactic thathas been used to protect against the threat of employee fraud inthe financial sector is turning on the internal controls and checksto reduce the opportunities for such fraudulent behavior. Typicalmeasures to be taken include task rotation, segregation of duties, in-dependent checks, improved internal communication and enhancedauthorization systems.

2 REVIEW OF LITERATURE

Asset misappropriation is the most common fraud since it con-tributes 85 (eighty-five) % of all the fraud cases in 2014 when com-pared to the remaining two fraud types (ACFE, 2014). Based onthe survey done by PWC (PricewaterhouseCoopers Pvt Ltd) in2016 among the public sector, it is noted that 69% of the reportingeconomic crime is in asset misappropriation thereby indicating thatthe asset misappropriation is the most severe problem resulting inlosses for the organization.

As per ACFE (2008), nearly 90 (ninety) % of all the employeefraud involved asset misappropriations, it is the most common typeof fraud by the median loss of nearly Rs.120, 000 crores. Similarly,based on the survey done by ACFE (2014) among different indus-tries , it noted that the findings in the previous reports of the Bank-ing sector and the financial services were the sectors in which mostof the fraud cases occurred thereby indicating that the most fraudcases happened in assets misappropriation in the Banking sectors(Owolabi, 2010). Thus, the focus of the study will be on the assetmisappropriation by the Bank employees.

Figure 1: Top-5 (Five) Banks with the highest growth inNPAs due to the fraud cases

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Source: RBI (Reserve Bank of India)

Wells (2001) proposed that nearly 33(thirty-three) % of theAmerican employees have stolen from their employees. Some ofthese cases are immaterial. CPAs (Certified Public Accountants)suggested the need for a periodic examination of the cash accountas an additional service to prevent employee fraud. CPAs have an-alyzed 2608 cases of employee fraud and came up with the resultof assets misappropriation.

Figure 2: Fraud Management Maturity Model

Source: Infosys

Although there are many studies on fraud most of them are relatedto the developed countries and none in the Banking sector. Hence,this study tries to fill the gap. Since the last decade, developingcountry in Asia like India is faced with a number of employee frauds

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in the Banks which have been highlighted by the media (Samadian& Sima, 2013). Indian Student News Agency (ISNA, 2012) , re-ported that an employee of a state-owned Bank has abused hisposition with over 3 (three) million USD. The fraudulent personconfessed that the main motive of misappropriation was to gainproperty in favor of him. Furthermore, the India Press (2013) an-nounced a case of embezzlement by 5 (five) Bank employees inIndia by forging signatures of the Bank customers and creating afalse Bank account in their name and receiving 7 (seven) to 10 (ten)billion US dollars. The perpetrators also opened a false account un-der the name of a six-year-old boy who had the same Bank accountand then tricked them out of 900 (nine hundred) million USD inthe name of the child.

Figure 3: ACFE Fraud Tree

Source: ACFE (Association of Certified Fraud Examiners)

According to ISA 240, misappropriation of assets involves thetheft of an entitys assets and often committed by the employeesin relatively small and immaterial amount. Also, people involvedin the management level who are able to conceal the misappro-priations in a manner that is difficult to detect. It also revealedthat the misappropriation of assets often affects the books of ac-count in order so as to hide the discrepancies. By referring to theACFE Fraud Tree, it can be noted that there are generally seven(7) types of misappropriation of asset schemes that are normally

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used by fraudsters in order to commit fraud. The seven schemesare skimming, cash larceny, check tampering, register reimburse-ment, billing, payroll, and expenses reimbursement and inventoryand other asset schemes. KPMG (2013) has defined asset misappro-priation as theft or undue use of the companys resources to get theirregular benefit. The analysis of KPMG in 2013 has shown that46 (forty-six) % of economic crime is under asset misappropriationschemes whereby corruption cases are reported at 31 (thirty-one)% and financial statement crimes at 13 (thirteen) %.

The Organization of Asia-Pacific News Agencies (2012) reportedthat the 12 (twelve) local Bank employees had been arrested in In-dia due to fraud and forgery. Isayev and Jafarov (2012) has citedfrom Indian Students News Agency (ISNA) stated that due to inap-propriate supervision, the fraudulent employees had been distribut-ing Rs 30,000 and trading currency outside the Banking network.Beasley et al. (2000) and Holton (2009) indicated that the mostcommon tactic that has been used to protect against the threat ofemployee fraud in the financial sector is turning on internal controlsand checks to reduce the opportunities for fraudulent behavior atwork. The measures to be included are task rotation, independentchecks, improved internal communication, segregation of duties andenhancing authorization of system. Also, Albrecht, Albrecht, Al-brecht, and Zimbelman (2008) believe that pressure can be specifiedas finance pressure; such as personal financial loss or greed, as wellas non-finance pressure such as the need to report the result betterthan actual performance or even a challenge to beat the system.

3 SAMPLING METHODOLOGY AND

DATA COLLECTION

This study was conducted among top five (5) Bank employees inIndia. These Banks are selected since they have faced a large num-ber of asset misappropriation cases in the past 10 years, which isreported by Reserve Bank India (RBI). A total of 480 (four hundredand forty) questionnaires were distributed among different levels ofemployees in the Indian Banks and finally, 400 questionnaires werecollected. Of these responses, 360 were usable, yielding a usable re-sponse rate of 75.00 %. The questionnaires were distributed based

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on the simple random sampling methodology, which was adaptedfrom the study carried out by Green in 1991 (Vanvoorhis, 2007).

4 RESEARCH FINDINGS:

360 respondents had completed the questionnaires. The statisticsgive insight into the demographic profiles of different level of Bankemployees, who responded to the questionnaires. Based on theanalysis, the response rate was 75.00% (360 out of 480). Amongthese respondents, 63% were male and 37% were female. The anal-ysis also shows that only 1% respondents were less than 25 yearsold, 7% were between 25-30 years old, the biggest group was therespondents between 30-40 years old by 58%, 28% of respondentswere between 41 to 50 years old, 4% were more than 51 years oldand 2% of respondents did not answer the item. The majority ofthe respondents (59%) have a Bachelors degree, 12% have a masteror Ph.D. degree and 26% have a Diploma. Further, 59% of therespondents were from the support staff level, while 17% and 13%were supervisors and management staff respectively, and only 4%were in top management level. Finally, the majority of respondentshave more than five years experience of working in Bank while 38%of them are working in the current branch more than 3 years as wellas 37% of respondents who are working in current branch more than5 years. Table 1 below summarizes the sampling characteristics andthe demographic information of the respondents.

The measurement of asset misappropriation was adopted withsome modifications from Gates and Sullivan (2013), Walston (1994)and Sameer (2003). The survey questionnaires were distributed tothe employees with 9 (nine) hypothetical case scenarios. The sce-nario cover a range of situations, from those who may use valuableBank asset for personal use (case 1), use Bank facilities for personalpurpose (case 2 to case 5), borrow the valuable assets for their tem-porary problems (case 6) and abuse their positions and authorities(case 7 to case 9). Respondents were requested to rate how seri-ously they consider this behavior of a Bank employee based on thefollowing scenario. Table 1 exhibits the 9 (nine) scenarios. The five-point Likert-type scales range 5= strongly disagree; 4 = disagree;3 = Neutral; 2 = agree and 1= strongly agree. The questionnaire

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was adopted with modification from Bryman and Bell (2011) andHaugen and Selin (1999). The mean scores were obtained by aver-aging each score of the situations. In order to measure this feature9 (nine) questions were provided and should be scored from 1 (one),strongly disagree to 5 (five), strongly agree. Among the items, AM5 was rated the highest with 3.15 which means respondents agreedmore with misappropriating of assets when there is no outside help.On the other hand, there are three questions scored by 3.07, whichis the minimum rank. Overall, it is averagely shown that more re-spondents agreed by the measurements and are involved in assetmisappropriation but as the rank is not high enough, it can be es-timated that the occurrence of asset misappropriation is not highlyfrequent.

Table 1: Descriptive statistics on Misappropriation ofAssets

Overall the mean score for all the 9 (nine) scenarios indicatesthat all of the respondents perceived that all of the situations givenare serious problems, thus showing that the Bank employees involvein misappropriation of assets. The finding implies the extent of theirdisagreement for some actions such as to apply securities for self ortheir close relatives without authority or to apply low-interest loanfor themselves or their close relatives. As such, fraud among Bankemployees has been subject to severe criticism in the recent years.

A significant contribution linking different types of fraud indi-cators, which will help the policymakers gain meaningful insightsinto how and why of the fraudulent activities may occur in par-ticular context. So, by understanding motives to commit fraud,the policymakers can profile and segment the fraud perpetratorsso as to proactively manage the controllable variables to inhibitfraudulent behaviors. This will also help Governments establish

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proactive contingency plans to prevent and handle fraudulent be-haviors. Similarly, the current study will potentially help designlearning programs and educational programs for the public to ef-fectively sensitize employees fraudulent behaviors.

5 CONCLUSION:

The motivation for this study was the gap in research on asset mis-appropriation as well as the insufficient study on fraud detectionamong the Banking sector in India. Though there were similarstudies in the past which were carried out to examine other com-binations in various organizations. Due to cultural, religion andregional differences, the findings from previous studies may not beapplicable to Indian environment. In addition, the issue of assessingand evaluation the fraud indicators involve the benefit of a coun-trys economy directly. Moreover, previous research indicates thatmost of the countries including India are faced with a sharp increasein the number of fraud cases. The current research highlights thefraud exposures which occurred in the Banking sector. As of now,this study is focused on assets misappropriation which is at the topof the list of the most common types of fraud. The finding of thisstudy is consistent with the study carried out by Idolor (2010) andthe reports of the ACFE (2012).

Asset misappropriation is an important issue of discussion par-ticularly, in the present economic scenario. Misappropriation ofassets involves the use of deceptive tactics to gain an undue advan-tage. It is an act by an individual or group of individuals withinthe management, employees or the parties (SASNO.99, 2002). Priorresearch pertaining to fraud detection and prevention shall be em-phasized in addressing the red flags. For example, Dinapoli (2008)used the red flags method to evaluate the probability of fraud occur-rence. Many parties were affected badly and suffered huge losses.

Since the fraud mechanism is more prevalent in the Bankingsector, the Banking per se has become more susceptible and ex-pensive as the Banking activities command complete complianceof the standards and best practices for internal control strategies.Central Bank India (CBI, 2014) brings out certain measures forthe Banks to address specific risk associated with (i) the conduct

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of money services business activities which relates to money laun-dering, terrorist financing, and other illegal purposes; and (ii) thefailure of Banks to comply with legal and regulatory requirementapplicable to the licensee, (iii) mismanagement and fraud result-ing in losses of monies held in trust for customers; and (iv) lossof key information of business records maintained being tempereddue to unauthorized alteration and manipulation. According toCBI report in 2014, Indian Government believes that these kindsof mechanisms can reduce the likelihood of the occurrence of fraudand could improve Bank performance.

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