International Business Machines Corp. (IBM), sacked some two dozen employees in India earlier in July for overstating revenue by at least $8 million (around Rs.48 crore) from different customer accounts to meet financial targets.
The episode involved some senior officials in IBM India’s sales, operations and finance departments based in Bangalore, two people directly familiar with the development confirmed last week.
“The fraud was first officially discovered in February this year and, by 7 July, 24 officials were asked to go,” one of them said, requesting anonymity because he is not authorized to discuss internal matters publicly.
The fraud happened during 2011-2012 and involved staff working in IBM India’s software services division, he added.
“Internal investigations found that false orders were created and even revenue from existing customers was overstated,” said the second person.
An IBM India spokesperson said last week the company would not participate in the story. On Monday, an IBM spokesperson based in Armonk, US, redirected the query to the India office, which again declined to give any inputs for the story.
In a year when India’s $108 billion information technology (IT) industry is struggling to grow revenue and rival vendors are pushing aggressively to gain market share, instances of overstating earnings could increase, said a forensic official at an accounting firm based in India. He requested anonymity because his firm counts some of these software firms as customers.
Global accounting firm EY said the volatile economy of the past two years has aggravated the situation, resulting in a steep increase in the value and quantum of frauds in the IT-ITeS (IT-enabled services) sector. It cited examples of employee embezzlement, misappropriation of funds, and procurement fraud in its 2012 study titled “Ever increasing fraud risks in the IT and ITeS sector”.
Accounting firm KPMG International said in its India Fraud Survey 2012 report that the economic slowdown put pressure on individuals to perform as well as tempt them into committing fraud.
But frauds are also most likely to be discovered during economic downturns (even if perpetrated much earlier), as that is when managements increase their scrutiny to protect margins and profits, the KPMG survey said.
“The looming threat of recession, weakening rupee, and the decreasing outsourcing opportunities have brought Indian IT/ITeS firms under pressure, raising questions over their ability to deliver consistent results,” KPMG India said in its 2012 Fraud Survey, authored by forensic services partners Rohit Mahajan and Dinesh Anand.
Mahajan has since joined Deloitte Touche Tohmatsu India as a senior director.
“If you see the IT sector, some of the frauds that you talk about are the ones where the senior management put their weight on performance. Those are the instances (when accounts have been overstated) where the senior management has been involved,” Mahajan said.
This is the second instance this year of IBM India discovering a fraud involving its staff.
In February, IBM India fired three senior officials “for alleged malpractices that included forging customer purchase orders and diverting materials sourced for customer deals to the open market,” Computer Reseller News (CRN) magazine reported.
“The company has also scrapped its popular stock-and-sell programme, Easy Sell, which IBM partners said has been the main culprit behind the alleged malpractices,” CRN India said in its report dated 1 February.
Mint could not independently confirm either the sackings or the scrapping of the Easy Sell programme.
“Financial misreporting is more often than not a fraud that is being committed by the senior management because they have the capabilities to over-ride processes and controls. They control everything and know more than anyone else. Financial misreporting is something that is very difficult and especially because of the scale, it’s very difficult to happen on the lower end,” Mahajan added.
The most notable case of this is Satyam Computer Systems, whose promoter and chairman confessed in early 2009 to fudging revenue, over the years, to the tune of Rs.7,136 crore.
The case is winding its way through the Indian legal system, but the company has changed hands and is now owned by the Mahindra Group.
India-based software firms are seeing a rise in financial crimes reported internally, but not many companies publicly admit to these.
“Most corporate frauds happen in the areas of overstatement of revenues and understatement of costs to shore up their results, play the stock markets and get higher valuations,” said Prabal Basu Roy, chief executive at Diptish
Investments and Fund Advisors Inc. Roy was formerly the group chief financial officer at Polaris Software.
Senior finance executives in the Indian IT sector said companies need to deal with employee frauds more harshly without attempting to bury them for avoiding perception of damage.
“Companies are choosing to settle employee frauds by asking them to quit without any public firing. Many of these professionals easily find jobs in the sector and escape harsh punishments,” said the chief financial officer at a Bangalore-based technology firm, requesting anonymity.
In February 2010, an employee at Wipro Ltd, then India’s third-largest software firm, embezzled $4 million by stealing the password of his supervisor. Wipro discovered the fraud only after one of the company’s banks alerted it about a lack of funds in an account.