2019: A year for Indian startups to build an ethical culture to prevent fraud

[Written by Nikhil Bedi, Partner, Deloitte India]

2018 emerged to be a significant year for Indian start-ups with eight companies joining the ‘unicorn club’ (companies with a valuation of USD 1 Billion or more).

This has put India behind only the US and China in the number of unicorn start-ups that exist in the world. While this growth is a demonstration of sound business practices and a clear vision for marketplace development, it is also a critical moment for founders and business executives to take stock of the culture and practices within the organisation.

In our experience, we believe entrepreneurs need to look at founding ethical enterprises of the future and need to seed a culture of zero tolerance to fraud early on in the organisation’s evolution when companies enter the growth phase. Our recent India Corporate Fraud Perception Survey, where 58 % of respondents believed incidents of fraud would rise in the next two years, has highlighted diminishing ethical values as one of the top three reasons for fraud. This is despite the belief held by 87 % of survey respondents who said fostering an ethical mind-set amongst employees could prevent fraud. In fact, it is widely seen that aspects such as fraud risk management, regulatory (and other) compliance, and ethical conduct tend to take a backseat to the growth ambitions laid down by entrepreneurs as the business progresses along its growth trajectory.

Below are a few suggestions that entrepreneurs can consider for creating an ethical anti-fraud culture:

  1. Identify ethical dilemmas – Is the business pitch realistic? How much of the job description would the candidate actually end up doing in real life? Have you adequately disclosed business challenges to your investors? Entrepreneurs can face several such questions in their line of work and be tempted to mis-sell their promise. It is therefore important to identify several such areas and decide a course of action that is acceptable to all stakeholders without diluting the capabilities the organisation has.
  2. Find a way to communicate ethical/ anti-fraud practices – Even in larger organisations, the commitment to ethical practices is determined by how the senior management “walks the talk”. Entrepreneurs can demonstrate their commitment to ethical practices by ensuring that they allow for minimal (or no) overrides of key processes, encourage teams to consult with their peers/ bosses when faced with ethical dilemmas and periodically discuss how ethical behaviours will safe guard the future of the business. For instance, many founders tend to share emails with their teams about recent victories and milestones. In the same email, a line can be added to reinforce how these wins are a result of the ethical practices followed by the sales teams.
  1. Take a stand against conflicts of interest – In a small business, personal relationship (and self-interest) can dominate judgement on key decisions – be it handing over select areas of business to friends / relatives to manage or retaining certain areas with oneself, without objectively assessing if these candidates are indeed the right fit for the job at hand. In our experience, we have seen promoters defraud lenders and investors by systematically acting in their self-interest and putting the future of their companies in jeopardy.
  2. Seek external help to periodically relook at your business’ ethical quotient – Most entrepreneurs have coaches and mentors who guide them on making business decisions. They also provide counsel on aspects such as talent acquisition, funding prospects and identifying customer segments. These mentors can also provide guidance on ethical behaviours and refer entrepreneurs to experts who can help with putting together effective anti-fraud policies.
  3. Document ethical practices and create a policy – While start-ups are not mandated by law to have a code of conduct or ethics or anti-fraud policy, it is still recommended that they formally document best practices in this regard. Such documentation can be helpful in winning customers, getting funding and eventually prepare the organisation for future regulatory obligations.

The entrepreneurship ecosystem remains close knit despite the presence of global private equity and venture capital funds in India. While there is a market for serial entrepreneurs, there isn’t one for serial defrauders or those engaging in malpractice.

Entrepreneurs who set the ethical and anti-fraud benchmarks in their organisations are able to build an ethical enterprise with a strong foundation which augurs well for future growth and expansion.

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