Business Ethics & Corporate Governance

Contents
What is s corruption? .............................................................................................................................. 2 Social impact of corruption ..................................................................................................................... 2 Measures to reduce corruption .............................................................................................................. 3 Fraud ....................................................................................................................................................... 5 Characteristics of Fraudster .................................................................................................................... 5 Computer Frauds Characteristic .......................................................................................................... 6 Role of computerization & IT in detecting frauds, scams ....................................................................... 7 Zero tolerance of corruption .................................................................................................................. 9 Computer crimes & Measures taken to prevent computer crimes ........................................................ 9 Monopolistic trade practices ................................................................................................................ 11 Unfair trade practices ........................................................................................................................... 12 Restrictive trade practices .................................................................................................................... 13 Differences between unfair trade practices, restrictive trade practices & monopolistic trade practices .............................................................................................................................................................. 13 MRTP Act (Monopolistic and restrictive trade practices act) MRTP Act (Monopolistic and restrictive trade practices act) ............................................................................................................................... 14 MRTP Commission ................................................................................................................................ 15 Competition act .................................................................................................................................... 17

Business Ethics & Corporate Governance

What is s corruption?
Corruption is Misuse of power Misuse of public office or authority For private profit.

Corruption involves Improper & unlawful behavior of public-service officials, both politicians & civil servants

Corruption can be on account of personal greed, to support family or friends, to hurt seniors as a revenge, or a simple thinking of everyone does it

Corruption slowly & steadily destroys the integrity of society World bank defines corruption as the misuse of public office for private gain It involves the improper & unlawful behavior of public-service officials, both politicians & civil servants, whose positions create opportunities for the diversion of money & assets from govt. to themselves & their accomplices. Common excuses for indulging in corruption are Corruption is everywhere Corruption always existed Cleansing will required whole change in attitudes & values Nothing can be done of the top is corrupt

Social impact of corruption

Distorts resource allocation & govt. performance. Causes much hurt to minorities, and the poor, increasing poverty, poor can not afford bribes.

Business Ethics & Corporate Governance Reliefs are diverted, causes people to lose trust in each other, in the workplace, in govt. politics Democracy leads to anger frustration, conflict Corruption damages security system in the society, no one feels safe, Leads to crime, people live in fear & citizen concerns as to unsafe food, drugs, workplace, terrorism

In the developing countries, the basic rights such as rights to education, rights to healthcare, right to clean water can not be realized because of the corruption that results in diversion of development funds in to private pockets. Such situations leads to inequality, injustice & unfairness in the society.

Corruption also leads to violation of civil & political rights by causing discrimination in favour of the powerful & against the poor. Freedom of expression is threatened when corruption causes harassment of its critics. In emerging democracies, vote buying through corrupt deals prior to elections is another serious problem & hampers peoples right to vote Corruption includes the use of public resources for conspicuous consumption by public houses, Such consumption has implications for the progressive realization of economic, social & cultural rights since such funds are diverted from meeting population needs.

Causes of corruption Administrative delays Too many regulations Scope of personal discretion Cumbersome procedures Scarcity of goods & services Lack of transparency

Measures to reduce corruption

Santhanam committee , while outlining the preventive measures to reduce corruption, had identified four major cause of corruption: Administrative delays

Business Ethics & Corporate Governance Govt. taking upon themselves more than what they can manage by way of regulatory functions.

Scope of personal discretion in the exercise of powers vested in different categories of govt. servants Cumbersome procedures of dealing with various matters which are of importance of citizens in their day to day affairs.

The Chief Vigilance Officers (CVO) is expected to take following measures on as a prevention of corruption. Review the existing policies & practices & modify as required To reduce/remove the scope of corruption To find the cause of procedural delays To identify the delay points & device suitable steps to minimize delays at different stages

Review the regulatory functions with a view to see whether all of them are strictly necessary as compared to the work involved Discharging their functions effectively & are there any areas of improvements

Device adequate methods of control over exercise of discretion so as to ensure that discretionary powers are not misused but are transparent & fair enough Educate citizens about the procedures of dealing with various matters & also to simplify the cumbersome procedures as far as possible. Identify areas in his (CVOs ) scope which are prone to corruption & ensure officers of proven integrity are employed in those corruption prone roles/areas Prepare list of officers of doubtful integrity , i.e. the officers who have found to be lacking integrity such as An officer convicted to corruption but not dismissed, compulsorily retired by court An officer who has be given a major penalty on some accusation An officer who was prosecuted but acquitted on technical grounds

Prepare the agreed list in consultation with the CBI this list will include the officers against whose honesty & integrity there are complaints, doubts etc Ensure that the officers appearing on the list are not posted in the sensitive, corruption prone areas Ensure periodical rotation of staff.

Business Ethics & Corporate Governance Ensure the availability of documentation in terms of important policies, procedures so that the department is not person dependent & is system dependent.

Fraud
As per Indian Contract Act, the fraud means & includes any of the following acts committed by a party to a contract, or by his agent, with an intent to deceive another party or by his/her agent or to induce the other party to enter in to the contract: The suggestion, as a fact, which is not true The active concealment of a fact by one having knowledge or belief of the fact A promise made without any intention of performing it Any other act fitted to deceive Any such act to omission as the law specifically declare to be fraudulent

Characteristics of Fraudster
Male: 3/4th of all frauds are committed by men Intelligent: They are intelligent. Many times, they commit fraud for the challenge because they are bored with their job. Inquisitive & risk taker : They are risk takers. They are not afraid to fail. Short cut approach: They want to take short cuts, & they justify Want to be different: They do not want to follow the set rules, want to define their own ways Hard workers: They would arrive early for work & leave late. They would put more time in office, however, this time they put in their fraudulent activities. Under stress: They look constantly under stress. They would have a stressful event that may cause them to commit the fraud. Greedy & financial need: Many of the fraudsters are married people. Married employees commit greatest number of frauds. Big spender: Many are members of senior management. Senior team is more likely to commit fraud than non-managerial employees. Desire of personal gain Pressure to perform: One fraud leads to another Close relationships with vendors/suppliers

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Computer Frauds Characteristic

Computer frauds are easy to commit with a few technical skills, the computer frauds are difficult to detect & many a times harder to prove. Most important type of computer fraud is committing the fraud by manipulation of input, output or throughput of the computer system Input manipulation Input data such as deposit amounts in ledgers, limits in accounts can be altered

Output manipulation Achieved by affecting the output of the system, such as use of stolen or falsified cards in ATMs machines Misuse of access cards

Throughput manipulation Rounding off sums credited to different accounts Systems are not very foolproof & fraudulent transfers can occur in even highly automated & secure funds transfer systems

Computer frauds are generally for economic benefit to the fraudster & corresponding loss to the organization. They are also made with an intention of terrorism, organized crimes or by groups hating the organization. Following are the examples of fraud committed with the help of computers Altering computer input in an unauthorized way, this requires little technical expertise & is not an uncommon from of theft by employees altering the data before entry or entering false data, or by entering unauthorized instructions or using unauthorized process Altering, destroying, stealing the output to conceal unauthorized transactions, usually difficult to detect Altering or deleting stored data Altering, misusing existing system tools or soft wares, altering or writing codes for fraudulent purposes. This requires programming skills Manipulating banking systems to make unauthorized identity theft with reference ATM fraud Offensive content: The contents of the websites may be intentionally/unintentionally harmful or offensive for variety of reasons

Business Ethics & Corporate Governance Harassment: This includes offensive comments at specific individuals focusing for example on gender, race, religion, nationality. Drug trafficking: Drug traffickers use encrypted e-mail & other internet technology to sell their illegal substances. Cyber crime has been on a increasing trend. The crime has matured very fast it ranges from drug trafficking to extortion, money laundering etc. it has become possible for people with low technical skills to steal thousands of pounds without leaving their homes. The only time the criminal need to leave his PC is to collect his/her cash.

Role of computerization & IT in detecting frauds, scams

Computerization has advantages of speed, accuracy, massive data handling & storing. Due to the convenience that it provides we are becoming more & more dependent on the computers. The wide use of computers has also created ample opportunities for its misuse particularly for financial gains. Huge & complex network makes it easy to commit crimes from geographically far places. There have been various instances worldwide where the computer frauds have caused huge losses of sums. In India, there is a high risk of computer frauds as the security is not given high attention yet.

Computer frauds vary from complex financial frauds where large sums are illegally transferred between accounts to copying & stealing the important data from a standalone computer. (stealing data from a laptop is same as stealing papers from a briefcase)

As a control measure, the information system controls in financial organizations are established on two principles, namely Principle of least privilege Principle of maker & checker

Principle of least privilege : means every individual is given access to the sensitive information strictly on the need to know basis & is given only those rights to access data & programs which are in line with his job duties & nothing more.

Business Ethics & Corporate Governance Giving lesser rights than required may decrease the efficiency of working but would assure the security of the data. Giving more rights than required can lead to increase in associated risks of misuse or possible frauds

As a part of data security, following folder structure is followed in most organizations Restricted folder: accessible to very specific user Confidential folder : accessible to a small group of users Internal accessible to a big group of users Public folder : accessible to everyone in the organization

Principle of maker & checker: means that every transaction is processed by two individuals in order for its accuracy. One individual creates a transaction, other individual authorizes/reviews/confirms the transaction Segregation of duties is one of the important control that is put in maker & checker situations for example Person who receives the goods in stores can not approve payments Person who books the AP voucher can not have access to vendor master data such as access to bank details

Segregation of duties ensures a strict control over system, keeping in mind the division of the labor between all classes of employees. There is an increasing focus on controls over the outsourced processes, whole intention of such controls over the vendors is to ensure that vendors have no or limited access to companys data, hardware, software & its use. Strict controls are ensured while the vendors access the data or while they take the data out of any device for maintenance purposes. The data security is important as it can be misused e.g. taking the data to competitors, clients etc

Many a times, the access is allowed to users to download or upload the data using Wide Area Network or internet. Similarly access is allowed to outsiders (other than customers) through internet & this access may be either for information on products or direct access to services through computers as per business policies of the organization This open access of information system of organizations may be open for use by almost everybody from lower level workers to database managers, top customers, general public etc.

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Normally user rights for each category will have to be properly defined & appropriately incorporated in the software systems (operating systems, database management systems & application software) to prevent their misuse.

Zero tolerance of corruption

Zero tolerance of corruption means no case of corruption will be tolerated & the corrupt would be punished. In a zero tolerance, the bribe giver & bribe taker are both guilty. Following measures can help in achieving zero tolerance. Development of corruption perception index of all government departments, public sector firms & banks Annual property returns by MPs (Members of Parliaments) & ministers Mobilizing the youth to fight corruption Central vigilance commission bill made part of law Trap & speedy disciplinary action through departmental action Encouragement of whistle blowing & pass the Whistle Blower Act Freedom of Information Act for empowering the public E-governance & use of IT to keep check on the corruption Remove obsolete laws Remove laws & systems that promote corruption Enact Corrupt Public Servants Act (Forfeiture of Property) Implement the Benjamin Transactions Act (1988)

Computer crimes & Measures taken to prevent computer crimes

Computer crime is any crime that involves computer (stand alone) or a computer & a network (WAN). Following are a few types of computer crimes: Phishing scams: Any computer will have certain data which is either protected well through encryption or it could be unprotected. If any such data can be obtained & decrypted, it can be a great value to criminal investigations Spam: Bulk emails sent for commercial purposes

Business Ethics & Corporate Governance Fraud : dishonest misinterpretation of facts indented to let another to do or refrain from doing something which causes loss. Fraud can be committed by altering computer data at input, throughput & output levels. Besides there are variety of internet scams involving offensive contents, harassment in terms of gender, religion, drug tr

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Measure to prevent computer crimes can be grouped in to three areas Measure to prevent computer crimes can be grouped in to three areas A. Implementing the Information security systems B. Taking preventive measures C. Various acts/laws introduced to ensure computer crimes

A. Information Security systems : Maintaining security systems require several steps: a. Identify what requires protection: This can include data, softwares, portable media, hardware etc. b. Assign value to what requires protection: Assigning value helps in understanding the criticality of the information. Which in turn would reveal how much time, effort & money should be put in on security. c. Identify threats associated with the critical assets: the threats would vary from business to business & person to person Threats associated to a home PC would be much lower when compared with an organisations PC where there are multiple users, multiple servers, multiple applications Computers located in different areas of a company may have different risks associated with them. A network server in Japan will have high computer risks from earthquakes, but this will be a low priority in India. Identify the risk exposure of critical assets: typically, PCs exposed to internet will have high risk exposure than standalone PCs. Similarly, exposure of systems to a variety of users would be a higher risks Determine & implement measure to be taken to deal with the variety of risks. For example, routine upgrades & regularity in maintaining the security. This includes anti-virus files, upgrading security software, performing routine back-up etc Check from time to time to see what changes have happened in the systems & whether the current security measures needs changing to fight against increased levels of threats & what new measures have to be taken to deal with possible problems. B. Preventive measures

Business Ethics & Corporate Governance i. Preventing disclosure of any personal information over the phone ii. Avoidance of sending of photographs online to avoid misuse iii. Using latest & up to date anti-virus softwares iv. Keeping adequate backups to avoid any sufferings from an inadvertent/errornous data loss or loss from the virus attacks v. Avoidance of sending of credit/ATM card details through sites which are unsecured vi. Keeping a watch on sites that the kids access to avoid an y harassment or misuse

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vii. Website owners to watch traffic to check for any irregularity of user visits or too many visits to the website. Too many visit could at times mean denial of service attack viii. Use of firewalls ix. Public service companies should separate the public network from the internal corporate network, the best practice is to separate the the two servers. C. Various acts/laws/systems evolved to ensure computer crimes Cyber Law: intended to reduce the internet related crimes IT Act 2000: Intended to continuously change the outdated laws & provide ways to deal with cyber crimes ISO 27001, Information Security system Provides standards on how the information security of any organisations information can be set up, managed & impoved

Monopolistic trade practices

A trade practice which has the effect of Maintaining the prices of good/services at an unreasonable level by Limiting, reducing or controlling the production, supply or distribution

Preventing, lessening competition in the production, supply or distribution through unfair methods

Business Ethics & Corporate Governance Limiting technical advancement or capital investment in a country Allowing the quality of any goods/service produced to deteriorate Increasing unreasonably The cost of production Charges for the provision, maintenance of services The sale/resale prices The profits derived from the production

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Unfair trade practices

A trade practice which in order to promote the sale, use or supply of any goods adopts any unfair methods such as False representation that Goods or services are of a particular standard, quality, quantity, grade The goods or services have sponsorship, approval ,characteristics, accessories Goods are covered by a warrantee, promise to replace, maintain or repair

False bargain price Popularizing (through media) that goods would be offered at bargain price without any intention of offering the bargain

Free gifts/prize schemes Offer gifts, prizes where there is no intention to provide them Creating an impression that something is being offered free of charges, however covering the discounts through the price charged

Substandard quality of goods Supplying goods that do not conform to basic standards of performance, design, finishing, packaging necessary to prevent or reduce the risk of injury to a person using the goods

Hoarding, Destruction, refusal Hoarding or destruction of goods, or refusing to sell them, or provide any services with an intention to raise the cost of those or other similar goods or services is an unfair trade practice

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Restrictive trade practices

Restrictive trade practices is one which tends To restrict or prevent the competition To obstruct the flow of resources like capital in to the production process To manipulate the prices or affect flow of goods & services in to the market Any contract/agreement falling in to any of the following categories fall under the restrictive trade practice category as per Director General MRTP which restricts persons to whom goods are sold, or from whom goods are bought Which restricts a purchaser from dealing in any goods other than purchase some other goods Which requires a purchaser of goods, as a condition of purchase to purchase some other goods Which stipulates purchase of sell of goods only at prices or on terms & condition agreed to by the contracting parties Which allows concessions or benefits in connection with dealings Which provides for restricting supply of any goods, or allocates any area/markets for disposal of goods Which does not permit employment of any method, machinery or process in the manufacture of such goods Which requires any person to be excluded from any association of the trade

Differences between unfair trade practices, restrictive trade practices & monopolistic trade practices

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MRTP Act (Monopolistic and restrictive trade practices act) MRTP Act (Monopolistic and restrictive trade practices act)
Monopolistic & restrictive trade practices were regulated by MRTP act, 1969. Scope/applicability of the MRTP act All firms engaged in manufacturing, supply & distribution in the private sector. Public sector firms owned by the government Govt undertakings Statutory corporations

Business Ethics & Corporate Governance Co-operative societies Financial institutions, banks

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Objectives of the Act Enacted to ensure that the concentration of economic power does not fall in to a few hands. In other words, monopolies would have to be controlled & restricted trade practices would have to be prohibited

MRTP commission has been constituted under section 5 (1) of the MRTP act 1969. The commission is empowered to enquire in to monopolistic or restrictive trade practices based on a reference from the central govt or its own knowledge or information.

MRTP commission receives complaints from registered consumer & trade association & also from individuals. Complaints are required to be referred to the director general of investigation & registration for conducting preliminary investigation. Enquiries are instituted by the commission after the director general of investigation completes the preliminary investigation & submits an application to the commission for an enquiry Principles of the act are social justice with economic growth, welfare, regulating the concentration of economic power to the common people, controlling monopolistic, unfair & restrictive practices Monopolistic trade enquiries 5 enquiries were pending as on end of 1996

Restrictive trade practices 990 enquiries are pending at the end of 1996

Unfair trade practices 881 enquiries are pending at the end of 1996

MRTP Commission
Commission is constituted by govt of India as follows:

Business Ethics & Corporate Governance One chairman a person qualified to be a judge of supreme court or a high court

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Two to eight other members persons of ability, integrity & standing, who had adequate knowledge, experience & capacity to deal with problems relating to economics, law, commerce, accountancy, public affairs & administration

The authority of the commission includes the power To direct a firm to discontinue a trade practice To pass a cease order To grant temporary discontinuation To award compensation To direct parties to agreements to modify the same To direct parties to issue corrective advertisement To recommend central govt on the division of undertaking if required To recommend central govt about the inter-connection between undertakings

The commission is empowered to inquire in to Any restrictive trade practice On receiving a complaint from any trade association, consumers Upon a reference from the central govt, or the state govt Upon an application by the director General Upon its own knowledge & information

Any monopolistic trade practice Upon a reference made to it by the central govt Upon an application made to it by the Director General Upon its own knowledge & information

The MRTP commission, during any inquiry, was satisfied about an undertaking carrying out any monopolistic, restrictive, unfair trade practice, the commission may grant a temporary injuction restraining such practice until the conclusion of the inquiry.

Business Ethics & Corporate Governance If such practice has caused any damage to any govt, trader, consumer, the commission, on application from the aggrieved party can award an appropriate compensation. The central govt, on the report of the inquiry by the commission could Regulate the production, storage, supply, distribution of goods Prohibit any act, policy which prevented or lessened the competition Fix standards for the goods used by a firm Declare unlawful a specified agreement Regulate the profits & the quality fo any good/service

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Competition act
To overcome the limitations of the MRTP act, govt of India passed a new act called Competition Act 2002 Brief explanation: The act states that The Indian traders must not do any activity which would promote monopoly If any of the activity traders found to be promoting monopoly in production, distribution & pricing, then such activity would be treated against the competition act & the activity would be void

Following restricted practices are identified & stopped under the act Price fixing 2 or more suppliers fixing the same price

Bid ragging 2 or more suppliers exchange sensitive information of bid

Re-sale price fixation A producer sell goods to the distributors on the condition that the distributor would not sell at any other price which is not fixed by the producer

Exclusive dealing If the distributor purchases the goods on the condition that supplier will not supply the goods to any other distributor

Competition Commission constituted by govt of India includes

Business Ethics & Corporate Governance A Chairman Judge of high court with a minimum of 15 years of experience in international trade, commerce, economics, law & finance.

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Other members to work with the chairman

Functions of Competition commission To stop activity & practices which promotes monopoly To promote competition To protect the interests of the consumers