IBM executive fraud puts focus on performance pressure

  IBM India  is said to have sacked 24 employees in early July for overstating revenues by $8 million during 2011-12. The company has not d...

 IBM India is said to have sacked 24 employees in early July for overstating revenues by $8 million during 2011-12. The company has not denied the media report that said that the overstatement was done by executives who were under pressure to achieve financial targets.

The incident has put the spotlight on how senior executives are increasingly under pressure to demonstrate growth in challenging times, pushing them sometimes to resort to unethical accounting practices.

Last year, lifestyle sports retailer Reebok sacked its managing director Subhinder Singh Prem and its COO Vishu Bhagat for their alleged involvement in a Rs 870 crore fraud involving fudging of accounts and creating fake invoices.

In IBM's case, it looks to have been an instance of dressing up financial statements to make it look good, and not an attempt at misappropriating funds. When TOI contacted IBM, the company's spokesperson declined to get into the specific issue, but said in a statement, "It's fundamental to IBM's culture and business model that we act with integrity wherever and whenever we do business, and the company has demonstrated that commitment to integrity over our long history. We have a robust compliance program that reaches into every country in which we do business. When we receive an allegation of wrongdoing, the company investigates it and takes appropriate action."

Rohit Mahajan, senior director, Deloitte India: Unfortunately in India, legislation related to fraudulent financial statements is not effective. How many convictions have we seen so far?
Dinesh Anand, head of forensic services, KPMG India: Companies often do not take adequate action against employees for indulging in frauds of small magnitude. They either terminate the employee or ask him to resign, without pursuing legal action or initiating recovery. Success in tackling fraud depends on a zero tolerance policy and an effort to communicate the fraud to employees so that it deters others from indulging in it.

"There is pressure to report favourable business performance and a desire to exceed targets, as a sizable chunk of salaries is linked to performance," said Rohit Mahajan, senior director in consulting firm Deloitte India. Top executives, he said, were so focused on going after growth that they tended to look at diversions from established policies as one-off instances. "Even if a red flag is raised, you tend to ignore it. But it's a ticking time bomb waiting to explode," he said.

Global technology companies are increasingly looking at emerging economies like India and China for growth, given the business saturation in the US and Europe. So senior leaders in these markets are expected to deliver. "Meeting financial targets is clearly top of mind for these executives," said Shriram Subramanian, MD of corporate governance research firm InGovern Research Services. "This has created a perverse incentive to engage in certain kinds of behaviour. The rigour of quarterly performance to meet the expectations of shareholders and shore up share prices also put tremendous pressure on the senior leadership," he said.

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