Clipped from: https://www.thehindubusinessline.com/opinion/a-season-for-fraud/article71030195.ece
Economic shock and corporate fraud are linked
Audit lapses: Causing concern | Photo Credit: AndreyPopov
The war on Iran by US and Israel have induced market volatility and impacted economic growth. This impacts businesses, leading to decline in investors’ confidence — serving as a fertile ground for financial statement frauds.
A research based on Covid-19 induced economic stress by Arum et al (2023) has established a significant increase in the risk of financial statement frauds. Another study using firm-level data of Chinese listed companies by Shun et al (2025) has shown that reporting misconduct rises with market volatility.
Firms with high leverage are more likely to manipulate accounting information. Similarly, volatility in markets increases uncertainty and financing constraints that builds pressure on executives to indulge in fraudulent steps. Downsizing increases pressure on employees towards behaviour that shores up short-term performance.
Moreover, entities with weak corporate governance and lack of external oversight are susceptible to manipulation. When faced with bleak economic headwinds, they fail to meet earning expectations, service debt, and maintain valuations.
As a result, the temptation to manipulate accounts rises. Besides, in volatile markets, non-state owned entities are more prone to indulge in fraudulent reporting. Though the study on Chinese firms has shown that susceptibility increases if the external auditors hired by them are not prestigious ‘big four’, historically even they have failed to detect and report major frauds across the globe.
Audit failures
Among the ‘big four’, Ernst & Young (EY) had failed to report the hidden debts of billions of dollars in debt engineered through accounting jugglery to classify borrowings as sales through “Repo 105” resulting in one of the biggest bankruptcy in the world in 2008. Back home in India, PricewaterhouseCoopers (PwC) had failed to verify fictitious cash and bank balances, fake invoices, ghost employees to siphon off salaries, and whistle-blowers concerns in the case of Satyam Computers Services in 2009.
Some major reason for frauds in non-state owned entities can be attributed to the non-fulfilment of responsibilities by various auditors, insider trading and resource diversion. Back in 2005, Newman, Patterson and Smith, while examining the role of auditing in investor protection, had shown that markets with relatively greater penalties for audit failure, and greater insider penalties for detected resource diversion have higher total investment levels. In most of the matured economies and markets, legislations and policies seem to confer much of the responsibilities to auditors for accurate financial representations.
In India, financial regulatory paradigm is mainly managed by National Financial Regulatory Authority (NFRA), Reserve Bank of India (RBI), and Security Exchange Board of India (SEBI). Among them, NFRA is the most recently established (2018) independent regulator for the auditing profession. Since its inception, it has passed several important orders involving high profile auditing failures against big listed entities levying monetary penalties on auditors and debarment from practice. It has also taken several new initiatives in the last two years such as AI-powered Financial Reporting Compliance.
Similarly, RBI has also taken proactive steps like setting up early warning system frameworks in core banking systems, compulsory reporting by banks on frauds occurring in non-regulated group entities, improved audit quality of public sector banks. SEBI has launched its new SEBI (Stock Brokers) Regulations, 2026 to move from reactive supervision to proactive prevention, enhanced by AI.
The Supreme Court in a recent judgment in February 2026 has ruled that serious financial frauds destroy the well-being and quality of life. It is hoped that the regulatory framework for preventing financial and corporate frauds would remain vigilant to safeguard the financial and business ecosystem.
The writer is a public policy analyst and works with FCI. Views expressed are personal
Published on May 28, 2026
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