However, on the flip side, fraud-related incidents have become quite common in the past few years. These issues are leading to financial and reputational loss, along with the possible erosion of trust among customers and stakeholders.
Recently, several start-ups have been plagued by corporate governance concerns. They have faced scrutiny for alleged financial and accounting irregularities, urging better governance practices.
Such instances demonstrate that while experiencing rapid growth, companies often prioritise business objectives over compliance to fulfil their commitments. Hence, stringent corporate governance practices are needed as a fundamental aspect while building a company. A robust governance framework encompasses every aspect of how decisions are made and executed within a company, ensuring adequate checks and controls are in place.
Varied approaches to corporate governance for different stages of start-ups
The spectrum of companies within India’s start-up ecosystem is large, varied, unique and complex. There is no one-size-fits-all approach, and each stage requires diverse corporate governance practices.
For instance, for growth-stage start-ups (that have moved beyond the initial phase and are now focused on expanding their market presence, scaling operations and increasing revenue), key parameters include establishing robust governance structures with a functioning board, comprehensive internal and external audits, risk and fraud management, ethical practices, organisational development and compliance with business regulations.
However, for mature start-ups (with a stable market position, consistent revenue streams, optimised operations and long-term sustainable plans), in addition to the requirements for growth-stage start-ups, it is crucial to have regulatory compliance, succession planning, compensation management, fraud risk management, crisis management, stakeholder relationship committees and disclosure management.
Start-ups can mitigate most of their risks by addressing the following factors:
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- Related party transactions, including those with connected parties that may not technically fall under the definition of related parties but do not occur at arm’s length
- Third-party risk management, including risk coverage from vendor onboarding and incorporation of relevant ethics and compliance-related terms in vendor contracts
- Adequate background checks on employees, including verification of qualifications, criminal records and experience, with additional checks for senior employees
- Robust IT controls and frequent security assessments to prevent cyber fraud, especially for companies with IP-based business models
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Using technology to proactively identify fraud risks
Private Equity (PE) and Venture Capital (VC) funds have a large portfolio of investments, making it challenging to track their investments (for start-ups) closely. PE/VCs mostly rely on the limited data/information shared with them through periodic Management Information Systems (MIS).
Typically, traditional interventions may not detect subtle patterns or skewness in financial data. Standard approaches may miss early warning signs embedded in complex or hidden patterns within financial reports, news or market behaviour. Additionally, publicly available data, such as company filings, press releases and market movements, are often underused due to the lack of integrated analysis tools.
Early warning solutions and tools can be helpful by providing real-time red flags for potential fraud, mismanagement or corporate wrongdoing.
These solutions use advanced analytics and ratios to scan and interpret financial statements, Key Performance Indicators (KPIs), market trends and/or other publicly available data (such as RoC filings, industry databases, media, market intelligence and press releases) and identify anomalies, inconsistencies or patterns associated with high-risk behaviour. They also use ratio analysis techniques to detect financial issues/areas of stress; forensic accounting principles to identify suspicious accounting practices (e.g., bogus revenue recognition); ML models to detect anomalies based on historical data patterns; and Natural Language Processing (NLP) to interpret and analyse unstructured data from news articles or social media.
The rapid expansion of India’s start-up ecosystem presents both opportunities and challenges. To navigate this dynamic landscape, it is essential to implement rigorous corporate governance practices that evolve with the needs of start-ups at different stages to mitigate risks, enhance investor confidence and uphold their reputations. Using technology-driven proactive solutions will not only prevent potential financial irregularities but also pave the way for a resilient and trustworthy business environment, ensuring long-term success and stability for India’s start-ups.
—The authors, Rohit Madan and Saurabh Khosla are Partners at Deloitte India. The article also includes inputs from Agnibrat Arya, Deputy Manager, and Drishti Bagla, Assistant Manager, at Deloitte India. The views expressed are personal.
