The eFishery fraud: an Indonesian unicorn entangled in financial reporting fraud

Recently, the Indonesian startup world was shocked by allegations of financial reporting fraud involving eFishery, a unicorn startup in the aquaculture sector. Reports indicate that the company allegedly manipulated 75% of its total sales figures. This scandal raises serious concerns about corporate governance and financial integrity in the rapidly growing technology sector.

Before the eFishery case, there were previous instances of fraud involving other startups, such as TaniFund and Investree, which should serve as lessons for investors and startups to develop mitigation strategies to prevent similar cases from occurring in the future.

The eFishery case is a major blow due to the enormous financial losses involved. This situation not only results in financial harm to investors but also erodes public trust, threatens Indonesia’s appeal as a technology investment destination, and raises serious questions about the integrity of the startup ecosystem as a whole.

Financial reporting fraud and whistleblowers

eFishery, which reached a valuation of USD 1.4 billion after successfully raising USD 200 million in a Series D funding round in 2023, is accused of inflating 75% of its sales figures to attract investors. The inflated sales figures reached nearly USD 600 million. Interestingly, routine audits conducted by leading accounting firms such as PwC and Grant Thornton failed to detect this alleged fraud. Instead, a whistleblower report triggered the revelation of this scandal, as reported by The Strait Times.

The question arises: how could a startup that has achieved unicorn status and attracted significant investments from prominent investors become involved in large-scale financial reporting fraud that went unnoticed by renowned auditors? Initial investigations suggest that financial statement manipulation has allegedly been carried out by management since 2018 to attract investors and secure larger funding.

Other financial reporting fraud cases

Financial reporting fraud has occurred in various companies worldwide. One of the most famous cases is the Enron scandal in the early 2000s. Enron, once one of the largest energy companies in the United States, was involved in fraudulent practices to hide losses and inflate its stock price. This case also involved the prominent auditor at the time, Arthur Andersen, which was later found guilty.

Another case is the Wirecard scandal in Germany, where this payment gateway startup was found to have inflated its financial statements by €1.9 billion. Like Enron, this scandal was also uncovered thanks to a whistleblower report. In this case, Ernst & Young (EY) was the auditor responsible for Wirecard’s financial statements, but they failed to detect the fraud that occurred.

Loopholes highlighting the importance of whistleblowers

From the financial reporting fraud cases discussed, it can be concluded that there are several potential gaps that investors and startups must be wary of, making the role of whistleblowers extremely important. Some of these loopholes include:

• Auditor failure

In the Wirecard case, EY was found guilty of negligence in detecting financial statement manipulation. This shows that auditors, despite having a good reputation, can still fail to identify fraud. Whistleblowers can provide information that auditors may overlook, helping to expose unethical practices.

• Complex financial structure. 

In the Enron case, companies often used complex financial structures. For example, they frequently reported revenue from contracts that had not yet generated cash, making their revenue figures appear higher than they actually were. Whistleblowers with a deep understanding of a company’s internal operations can provide valuable insights into suspicious practices.

• Conflicts of interest.

In some cases, company executives may engage in fraud to enhance personal profits. Whistleblowers can help uncover conflicts of interest that may not be visible to outsiders.

• Collusion. 

Management may collude with auditors to issue favorable audit reports, as seen in the Enron case. Another possibility is that those responsible for acquisitions may collude with individuals responsible for recording transactions. Whistleblowers act as internal monitors who can expose such collusive practices.

Robust whistleblowing systems

It is crucial for organizations in general to support and pay more attention to whistleblowers. Here are some steps organizations can take to implement a robust whistleblowing program:

• Secure reporting channels.

Organizations must provide secure channels and maintain the confidentiality of whistleblowers’ identities. These channels can take the form of hotlines, applications, or secure online platforms.

Through the Canary Whistleblowing System, Integrity Indonesia offers a combination of several reporting channels centralized on a website application, thereby enhancing accessibility to reports while ensuring the confidentiality of whistleblowers.

• Protection for whistleblowers.

It is essential to ensure that whistleblowers will not face retaliation or discrimination after reporting wrongdoing. Organizations should implement clear policies to protect them.

• Training and awareness.

Companies should conduct training programs to raise awareness about the importance of whistleblowing and how to do it. Employees need to understand that reporting fraud is part of their responsibility.

• Transparent follow-Up.

After a report is received, companies must ensure that there is transparent and accountable follow-up. Whistleblowers should be informed about the results of the investigation and the steps taken to address the issue. When whistleblowers see that their reports are taken seriously and transparently followed up, they will feel valued and heard. This also demonstrates to other employees that the company is committed to addressing ethical issues and fraud.

The eFishery case and other cases of financial reporting fraud show that protecting and valuing the role of whistleblowers is a crucial step in detecting fraud as early as possible. The earlier fraud is detected, the greater the potential losses that can be prevented.

Image freepik