If it is a fraud to conceal fraud, consider this a sincere effort to shed some light. With 697 cases of fraud filed under the Companies Act and
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Satyam’s rise, fall & resurrection |
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The Great Fall of Satyam |
The crux of the scam in Satyam |
Five facts about Satyam
70 complaints logged in with Indian Penal Code, corporate India is under a cloud. The slowdown has only turned the canter to a trot, with more and more cases of fraud being reported as companies tighten their purse strings and resort to cutting costs.

The 26/11 terror strikes in South Mumbai, the Mecca of corporate India, coupled with the infamous Satyam saga at the beginning of this year were the other catalysts that have woken up India Inc. from its growth slumber and take notice of systemic faults. There are cracks in the wall and a whole new breed of forensic experts, detectives and lawyers are now out there to fill the gaps.

Move over Frank Abagnale Jr. (the infamous US impostor and the inspiration behind Catch Me If You Can), Nick Leeson and Charles Ponzi (father of the Ponzi scheme). Even Wall Street fund operator Bernie Madoff’s defrauding investors to the tune of $65 billion looks distant compared to the enemy within. The overstating of financial accounts by former Satyam chairman and promoter Ramalinga Raju has sent shockwaves across India Inc. and zapped the rest of the world.

He has admitted to overstating the IT firm’s cash reserves to the tune of $1.5 billion and the tech-savvy Raju family made full use of technology to conceal the fraud. In its turn, the Serious Fraud Investigating Office (SFIO) of the Ministry of Company Affairs (MCA) got the mandate to investigate the Satyam case on January 13 this year.

“It’s the most difficult case we have received till date and nearly 30-35 people worked on it daily for almost 24 hours for 90 days at a stretch before submitting the report to MCA on April 13,” admits SK Sharma, Jt. Director , SFIO. “It took time and resources to crack Satyam as the Rajus used technology to the hilt.”

Sharma doesn’t stop there. He points to a spike in promoter-related frauds corroborated by many others. “Promoters mostly put public or the bank’s money into projects and try to jack up its cost…they use the margin for personal gains,” he claims. Forensic experts couldn’t agree more.

“Windowdressing of accounts is where the big play happens because if the company’s share price can be jacked up, so will its valuations, and promoters and the top management benefit the most,” says Deepankar Sanwalka, Executive Director, Advisory Head-Forensic Services, KPMG, who now heads a team of 350 people having started out solo 14 years ago. In the value pie, Sanwalka claims that window-dressing of accounts contributes to as much as 50% of the total frauds committed in the country.

Downturns usually see a spike in frauds. Why? Because of three conditions that a downturn presents, explains criminologist Dr Donald Cressey. The perpetrators experience incentive or pressure to engage in misconduct; there is an opportunity to commit frauds; and perpetrators are often able to rationalise or justify their actions. For some, desperate times call for desperate measures.

“It’s during the low tide that you see the muck. When the tide is high, all irregularities are hidden,” says Neeta Potnis, Partner, Deloitte Haskins and Sells.

Take the case of the retail loan portfolio of an NBFC, which gave its customers liberal loans during the growth phase. There was zero scrutiny. Upon investigation by KPMG, it was found that the top management of the finance company showed an extremely low level of non-performing assets (NPAs) to shore up the share price. It’s not just teeming and lading, the fraudsters even changed the bucket of loans disbursed (say, a 60-day loan was shown as a 30-day give-away ). Of course, those involved were sacked but it sent tremors across the organisation from which it is finding hard to recover.

Cooking of financial books is a widely practised fraud due to loopholes in accounting methods. “Since individual judgement is used in the way transactions are recorded, there are accounting assumptions, which fraudsters tend to exploit, says Navita Srikant, Partner & National Leader Fraud Investigation & Dispute Services, Ernst & Young (E&Y ).

So the E&Y team came across companies where, in some instances, fictitious inventory, production and sales were shown to work the numbers. The companies concerned had even paid all statutory dues and incurred expenses that should never have occurred because the products were not even manufactured. In another case, a company booked inventory in the first year and a private equity fund invested in the company on the basis of the revival story being projected.

In the following year, the company started to default on its creditors. When the fund made inquiries, the CFO started showing inventory writeoffs . The fund went ahead and hired a forensic expert to do the investigation which revealed several other areas of concern. Today the stakes are much higher than ever before due to a globalised world.

“After Satyam, the world is looking at India very closely. Investors want to know what’s the problem ; is it a local problem, or an industrywide problem or a global problem. Today, people want to look behind the numbers,” observes Potnis. Even the MNCs want a closer look at the doings of their Indian arms. “Owing to the recession, more foreign companies are looking at what has been happening in some of their subsidiaries in India,” seconds Vineet Aneja, Partner, Head of Corporate Practice-FoxMandal Little.

Apart from the Big Four forensic experts and lawyers, detective agencies are getting to mint money too. “I’ve seen a 30% rise in cases over the last 12 months, mainly related to defaults and cheating,” says Sachit Kumar, CEO of Globe Detective Agency. Nowadays, he’s busy tracking down a hotshot client-servicing executive in an ad agency. “He defaulted on payments due to the ad agency to the tune of Rs 78 lakh,” exclaims Kumar.

While promoter and top management-driven frauds take the cake, procurement-related frauds and those concerning intellectual property and employees, are more widespread, though the spoils are much smaller. “The procurement-related frauds are on the rise and irrespective of the company’s size, there is a leakage of funds. The requests for vendor monitoring and due diligence have gone up in recent months and the companies are re-looking at contracts they’d entered during the boom when the vendor base was large and budgets were big,” claims Vidya Rajarao, Executive Director, Financial Advisory Services, PwC.

With supplier margins being squeezed in a downturn, they tend to cut corners. For instance , a month back, a large FMCG company approached a forensic consultant to look into a packaging issue wherein the strength of the packaging material was compromised , knocking off 15-17 % from the original contract. Of course, the supplier was hauled up and its services discontinued when the finding came to light.

Procurement-related frauds are increasingly coming to light in several avatars. Scrap is an interesting variant, which baffles companies on the course of action they should take with rejected goods. “There have been instances where the clearing and forwarding agent (CFA) and company officials have got together taking the old packaging stock and re-labelling or repackaging them or even selling them in bulk and pocketing the entire money. The company’s reputation is at stake since this consignment was to be destroyed as the expiry date had set in,” explains Sanwalka of KPMG, whose firm has cracked similar cases from FMCG, auto, pharma and industrial goods sectors.

In some cases, PwC is reviewing vendor due diligence and putting in place a ‘compliance code’ for vendors. In a recent assignment, the consultancy found that vendors double billed and then over-invoiced , and the company ended up paying for both. They are now quantifying the extent of overpayment. At competitor E&Y’s forensic lab, three vendor kickback investigations are currently underway.

In a recent case, an employee in the procurement department of a company had created a shell company and all the paperwork seemed meticulous with his thorough knowledge of the system, gained over 10 years in the organisation.

How could he get caught even after covering every possible loophole? An alternate emergency phone number which he had duly filled out in his employee details belonged to a close relative. When the forensic team at EY ran a test between the employee data and vendor database, his goose was cooked. On-the-ground investigation and business intelligence confirmed the suspicion as no such business ever existed at the given address.

Intellectual property fraud is the next big area since only IP differentiates the company from its competitor. Thefts in IP are commonplace and the incidence ranges from soft data theft of banks and telcos by unscrupulous collection agents to the high-end theft of patented molecules in pharmaceutical companies.

“What happens when a top scientist in a pharma company joins a competitor along with his team upon development of 80% of a molecule in that very company ,” asks Sanwalka. Recently, his team stumbled upon a similar case and has suggested foolproof contracts with more emphasis on non-disclosures . He firmly believes it to be an act of fraud on the scientist’s part as he went a step ahead, violating the code of conduct set up by his company.

Alongside, there’s a spurt in employee-related frauds. Inflated expenses and providing false educational and work experience information are most common. A leading Indian IT services firm had a situation wherein a recruitment agency was sending letters to prospective employees on company letterheads. “With rapid growth in technology, it’s easy to alter documents digitally. People are using internet tools to create such documents,” claims Rajarao of PwC.

“Misrepresentation of facts by candidates at the time of recruitment is the ugly face of India Inc., ” contends E&Y’s Srikant. Recently, a candidate applied for a position in E&Y . During a routine check in the firm’s databases, it was found that he had earlier applied for another role in EY about three years ago, where the CV submitted had different work experience.

Perhaps, the zeitgeist has encouraged such economic offences to flourish. Indian and multinational companies treat fraud differently . “While MNCs will take steps to fix a problem, Indian companies think of it as a cost of doing business. So their mentality is—why should I spend my time to investigate and detect? MNCs have regulatory issues in the US, etc and they also feel strongly about ethics and culture,” points out Rajarao.

That’s why “80% of the companies in India prefer to hush up the case” leading to a bigger problem. “Companies want to hush up the case as they don’t want to deal with authorities because there is no enforcement . In large cases, the person is asked to resign . When the company does the cost-benefit analysis, often it doesn’t make sense to pursue the case,” adds Shrikant. A few months back, the CFO of a leading group was fired as some anomalies were found in accounts.

Soon enough, he landed a job in another big firm where he committed the same fraud. When this CEO called the CEO of his earlier company, he asked why wasn’t the CFO taken to task. Even the CEO of the new company set him scot-free . Caveat emptor. The fraudster is out again, raring to repeat the same act in a company …. and that could be yours.

source: Economictimes

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