Corporate frauds

Corporate frauds have emerged as the biggest risks which companies are exposed to, and are increasingly becoming a big threat. Incidents of frauds are increasingly at an alarming rate and in the process: 

  • Destroy the confidence of investors in stock markets
  • Results in enormous destruction in wealth of investors
  • Damage the reputation of the affected company, its management and board of directors
  • Erode ability of affected company to borrow and thus creating financial stress.

In case of frauds involving large amounts causing going concern issues (raising doubts in the ability of the company to continue its operation in the near- future)-e.g. Enron, Lehman brothers

Regulations are being regularly tightened to ensure monitoring, vigilance and disclosure mechanisms including whistle blowers’ complaints. It is a universal truth that fraudsters are always a step ahead of regulators.

A corporate fraud occurs when a company or an entity deliberately changes and conceals sensitive information which then apparently makes it look healthier. Companies adopt various modus-operandi to commit such corporate frauds, which may include miss-information in the prospectus, manipulation of accounting records, debt hiding etc. The aspect of falsification of financial information includes false accounting entries, false trades for inflation of profits, disclosure of price sensitive information which comes under the ambit of insider trading and showing false transactions which result in attracting more investors and lenders for funding.

There can be several reasons cited for which companies commit such frauds like making more falsified money, creating a false image of the company for the market scenario and misguiding Governmental authorities for tax evasion. In India, the Commission on ‘Prevention of Corruption’, in its report, observed, “The advancement of technological and scientific development is contributing to the emergence of mass society with a large rank in file and a small controlling elite, encouraging the growth of monopolies, the rise of a managerial class and intricate institutional mechanisms. There is a necessity for a strict adherence to high standards of ethical behavior for even the honest functioning of the new social, political and economic processes. The report of the Vivian Bose Commission inquiring into the affairs of the Dalmia Jain group of companies in 1963, highlighted as to how the big industries indulge in frauds, falsification of accounts and record tampering for personal gains and tax evasion etc.

The first successful trial of a financial scandal in independent India was the Mundhra Scam, in which Hon’ble Justice M.C. Chagla made certain critical observations about the big business magnate Mundhra who wanted to build an industrial empire entirely out of dubious means.

Types of Fraud:-

There are many types of corporate fraud, including the following common frauds:

1. Theft of cash, physical assets or confidential information

2. Misuse of accounts

3. Procurement fraud

4. Payroll fraud

5. Financial accounting mis-statements

6. Inappropriate journal vouchers

7. Suspense accounting fraud

8. Fraudulent expense claims

9. False employment credentials

10. Bribery and corruption.

CASE LAWS

DHFL

DHFL was the first ever fraud in a housing finance company, which happened mainly due to active involvement of promoters in syphoning of funds and alleged money laundering.

How fraud was committed: 

  • Granting of loans to related parties of promoters
  • Loans granted to parties, who were not credit worthy or were unknown having same addresses in obscure locations
  • Evergreening of bad loans
  • Creation of around 6 lacs dummy accounts at one branch, using name of borrowers who had already repaid loans. These accounts were used to grant loans which were used to siphon funds to promoter companies. These loans ultimately turned out to be non-recoverable
  • Utilisation of borrowed funds for personal purposes, such as acquiring personal properties, yachts etc.
  • Consequently, huge amounts were shown as recoverable in the balance sheet, which were not recoverable.

Cafe Coffee day (CCD)

CCD was the first company to set up a large chain of coffee shops across India and a trend setter. Over-leveraging to find expansion of the chain and diversion of funds to non-core business led to the downfall of the Company, which had a sound business model from growing coffee in its own fields to serving a wide variety of coffee to customers. 

The debacle of company resulted in unfortunate suicide by its promoter. Amounts due to banks are around Rs . 2500 crores to Rs. 3000 crores. Currently, Tata group is in talks with CCD for acquiring its coffee outlets, which if materialises, will rescue the company, and put it back on the recovery path.

ds have emerged as the biggest risks which companies are exposed to, and are increasingly becoming a big threat. Incidents of frauds are increasingly at an alarming rate and in the process: 

  • Destroy the confidence of investors in stock markets
  • Results in enormous destruction in wealth of investors
  • Damage the reputation of the affected company, its management and board of directors
  • Erode ability of affected company to borrow and thus creating financial stress.

In case of frauds involving large amounts causing going concern issues (raising doubts in the ability of the company to continue its operation in the near- future)-e.g. Enron, Lehman brothers

Regulations are being regularly tightened to ensure monitoring, vigilance and disclosure mechanisms including whistle blowers’ complaints. It is a universal truth that fraudsters are always a step ahead of regulators.

A corporate fraud occurs when a company or an entity deliberately changes and conceals sensitive information which then apparently makes it look healthier. Companies adopt various modus-operandi to commit such corporate frauds, which may include miss-information in the prospectus, manipulation of accounting records, debt hiding etc. The aspect of falsification of financial information includes false accounting entries, false trades for inflation of profits, disclosure of price sensitive information which comes under the ambit of insider trading and showing false transactions which result in attracting more investors and lenders for funding.

There can be several reasons cited for which companies commit such frauds like making more falsified money, creating a false image of the company for the market scenario and misguiding Governmental authorities for tax evasion. In India, the Commission on ‘Prevention of Corruption’, in its report, observed, “The advancement of technological and scientific development is contributing to the emergence of mass society with a large rank in file and a small controlling elite, encouraging the growth of monopolies, the rise of a managerial class and intricate institutional mechanisms. There is a necessity for a strict adherence to high standards of ethical behavior for even the honest functioning of the new social, political and economic processes. The report of the Vivian Bose Commission inquiring into the affairs of the Dalmia Jain group of companies in 1963, highlighted as to how the big industries indulge in frauds, falsification of accounts and record tampering for personal gains and tax evasion etc.

The first successful trial of a financial scandal in independent India was the Mundhra Scam, in which Hon’ble Justice M.C. Chagla made certain critical observations about the big business magnate Mundhra who wanted to build an industrial empire entirely out of dubious means.

Types of Fraud:-

There are many types of corporate fraud, including the following common frauds:

1. Theft of cash, physical assets or confidential information

2. Misuse of accounts

3. Procurement fraud

4. Payroll fraud

5. Financial accounting mis-statements

6. Inappropriate journal vouchers

7. Suspense accounting fraud

8. Fraudulent expense claims

9. False employment credentials

10. Bribery and corruption.

CASE LAWS

DHFL

DHFL was the first ever fraud in a housing finance company, which happened mainly due to active involvement of promoters in syphoning of funds and alleged money laundering.

How fraud was committed: 

  • Granting of loans to related parties of promoters
  • Loans granted to parties, who were not credit worthy or were unknown having same addresses in obscure locations
  • Evergreening of bad loans
  • Creation of around 6 lacs dummy accounts at one branch, using name of borrowers who had already repaid loans. These accounts were used to grant loans which were used to siphon funds to promoter companies. These loans ultimately turned out to be non-recoverable
  • Utilisation of borrowed funds for personal purposes, such as acquiring personal properties, yachts etc.
  • Consequently, huge amounts were shown as recoverable in the balance sheet, which were not recoverable.

Cafe Coffee day (CCD)

CCD was the first company to set up a large chain of coffee shops across India and a trend setter. Over-leveraging to find expansion of the chain and diversion of funds to non-core business led to the downfall of the Company, which had a sound business model from growing coffee in its own fields to serving a wide variety of coffee to customers. 

The debacle of company resulted in unfortunate suicide by its promoter. Amounts due to banks are around Rs . 2500 crores to Rs. 3000 crores. Currently, Tata group is in talks with CCD for acquiring its coffee outlets, which if materialises, will rescue the company, and put it back on the recovery path.

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

If you are interested in participating in the same, do let me know.

Do follow me on FacebookTwitter  Youtube and Instagram.

The copyright of this Article belongs exclusively to Ms. Aishwarya Sandeep. Reproduction of the same, without permission will amount to Copyright Infringement. Appropriate Legal Action under the Indian Laws will be taken.

If you would also like to contribute to my website, then do share your articles or poems at adv.aishwaryasandeep@gmail.com

We also have a Facebook Group Restarter Moms for Mothers or Women who would like to rejoin their careers post a career break or women who are enterpreneurs.

We are also running a series Inspirational Women from January 2021 to March 31,2021, featuring around 1000 stories about Indian Women, who changed the world. #choosetochallenge

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