ANALYSIS OF CORPORATE

FRAUDS IN INDIA

ASSIGNMENT

CORPORATE GOVERNANCE

IIM INDORE

SUBMITTED BY:-

SATYAJIT BEHERA

2011IPM093

INTRODUCTION

India has been amongst the fastest growing economies in the world in the last decade. It has

remained relatively unaffected by the global economic crisis, thanks to strong fundamentals

of the economic policy. However, despite this situation the confidence of international

investors and domestic entrepreneurs has been low in the last two years, thanks to the

various scams that have come to light during this period. The need for improving governance

and ethical culture across public and private sector companies has never been felt as acutely

as is being felt now.

While there is greater awareness of fraud and misconduct among corporate India, the

associated risks need to be considered at a strategic level. Investments need to be prioritised

to build a sustainable ecosystem that can mitigate frauds efficiently, including frauds of the

future.

With the sophistication of fraud, companies need to take a long term view of fraud risk

management and adopt comprehensive frameworks to mitigate fraud. As organisations strive

to create a high performance culture, they must back these efforts by creating strong controls,

pro-active supervision through use of technology and independent monitoring of key

performance parameters to create deterrence for misbehaviour.

While one cannot deny the challenges in fraud prevention and detection from external factors

such as regulation/ law enforcement, one should realise that change comes from within.

Some companies have demonstrated this by showing that business can be done in India

ethically.

CORPORATE FRAUD

Activities undertaken by an individual or company that are done in a dishonest or illegal

manner, and are designed to give an advantage to the perpetrating individual or company.

Corporate fraud schemes go beyond the scope of an employee's stated position, and are

marked by their complexity and economic impact on the business, other employees.

Fraud essentially involves using deception to make a personal gain for oneself dishonestly

and/or create a loss for another. Although definitions vary, most are based around these

themes.

Frauds committed by large organizations is known as corporate fraud. For example, if the

company overstates its profit then it amounts to corporate fraud. Corporate fraud usually is

the result of innovative business practices of overstating the profits and concealing debt

which increases the companies’ stock value and thereby allowing the company to borrow

more money and to expand. (Investopedia, 2004)

The term ‘fraud’ commonly includes activities such as theft, corruption, conspiracy,

embezzlement, money laundering, bribery and extortion.

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

• Theft of cash, physical assets or confidential information

• Misuse of accounts

• Procurement fraud

• Payroll fraud

• Financial accounting mis-statements

• Inappropriate journal vouchers

• Suspense accounting fraud

• Fraudulent expense claims

• False employment credentials

• Bribery and corruption. (Accountants, 2009)

INTERNAL FRAUD There are three main categories of internal fraud that affect organisations. These are

summarised in the following diagram.

INDIAN LAW Indian Contract Act, 1872

Section 17 of the Act defines “Fraud” as "Fraud" means and include any of the following acts

committed by a party to a contract, or with his connivance, or by his agents, with intent to

deceive another party thereto his agent, or to induce him to enter into a contract.

¾the suggestion as a fact, of that which is not true, by one who does not believe it to

be true;

¾the active concealment of a fact by one having knowledge or belief of the fact;

¾a promise made without any intention of performing it;

¾any other act fitted to deceive;

¾any such act or omission as the law specially declares to be fraudulent

Indian Penal Code, 1860

Section 25 of IPC defines "Fraudulently” as: A person is said to do a thing fraudulently if he

does that thing with intent to defraud but not otherwise. (Lamba, 2009)

Internal Fraud

ASSET MISAPPROPRIATION FRAUDLENT STATEMENTS CORRUPTION

CASH NON-

CASH

FINANCIAL

NON-

FINANCIAL

CONFLICTS

OF

INTEREST

BRIBERY &

EXTORTION

REGULATORY LEGISLATIONS

INDIA

► Indian Contract Act 1872

► Indian Penal Code

► Prevention of Corruption Act

► Prevention of Money Laundering Act

► The Companies Act 1956

► Clause 49 of Listing Agreement

► CARO 2003

USA/EUROPE

► Sarbanes Oxley Act

► Foreign Corrupt Practices Act

► Patriot Act

► OECD Guidelines

► IIA Guidance

CORPORATE FRAUDS IN INDIA

The last decade has seen significant coverage of corporate fraud in the Indian media. While

the Indian government has passed several laws aimed at curbing fraud, poor enforcement has

diluted the intended impact. With the rise of new business models backed by technology,

fraud has spawned new variants and seems to be on the rise.

(Survey, 2014)

Despite the extensive adoption of technology by organizations to build global business

models, corporate. India continues to face challenges in mitigating traditional fraud schemes.

Insufficient mechanisms to prevent and detect fraud, as well as limited enforcement of

internal controls are likely to be the reasons that organizations continue to experience

traditional fraud. Specifically in the area of bribery and corruption, organizations have, in the

past, considered bribery as the ‘cost of doing businesses, and hence demonstrated a degree

of acceptability towards this practice. But with increased scrutiny by foreign regulators, and

the Indian government taking a tough stand on bribery by enforcing legislations like the

Prevention of Corruption Act while passing judgments on cases, we are seeing several

companies taking efforts to address the risk of bribery and corruption. (KPMG, 2012)

Regulatory non-compliance

Bribery and corruption

Diversion/ theft of funds or goods

Corporate espionage

Money laundering

Intellectual property fraud

Financial statement fraud

Internet and/ or Cyber fraud

Types of Fraud in India

Regulatory non-compliance Bribery and corruption Diversion/ theft of funds or goods

Corporate espionage Money laundering Intellectual property fraud

Financial statement fraud Internet and/ or Cyber fraud

The perception levels for frauds like money laundering (47%), internal reporting related

frauds (44%) and intellectual property fraud (40%) too are significantly higher (compared to

our 2010 survey). These frauds today rely on technology to increase their impact. For

instance, money laundering is no longer a risk limited to the banking industry. Thanks to

widespread misuse of technology to launder/ circulate money, sectors like insurance and

mutual funds also provide conditions for such activities to be perpetrated. Consequently,

regulators have extended anti-money laundering controls to cover insurance and mutual

funds sectors. Recently, the Registrar of Companies was asked to probe the involvement of

13 companies in these sectors over allegations of money laundering and money circulation.

In case of intellectual property (IP) theft/fraud, technology is a convenient and inexpensive

channel to execute fraud. A single email can transfer confidential IP to unauthorised parties

without raising any suspicions or violating any internal controls. Theft or fraud of IP is

extremely difficult to track as the original information remains on the computer of the

creator. It is also difficult to indicate what truly constitutes IP as most of the data gathered is

still in an early stage with unknown potential. In such a case, parts of the data can be easily

obtained and sent to unauthorised parties such as competitors. What this can do is speed up

the go-to-market strategy of a competitor. (Das, 2015)

For many years now, MIS related frauds (internal reporting) have featured among the top five

business concerns. With increased adoption of technology, although rudimentary controls are

established, fraudsters can cleverly manipulate data such as sales commissions (mainly

percentage figures), expenses (forged bills) and assets to ensure that results are consistent

with expectations, while still siphoning off money. Understanding the modus operandi of the

frauds mentioned above and detecting them is not easy, and 94 percent of our respondents

agreed that frauds had become sophisticated in the last two years. Investigators too are

constantly challenged by the sophistication of frauds.

A case in point is the Telecom industry that has had its share of losses due to sophisticated

technology aided frauds. Globally, telecom frauds are estimated to cost the industry USD 40

billion, despite significant efforts made by operators and their software/ hardware vendors

to limit theft. Operators' billing systems and network vulnerabilities are always the key target

areas for most fraudsters who exploit any weaknesses in these areas. (Young, 2014)

Thus, type of fraud and its degree of sophistication tend to be sectorial in nature. Certain

technology intensive sectors such as financial services and IT or ITES are more vulnerable to

cyber related frauds, whereas, sectors such as real estate and infrastructure are more prone

to conventional frauds such as bribery and corruption and diversion of funds/ goods.

IN WHICH SECTORS FRAUDS ARE MORE FREQUENT? In the below figure, we can clearly the sector which has been affected by frauds the most.

IT sector has seen the most number of frauds and is followed by Real Estate, Telecom and

Infra. With the advent of IT, number of cyber frauds has gone up.

In today’s day and age technology has become a mainstay for all industries, irrespective of

sector or size. Our experience indicates that even fraudsters are becoming technology savvy

and are finding newer ways of perpetrating frauds. In the past, technology driven frauds were

reported to have much lower incidence compared to frauds of a conventional nature such as

diversion/ theft of goods. However, today there is increased awareness about technology led

frauds.

This awareness can be attributed to the increased media coverage of such frauds. A case in

point is the recently unearthed sophisticated bank fraud that originated in Italy and spread

globally, initiating the transfer of almost USD 78 million from around 60 financial institutions.

Perpetrators attacked the computers of wealthy individuals and carried out these fraudulent

transactions from their bank accounts. These transactions were hidden by an additional layer

of malware to delay discovery. The malware circumvented the two-stage authentication and

other fraud prevention and detection methods employed by the banks. The manner in which

the fraudsters had beaten the complex banking controls points towards the rising

sophistication of fraud. (Economist, 2010)

The last few years have seen increased number of frauds reported in India as well as globally.

From Satyam, Adidas-Reebok, the Commonwealth Games and OnMobile in India to LIBOR

manipulation, securities trading, over-riding international sanctions on the global front, we

have seen some of the more sophisticated and large frauds coming to light. With reports

indicating that as much as 5 percent of annual revenues could be lost to fraud, organisations

today are required to be more cognizant of the damage that fraud can do.

23%

18%

16%

16%

14%

13%

Frauds in Various Sectors

Banking Real Estate Telecom Infra IT/ES Consumer Products

This increase can be attributed to several aspects. The ongoing economic slowdown for one

puts pressure on individuals to perform and tempts them to commit fraud. It is also in a

downturn that frauds are most likely to be discovered (even though perpetrated much

earlier), as that is when managements increase their scrutiny in a bid to protect margins and

profits. Thirdly, greater awareness of fraud and its impact can result in companies becoming

more sensitive to noticing frauds, which otherwise tend to go unnoticed or are deliberately

overlooked. (KPMG, 2012)

Financial services and information and entertainment sectors have been identified as most

vulnerable to fraud by respondents. Interestingly, both sectors identified are heavy users of

technology implying that while technology can be a great facilitator for the business, it can

also offer an equally potent platform for committing frauds like cybercrime, phishing and data

theft. Despite having a strong regulator, the financial services sector has emerged as the most

susceptible sector to fraud. Possible misuse of technology in the banking sector includes use

of banking access for overpayments to vendors/ self-bank account, sharing of potential

confidential information and misuse of company’s technology resources for unauthorised

activities including conflicting business relationship. Additionally, providing services on

mobile and social media platforms with limited knowledge of the security requirements,

poses threats to customers as well as financial institutions. In case of the information and

entertainment sector, despite functioning as global entities and complying with stringent

foreign legislations, they have been identified as the second most fraudulent sector in India.

Thus, organisations need to be more proactive and adopt a zero tolerance approach towards

fraud risk management. (Young, 2014)

While incidences of newer types of frauds are on the rise, from a process perspective they

continue to be targeted towards the same business processes. It is thus important to

understand the operational characteristics of each sector to identify functions vulnerable at

a sectorial level. These areas being characterised by large number of stakeholders, multiple

touch points, increasingly complex processes involving a significant proportion of

organisations’ funds, it is not surprising to see this finding. Additionally, these processes

involve a high degree of interaction with external stakeholders like vendors and customers

where collusion can override certain internal controls. Despite the widespread

acknowledgement of the vulnerability of these processes, organisations have failed to

implement basic controls. Due diligence of vendors before selection, involvement of

representatives from multiple departments in the vendor selection process, and adequate

segregation of duties and controls over access rights, are some of the controls which may help

organisations in managing these risks better. (KPMG, 2012)

CENTRAL CHARACTERS OF FRAUD

Employees are often central to frauds as they either perpetrate the fraud or assist an external

team to do so. Hence, the larger threat of fraud lies within an organisation itself. However,

most organisations tend to ignore or merely warn respective employees upon discovery of

small value frauds (such as faking personal bills or fudging of expense reports). Therefore,

when employees collude with external parties to commit fraud (such as processing fake

invoices submitted by vendors), organisations often tend to blame external parties first and

not employees.

Among employees, senior management is considered the most susceptible to committing

fraud by virtue of their ability to override existing controls. According to the ACFE 2012 Global

Fraud Study, the position held by the fraudster within an organisation is directly related to

the loss incurred on account of the fraud committed. Losses caused by senior management

were approximately three times higher than the value of fraud loss due to managers;

managers in turn caused losses approximately three times higher than junior employees. In

such circumstances it becomes imperative for organisations to provide a safe, robust channel

for employees to report suspicions of malpractice. It is also important that an organisation’s

Board comprise of individuals with utmost integrity who would engage themselves with the

management. The Board needs to take a lead by setting the tone at the top and facilitate a

zero tolerance approach towards fraud. (Das, 2015)

DISCOVERY OF FRAUD METHODS AND TECHNIQUES

Numerous fraud surveys have indicated that internal stakeholders are highly susceptible to

committing fraud. However, these surveys have also indicated that most frauds are unearthed

from tips or complaints by sources internal to an organisation. This fact is reiterated in our

survey with respondents identifying whistleblower hotlines as the most effective way to

detect fraud. An effective mechanism providing comfort to the complainant that their identity

would remain anonymous and that the information disclosed would be handled in a safe and

confidential manner have resulted in a number of fraud related issues being reported on such

channels. It has been observed that such hotlines also become preventive tools over a period

of time. Most multinational companies have whistleblower hot lines as mandated by

regulators in their home countries. However, we have seen an increase in the number of

Indian business houses opting for such hotlines. Both Indian and multinational companies are

reviewing their business code of conduct, whistleblower policies and putting in place

committees, rather than individuals, to receive such complaints and to act on them.

Complaints received are tracked and the progress on each complaint is discussed in

committee meetings. The critical success factors for a whistleblower hotline include an

34%

22%

18%

8%

6%

5%3%4%

Discovery of Fraud-Methods & Techniques

Whistle Blowing Mechanism Internal Audit

Proactive Fraud Risk Management Automated Detection/Survelliance Systems

Rotation of Duties/Personnel External Audit

By accident Others

independent, anonymous and confidential mechanism that is easy to access. This, backed by

a well-defined and structured committee empowered to act on complaints received can help

build whistleblower confidence in the entire mechanism. Besides whistleblower hotlines,

survey respondents have also highlighted data analytics as one of the effective ways to detect

fraud. Considering most companies today deal with vast and complex data, real time analytics

and dashboard tools can be adopted to highlight any red-flags and capture any deviation from

the routine, which could be an indication of a fraud. These tools are very effective in detecting

fraud at an initial stage. However, in our experience we have observed that, barring few

organisations, not many make use of the data available to them on their Enterprise Resource

Planning (ERP) systems. Apart from technology, it is also important to ensure having basic

controls in place, especially those highlighted in the internal audit (IA) reviews, if one has to

prevent fraud. For instance, lack of control in access logs reported in IA review, if not

corrected, could result in several challenges. (Survey, 2014)

Global surveys by organisations like the ACFE have highlighted that presence of formal

management reviews, employee support programmes and hotlines is inversely related to the

extent of financial losses suffered due to fraud. Organisations lacking these controls

experienced a significantly higher level of fraud loss.

When one looks at the relationship between the presence of a preventive control and the

duration of the fraud, the perpetrator’s ‘perception of detection’ plays a vital role. The

duration of frauds is considerably reduced when the perpetrators perceive that robust

detection mechanisms are in place. Specifically, organisations that utilise job rotation and

mandatory vacation policies, rewards for whistle-blowers and surprise audits detect their

frauds more than twice as quickly as organisations lacking such controls. As a result, the

incidence of fraud among such companies is low as fraudsters feel the likelihood of them

being caught is high.

IMPACT OF THE COMPANIES ACT 2013 ON THE STATE OF FRAUD Comprehensive legislation combined with strong enforcement can be a big deterrent to

fraud. The majority of the survey respondents agreed that the potential for prosecution and

enforcement is a strong deterrent against fraudulent conduct. In this context, India’s position

on legislations to curb corporate fraud is still evolving. The Companies Act 2013 is a significant

development in the evolution of India’s regulatory environment. This law is the first in the

country to focus comprehensively on fraud risk management and prescribes stringent

punishment upon the violation of its provisions. The Act includes specific provisions to

address the risk of fraud, alongside prescribing greater responsibility and increased

accountability for independent directors and auditors. It goes beyond professional liability for

fraud and extends to personal liability, prescribing penalties for directors, key management

personnel, auditors and employees.

Effective enforcement of this legislation can reduce fraud significantly, according to 88

percent of the survey respondents. Among the provisions in the Act, survey respondents

identified the mandatory establishment of a vigil mechanism for listed companies, and a

greater degree of accountability placed on the Board of Directors, as the most effective

provisions in tackling wrongdoing

The Companies Act 2013 calls for the establishment of a vigil mechanism for directors and

employees to report concerns about unethical behaviour, suspected fraud or violations of the

company’s code of conduct or ethics policy. However, the effectiveness of a vigil mechanism

is not guaranteed by its mere existence, but by the confidence that stakeholders place in its

functioning. As per the Deloitte India’s Whistleblowing Survey 2014, survey respondents felt

that a whistleblower program, should necessarily have the following key characteristics. a)

Anonymity and confidentiality b) Adequate whistleblower protection c) Transparency and

Independence, as required by the legislation, and to provide for an objective view d) A

dedicated team to handle whistleblower complaints (third party or internal) e) A well-

documented process of addressing complaints, feedback and communication. (Lamba, 2009)

From an operational standpoint, a robust whistleblowing mechanism should feature multi-

channel accessibility and multi-lingual support. Close to 38 percent of respondents to Deloitte

India’s Whistleblowing Survey 20146 identified the need for multiple reporting methods, such

as a dedicated phone number, an exclusive email address or website, and the ability to receive

complaints by post or fax. A comprehensive solution would be to engage a 24-hour response

center staffed by multi-lingual officers to receive information, as well as analysts to prepare

incident reports from disclosures received through any of these channels. Whistleblower

reports are sensitive and not being able to use one’s preferred language can adversely impact

a report’s completeness and accuracy. For many companies, whose operations span national

and linguistic borders, the ability to take reports in many different languages is absolutely

essential. Lastly, support from senior management is crucial to making whistleblower

programs successful. For instance, senior officers at a company known to us, sent an email to

all employees, sharing their experience of testing the whistleblower hotline, helping reassure

their staff about how easy and confidential the whole process was. Subsequently, the

company saw higher number of employees use the hotline. Given the limited success that

Indian companies have had in the past with their whistleblower programs, we would

recommend a well-planned campaign to create awareness about the whistleblower program

and its features to all stakeholders.

CASE STUDY OF SOME FAMOUS INDIAN CORPORATE FRAUDS

1) Satyam Computers Limited Scandal

On January 7, 2009, Mr. Raju disclosed in a letter to Satyam Computers Limited Board

of Directors that “he had been manipulating the company’s accounting numbers for

years”. Mr. Raju claimed that he overstated assets on Satyam’s balance sheet by $1.47

billion. Nearly $1.04 billion in bank loans and cash that the company claimed to own

was non-existent. Satyam also underreported liabilities on its balance sheet. Satyam

overstated income nearly every quarter over the course of several years in order to

meet analyst expectations. For example, the results announced on October 17, 2009

overstated quarterly revenues by 75 percent and profits by 97 percent. Mr. Raju and

the company’s global head of internal audit used a number of different techniques to

perpetrate the fraud. “Using his personal computer, Mr. Raju created numerous bank

statements to advance the fraud. Mr. Raju falsified the bank accounts to inflate the

balance sheet with balances that did not exist. He inflated the income statement by

claiming interest income from the fake bank accounts. Mr. Raju also revealed that he

created 6000 fake salary accounts over the past few years and appropriated the

money after the company deposited it. The company’s global head of internal audit

created fake customer identities and generated fake invoices against their names to

inflate revenue. The global head of internal audit also forged board resolutions and

illegally obtained loans for the company”. It also appeared that the cash that the

company raised through American Depository Receipts in the United States never

made it to the balance sheets. Greed for money, power, competition, success and

prestige compelled Mr. Raju to “ride the tiger”, which led to violation of all duties

imposed on them as fiduciaries—the duty of care, the duty of negligence, the duty of

loyalty, the duty of disclosure towards the stakeholders. “The Satyam scandal is a

classic case of negligence of fiduciary duties, total collapse of ethical standards, and a

lack of corporate social responsibility. It is human greed and desire that led to fraud.

This type of behavior can be traced to: greed overshadowing the responsibility to meet

fiduciary duties; fierce competition and the need to impress stakeholders especially

investors, analysts, shareholders, and the stock market; low ethical and moral

standards by top management; and, greater emphasis on short‐term performance”.

According to CBI, the Indian crime investigation agency, the fraud activity dates back

from April 1999, when the company embarked on a road to double-digit annual

growth. As of December 2008, Satyam had a total market capitalization of $3.2 billion

dollars. Satyam planned to acquire a 51% stake in Maytas Infrastructure Limited, a

leading infrastructure development, construction and project management company,

for $300 million. Here, the Rajus’s had a 37% stake. The total turnover was $350

million and a net profit of $20 million. Raju’s also had a 35% share in Maytas

Properties, another real-estate investment firm. Satyam revenues exceeded $1 billion

in 2006. In April, 2008 Satyam became the first Indian company to publish IFRS audited

financials. On December 16, 2008, the Satyam board, including its five independent

directors had approved the founder’s proposal to buy the stake in Maytas

Infrastructure and all of Maytas Properties, which were owned by family members of

Satyam’s Chairman, Ramalinga Raju, as fully owned subsidiary for $1.6 billion. Without

shareholder approval, the directors went ahead with the management’s decision. The

decision of acquisition was, however, reversed twelve hours after investors sold

Satyam’s stock and threatened action against the management. This was followed by

the law-suits filed in the US contesting Maytas deal. The World Bank banned Satyam

from conducting business for 8 years due to inappropriate payments to staff and

inability to provide information sought on invoices. Four independent directors quit

the Satyam board and SEBI ordered promoters to disclose pledged shares to stock

exchange. Investment bank DSP Merrill Lynch, which was appointed by Satyam to look

for a partner or buyer for the company, ultimately blew the whistle and terminated

its engagement with the company soon after it found financial irregularities. On 7

January 2009, Saytam’s Chairman, Ramalinga Raju, resigned after notifying board

members and the Securities and Exchange Board of India (SEBI) that Satyam’s

accounts had been falsified. Raju confessed that Satyam’s balance sheet of September

30, 2008, contained the following irregularies: “He faked figures to the extent of Rs.

5040 crore of non-existent cash and bank balances as against Rs. 5361 crore in the

books, accrued interest of Rs. 376 crore (non-existent), understated liability of Rs.

1230 crore on account of funds raised by Raju, and an overstated debtor’s position of

Rs. 490 crore. He accepted that Satyam had reported revenue of Rs. 2700 crore and

an operating margin of Rs. 649 crore, while the actual revenue was Rs. 2112 crore and

the margin was Rs. 61 crore”. In other words, Raju: 1) inflated figures for cash and

bank balances of US $1.04 billion vs. US $1.1 billion reflected in the books; 2) an

accrued interest of US $77.46 million which was non-existent; 3) an understated

liability of US $253.38 million on account of funds was arranged by himself; and 4) an

overstated debtors' position of US $100.94 million vs. US $546.11 million in the books.

Raju claimed in the same letter that “neither he nor the managing director had

benefited financially from the inflated revenues, and none of the board members had

any knowledge of the situation in which the company was placed”. The fraud took

place to divert company funds into real-estate investment, keep high earnings per

share, raise executive compensation, and make huge profits by selling stake at inflated

price. The gap in the balance sheet had arisen purely on account of inflated profits

over a period that lasted several years starting in April 1999. “What accounted as a

marginal gap between actual operating profit and the one reflected in the books of

accounts continued to grow over the years. This gap reached unmanageable

proportions as company operations grew significantly”, Ragu explained in his letter to

the board and shareholders. He went on to explain, “Every attempt to eliminate the

gap failed, and the aborted Maytas acquisition deal was the last attempt to fill the

fictitious assets with real ones. But the investors thought it was a brazen attempt to

siphon cash out of Satyam, in which the Raju family held a small stake, into firms the

family held tightly”.

Additionally, the Satyam fraud went on for a number of years and involved both the

manipulation of balance sheets and income statements. Whenever Satyam needed

more income to meet analyst estimates, it simply created “fictitious” sources and it

did so numerous times, without the auditors ever discovering the fraud. Suspiciously,

Satyam also paid PwC twice what other firms would charge for the audit, which raises

questions about whether PwC was complicit in the fraud. Furthermore, PwC audited

the company for nearly 9 years and did not uncover the fraud, whereas Merrill Lynch

discovered the fraud as part of its due diligence in merely 10 days. Missing these “red-

flags” implied either that the auditors were grossly inept or in collusion with the

company in committing the fraud. PWC initially asserted that it performed all of the

company’s audits in accordance with applicable auditing standards.

Lessons Learned from Satyam Scam The 2009 Satyam scandal in India highlighted the nefarious potential of an improperly

governed corporate leader. As the fallout continues, and the effects were felt

throughout the global economy, the prevailing hope is that some good can come from

the scandal in terms of lessons learned. Here are some lessons learned from the

Satyam Scandal:

Investigate All Inaccuracies: The fraud scheme at Satyam started very small,

eventually growing into $276 million white-elephant in the room. Indeed, a lot of fraud

schemes initially start out small, with the perpetrator thinking that small changes here

and there would not make a big difference, and is less likely to be detected. This sends

a message to a lot of companies: if your accounts are not balancing, or if something

seems inaccurate (even just a tiny bit), it is worth investigating. Dividing

responsibilities across a team of people makes it easier to detect irregularities or

misappropriated funds.

Ruined Reputations: Fraud does not just look bad on a company; it looks bad on the

whole industry and a country. “India’s biggest corporate scandal in memory threatens

future foreign investment flows into Asia’s third largest economy and casts a cloud

over growth in its once-booming outsourcing sector. The news sent Indian equity

markets into a tail-spin, with Bombay’s main benchmark index tumbling 7.3% and the

Indian rupee fell”. Now, because of the Satyam scandal, Indian rivals will come under

greater scrutiny by the regulators, investors and customers.

Corporate Governance Needs to Be Stronger: The Satyam case is just another

example supporting the need for stronger CG. All public-companies must be careful

when selecting executives and top-level managers. These are the people who set the

tone for the company: if there is corruption at the top, it is bound to trickle-down.

Also, separate the role of CEO and Chairman of the Board. Splitting up the roles, thus,

helps avoid situations like the one at Satyam. The Satyam Computer Services’ scandal

brought to light the importance of ethics and its relevance to corporate culture. The

fraud committed by the founders of Satyam is a testament to the fact that “the science

of conduct” is swayed in large by human greed, ambition, and hunger for power,

money, fame and glory.

2) Saradha Group Financial Scandal

The Saradha Group financial scandal was a major financial scam and alleged political

scandal caused by the collapse of a Ponzi scheme run by Saradha Group, a consortium of

over 200 private companies that was believed to be running collective investment

schemes popularly but incorrectly referred to as chit funds. In Eastern India. The group

collected around ₹200 to 300 billion (US$4–6 billion from over 1.7 million depositors

before it collapsed in April 2013. In the aftermath of the scandal, the State Government

of West Bengal where the Saradha Group and most of its investors were based instituted

an inquiry commission to investigate the collapse. The State government also set up a

fund of ₹5 billion (US$75 million) to ensure that low-income investors were not

bankrupted. The central government through the Income Tax Department

and Enforcement Directorate launched a multi-agency probe to investigate the Saradha

scam and similar Ponzi schemes. In May 2014, the Supreme Court of India, citing inter-

state ramifications, possible international money laundering, serious regulatory failures

and alleged political nexus, transferred all investigations into the Saradha scam and other

Ponzi schemes to the Central Bureau of Investigation (CBI), India's federal investigative

agency. Many prominent personalities were arrested for their involvement in the scam

including two Members of Parliament (MP) - Kunal Ghosh and Srinjoy Bose, former West

Bengal Director General of Police Rajat Majumdar, a top football club official Debabrata

Sarkar, Sports and Transport minister in the West Bengal Government.

3) KETAN PAREKH SECURITIES SCAM

The 176-point Sensex crash on March 1, 2001 came as a major shock for the Government

of India, the stock markets and the investors alike. More so, as the Union budget tabled a

day earlier had been acclaimed for its growth initiatives and had prompted a 177-point

increase in the Sensex. This sudden crash in the stock markets prompted the Securities

Exchange Board of India (SEBI) to launch immediate investigations into the volatility of

stock markets. SEBI also decided to inspect the books of several brokers who were

suspected of triggering the crash. Meanwhile, the Reserve Bank of India (RBI) ordered

some banks to furnish data related to their capital market exposure. This was after media

reports appeared regarding a private sector bank having exceeded its prudential norms

of capital exposure, thereby contributing to the stock market volatility. The panic runs on

the bourses continued and the Bombay Stock Exchange (BSE) President Anand Rathi's

(Rathi) resignation added to the downfall. Rathi had to resign following allegations that

he had used some privileged information, which contributed to the crash. The scam shook

the investor's confidence in the overall functioning of the stock markets. By the end of

March 2001, at least eight people were reported to have committed suicide and hundreds

of investors were driven to the brink of bankruptcy. The scam opened up the debate over

banks funding capital market operations and lending funds against collateral security. It

also raised questions about the validity of dual control of co-operative banks. (Analysts

pointed out that RBI was inspecting the accounts once in two years, which created ample

scope for violation of rules.) The first arrest in the scam was of the noted bull, Ketan

Parekh (KP), on March 30, 2001, by the Central Bureau of Investigation (CBI). Soon, reports

abounded as to how KP had single handled caused one of the biggest scams in the history

of Indian financial markets. He was charged with defrauding Bank of India (BoI) of about

$30 million among other charges. KP's arrest was followed by yet another panic run on

the bourses and the Sensex fell by 147 points. By this time, the scam had become the 'talk

of the nation,' with intensive media coverage and unprecedented public outcry. Ketan

Parekh [KP] was a chartered accountant by profession and used to manage a family

business, NH Securities started by his father. Known for maintaining a low profile, KP's

only dubious claim to fame was in 1992, when he was accused in the stock exchange scam.

He was known as the 'Bombay Bull' and had connections with movie stars, politicians and

even leading international entrepreneurs like Australian media tycoon Kerry Packer, who

partnered KP in KPV Ventures, a $250 million venture capital fund that invested mainly in

new economy companies. Over the years, KP built a network of companies, mainly in

Mumbai, involved in stock market operations. The small investors who lost their life's

savings felt that all parties in the functioning of the market were responsible for the

scams. They opined that the broker-banker-promoter nexus, which was deemed to have

the acceptance of the SEBI itself, was the main reason for the scams in the Indian stock

markets. The SEBI's measures were widely criticized as being reactive rather than

proactive. The market regulator was blamed for being lax in handling the issue of unusual

price movement and tremendous volatility in certain shares over an 18-month period

prior to February 2001. Analysts also opined that SEBI's market intelligence was very poor.

Media reports commented that KP's arrest was also not due to the SEBI's timely action

but the result of complaints by BoI. A market watcher said ,"When prices moved up, SEBI

watched these as 'normal' market movements. It ignored the large positions built up by

some operators. Worse, it asked no questions at all. It had to investigate these things, not

as a regulatory body, but as deep-probing agency that could coordinate with other

agencies. Who will bear the loss its inefficiency has caused?"An equally crucial question

was raised by media regarding SEBI's ignorance of the existence of an unofficial market at

the CSE. Interestingly enough, there were reports that the arrest was motivated by the

government's efforts to diffuse the Tehelka controversy. Many exchanges were not happy

with the decision of banning the badla system as they felt it would bring the liquidity in

the market. Analysts who opposed the ban argued that the ban on badla without a

suitable alternative for all the scrips, which were being moved to rolling settlement, would

rig the volatility in the markets. They argued that the lack of finances for all players in the

market would enable the few persons who were able to get funds from the banking

system - including co- operative banks or promoters - to have an undue influence on the

markets. (Inamdar, 2013)

CONCLUSION

From the above research it clearly indicates that although there is an increased awareness

about fraud, corporate India is still hesitant to accept it as a strategic risk. It continues to be

viewed as an operational risk and hence the mitigation strategies tend to be more generic

rather specialist. This could be one of the key reasons for under-investment in creation of an

ecosystem promoting a culture of ethics and integrity. Further, increased performance

pressure both on employees as well as organisations in the current economic environment

and rising aspirations have a leading role to play in the increased occurrence of fraud in most

organisations. The pressure to perform in the current economic environment has never been

higher and it is a fact that one needs to work much harder to get the same results. The survey

responses point out that today organisations are faced not only with the risk of traditional

frauds but also substantial risks from emerging frauds. Organisations need to adopt more

robust fraud risk management measures in order to mitigate the rising risk of emerging

frauds. A strong technology enabled platform to provide early warning signs; adoption of

ethical code of conduct amongst employees and all stakeholders; technology driven controls

and a robust whistleblower mechanism are some of the ways in which organisations can

mitigate the risk of fraud. While we are seeing more and more organisations showing

willingness to adopt comprehensive fraud prevention strategies, these attempts continue to

be half-hearted on account of underinvestment from respective organisations. In this regard,

the proposed Companies Bill 2011 is a key legislation. If enacted, it is likely to prompt

companies to think about having a fraud risk management policy in place. The Bill places onus

on independent directors to ascertain and ensure that the company has an adequate and

functional vigil mechanism. This in turn may result in companies considering controls around

accounting procedures and mechanisms to prevent and detect fraud, including undertaking a

formal fraud risk assessment. The most significant aspect of the Bill is the proposed stringent

penalties for those perpetrating fraudulent activities. While the enactment of the Bill may

happen in due course, it would be important for companies to start earlier and not wait for

the regulatory push. Fraud prevention is to be treated like a journey and not a destination

“Miles to go before Corporate India sees fraud as a strategic risk”

BIBLIOGRAPHY

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