A K Agnihotri Corporate corruption (part ii)

This article is the second and concluding part of the one published in the August 2011 issue.

The Art of Misaccounting

1. Company's profitability is rigged depending upon the situation. Pre-public issue profits and turnover are rigged.

2. Window Dressing of accounts to facilitate borrowings and investments 

3 Reverse mergers in small companies whose net worth is artificially inflated

4. Financial misstatements. Falsifying financial results. Inflated sales; Misleading accounting practices.  Illegal payments Inflating allowances.

5. The so called Independent directors are lured by obscure consultancies to entice them to shut out their objections. 


Financial Corruption

Misuse of Public Property and Funds: Control of Property provides opportunities for mismanagement and corruption. Corporate made to bear all expenditure including sojourns in exotic resorts. All expenses booked on corporate accounts.

A little known fact is the number of guest houses owned by corporates which are used to accommodate promoters.

Revenue loss to the Government: Officials may pocket tax revenues or fees (often with the collusion of the payer, in effect combining theft with bribery) steal cash from treasurers, extend advances to themselves that are never repaid, or draw pay for fictitious “ghost” workers, a pattern well documented in the reports of audit authorities.

Connivance of the Chartered accountants in falsification of accounts.

Steps to prevent graft

Corruption and opportunity are inter-linked. I’ll cheat if I cannot get caught. It means that, if the activities and decisions are not subjected to review by any independent authority/ institution, the probability of malpractices increases.

A multi layered checks and balance system to verify and audit the accounts of any organization by different independent authority / agency / institutions is required to stamp out the possibility of corruption / scam. The finalising of the accounts, audit thereof and internal  audit are vested on the members of the ICAI which more often than not shuts its eyes to the shenanigans of the crooked members. If the accounts audited by a member of ICAI are subjected to review by the CAG in selected cases, the possibility of scam and corruption would reduce to a great extent.

  Non disclosure of detailed accounts of the company: The abridged balance sheet has led to maximum frauds. Details such as sundry debtors, loans and advances are the two best ways to siphon off money and therefore the non-furnishing of these prevents disclosure and not getting caught.

  It is high time that listed companies offer themselves for coverage under the RTI Act. This would enable furnishing of information that a person may desire to get while suspecting the genuineness and trust worthiness of the books of accounts and management decisions of any organization. The shareholders of a company must have access to RTI to get detailed accounts the company he/she has invested in. Even though the CIC has held that the ROC must procure and furnish the financial information, collusive intent of the ROC and the promoters has defeated the judgment. [Shri Rakesh Kumar Agarwal v. The Registrar of Companies in Decision No. 5449/IC(A)/2010]

Trends and Future Threat:

The corruption in corporate sector anybody’s guess, yet the concept of the Promoters profit makes it clear that the rot is pervasive, more so in closely held companies. Gold, Silver, Diamonds and Real Estate are the largest sectors that account bulk of the black money in India. A conservative would put gold holdings at close to 20000 tonnes, silver at 1,20,000-1,40,000 tonnes. The value of these alone is mind boggling. We talk of foreign accounts holding upwards of 1 trillion dollars, little realising the much larger trove already existing in India. Incidentally, Real estate along with Infrastructure are the two sectors which virtually lack any oversight mechanism and transparency. It is amusing that the banking sector also abides the malpractice in this sector and Reserve Bank of India is least concerned about it. It is a common practice that a buyer or seller undervalues the property by at least 40 %, and banks provide loan on account of “furnishing and fixtures”, knowing that the money is used for paying the purchase of property and paid in black.

 Recent scams point to corporate houses manipulating the sectors with ostensibly strict regulatory structure. Corporate houses are able to tweak rules that will only benefit individual corporate entities. The lack of transparency in these deals is a reason for large-scale corruption. Increasing the transparency in the functioning of the corporate/government particularly in the big-ticket deals is one way of combating the white-collar crimes.

An emerging area of economic crime is merger and acquisitions. The sole responsibility of the M&A lies with High Court and Competition Commission of India (CCI). CCI is a post retirement haven for bureaucrats and there is hardly any expertise to detect fraud. Lack of expertise of agencies monitoring and investigating corporate frauds remains an important area of concern. This is not confined to CCI alone; the premier agencies investigating economic frauds do not have well trained manpower.

The welcome availability of accounts in MOCA site is putting the glare on limited companies. LLP’s must also place their accounts in the public domain, lest there is a rush to convert to avoid scrutiny.  


            * The Corporate sector must recognize its inadequate systems for tackling corruption. The lending institutions must insist upon a regulatory mechanism within the Company which is assisted or approaches for assistance.

            * Convoluted investment patterns with several conduit companies must be avoided. Unsecured loans and sundry debtors are now capable of being tracked and gone are the days when it was impossible for the agencies in India to track the identities of the ghost lenders or borrowers.

            * Disclosure of the Directors and their relatives in receiving financial benefits accruing from the company’s activities must be made available. The commissions earned by family members from insurance, freight are not disclosed. In Government this is a major offence and invites dismissal. Relatives of Directors cannot be made Independent Directors. Fees for any consultancy/advisory paid to an Independent director must be disclosed. 

            * The Corporate sector has yet to place a strict compliance mechanism to check corrupt practices. The Vigilance mechanism is totally lacking. Unlike the Government where the corruption has a vertical flow, corruption in Corporate is largely in the rarified circles. 

The financial crimes in India are not punished effectively. In the case referred to in the investigations by CEIB, the promoters were able to compound their offence for a fine of Rs 55000/- With this kind of punishment, isn’t the temptation to cheat inbuilt in the Company’s Act?