This article has been written by Ms Kamakshi, a fourth year student from REVA university

Corporate fraud has become one of the greatest risks facing businesses and is becoming a growing threat. Fraud incidents are increasing at an alarming rate. They destroy investor confidence in the stock market lead to the destruction of the investor’s vast wealth damage to the reputation of the company, its management and board of directors; Affected businesses’ ability to borrow is reduced, creating financial stress. For high value fraud affecting going concern (those that cast doubt on the company’s ability to continue as a going concern in the near future) – e.g. Enron, Lehman Brothers

Rules are regularly enhanced to ensure monitoring, vigilance and disclosure mechanisms, including whistleblower complaints. It’s a common truth that fraudsters are always one step ahead of regulators. We must accept that misconduct is inevitable, and companies must establish strong systems, processes, corporate governance practices, and robust recruitment processes to ensure that the right people are recruited in a system of integrity and value. should be adopted. It is also important to raise employee awareness of misconduct through rigorous training mechanisms to ensure that misconduct is investigated impartially and offenders are punished in a timely manner. 

Major corporate frauds in India

Satyam Computer (Satyam)

Satyam was the first large-scale fraud of its kind, shocking the country and leading to tightening of his mechanisms of regulation, reporting and governance. This scam had the same effect of shock and awe that was caused by the Enron and Lehman brothers in the United States. Many countries have enacted similar regulations. The company’s promoters have devised an ingenious method of making large-scale false claims for services to foreign customers. A logical step forward was the receipt of fake earnings in multiple bank accounts opened in different countries. Many of these accounts were later found to be non-existent. The company reported consistently high bank balances in its financial statements, which, given the size of its business, did not match those of his other IT companies. All of these operations were overseen by the organizers with the help of another staff member working on what I call the Fraud Factory.

When the financial statements were closed and the auditors were satisfied, forged bank confirmations and account statements were prepared and presented to the auditors as proof of balances. The amount of fraud was about US$1 billion. Surprisingly, Satyam has received awards for good corporate governance from several reputable organizations. His promoter has developed a respect for the industry and a commanding personality over time. In the midst of all this, the organizers’ sudden admission of dishonesty caused a great shock to the country. Overall, Satyam had a solid business model and a large international client portfolio. The government has had to launch an unprecedented rescue operation to save the company. He first he dismissed the company’s board and subsequently appointed a professional headed by Deepak Palik as a board member. Eventually, the company was sold to his Mahindra Group and is now an integral part of the group’s successful technology business. 

Kingfisher Airlines (UCK)

The KLA was another corporate scam, the first of its kind in the airline industry, that ultimately led to the downfall of the King of Good Times empire. The airline was founded by the flamboyant Vijay Mallya, known as the king of good times. In a short period of time, KLA established itself as the nation’s premier commercial airline with a high standard of service and enjoyed his second highest market share after Jet Airways. The company borrowed in every possible way, including from affiliates, exaggerating its brand value and pledging the Kingfisher brand as collateral. The good times didn’t last long and Vijay Malia had to sell his family jewelry and beer business to pay off some of his debts. Vijay Malia is currently in court in the UK to prevent her repatriation to India. The SBI-led banking consortium has around Rs 900 crore exposure to the effectively bankrupt airline. Most of the employees lost their jobs or quit because their salaries were not paid for months. The company failed to deposit statutory membership dues, such as his PF and TDS, with government agencies to be deducted from his salary. Kingfisher strikes me as more of a business failure than a corporate fraud. There were a number of red flags that lenders and regulators could have ignored, and potentially more likely airlines could have been bailed out. Financing a brand that has never been done before is a striking example. A quick Satyam-style bailout could have parachuted the airline to safety, saving lenders money and employees jobs. 

Jet airways

The airline, once the pride of India, landed at IBC to the rescue. After several bids over 18 months, Jet finally won a bidder (investor) with no prior aviation experience. Jet has established an unshakable position in the industry and has been the airline of choice for the country’s business community, top businessmen and CEOs. His service standard was his unique selling proposition. The lessor’s exposure to airlines is approximately Rs.85 billion and the total liability including levies to vendors, employees, AAI and aircraft lessors is approximately Rs.25 billion. The company has indulged in some cheating. Excessive fees paid over the years to Dubai-related parties based in Dubai. This resulted in significantly inflated expenses and underreported profits. Issued approximately 3,353 million rupee loans and diverted funds

Settlement of counterfeit invoices by Jetmiles Other similar transactions

Employees lost their jobs due to large unpaid wages. Then there was the acquisition of Sahara Airlines, a low-cost airline. In hindsight, the acquisition turned out to be Sahara Airlines’ nemesis and hastened the decline of Jet Airways. 

Bhushan steel

Bhushan Steel was an unprecedented fraud case at a major Indian bank. The company was acquired by Tata Steel, but the matter is still the subject of litigation. A promoter of a profitable company with a large modern facility indulged in several fraudulent activities. transfer funds borrowed from the company to various parties in the form of loans or advances Settlement of invoices for capital and other purchases that were never made, and funds generated thereby were diverted by promoters to their advantage The amount in question was about 50000 rupees. Another group company, Bhushan Power and Steel (BPSL), is now under IBC. JSW Steel He plans to acquire BPSL. According to CBI, BPSL diverted approximately Rs 2,348 billion from credit accounts of various banks to accounts of over 200 shell companies through its directors and employees without apparent purpose. 

PNB

PNB was the first major bank fraud to be reported in the country, with a huge fraud amounting to around Rs 1500 crore. The scam was perpetrated by Nirav Modi and Mehul Choksi (through his public company Gitanjali Gems). Both were in the business of importing rough diamonds and exporting cut diamonds. Over time, both have established retail chains of diamond shops in India and renowned international destinations. Nirav was particularly good at PR and showmanship. At the time, no one questioned its source of funding. It was only a few years later that this unprecedented fraud came to light and rocked the country like never before. He tricked PNB and other bankers by opening a large LC with no underlying transaction (basically fiat currency) under the acquiescence of a small group of junior bank officials. He took advantage of a fundamental flaw in his IT system of non-reconciliation of LCs opened in the underlying trades. As is a requirement that applies to all banks, LCs opened were not recorded in his RTGS system. Therefore, the existence of such LCs was unknown until the fraud was revealed. The amount involved is estimated at around 16000 kroner (including fees from Mehul Choksi). Again, there were some red flags that were ignored by bank management and regulators. Highlighting this deficiency, his regular inspection report by the RBI submitted to the Board was not carried out. The RBI has also issued several warnings to all banks, instructing them to fix these system flaws (mainly RTGC and non-coordination). But even these were deserted. Nirav and Mehul managed to leave India and India is now trying to bring them back to India in international courts. 

Corporate fraud and fraud significantly damage company property. Indian businesses as a whole have a great taste in deterring and minimizing corporate fraud and fraud. Independent management of the Audit Committee provides one of the primary ways to strengthen internal audits and annual statutory audits. Their independence should be strengthened. With a kudos to incentives, government reimbursement is ethically established in the long run and easiest to manage conservatively. Our response to corporate fraud must be complete and comprehensive.