According to a report prepared by Pune-based Indiaforensic Consultancy Services (ICS), at least 1,200 companies listed on domestic stock exchanges have forged their financial results. The figure included 20-25 firms on benchmark Sensex and Nifty indices. Thestudy called ‘Early Warning Signals of Corporate Frauds’ had alleged that such improper accounting includeddeferring revenue and inflating expenses.
This was perhaps India’s biggest corporate fraud case where M/s Satyam Computer Services Limited (M/s SCSL) caused loss to the investors to the tune of Rs.14,162 crore. The company head, Ramalinga Raju and members of his family secured illegal gains to the tune of about Rs.2,743 crore by various tricks. The fraud was perpetrated by inflating the revenue of the company through false sales invoices and showing corresponding gains by forging the bank statements with the connivance of the Statutory and Internal Auditors of the company. The annual financial statements of the company with inflated revenue were publishedfor several years and this led to higher price of the scrip in the market. In the process, innocent investors were lured to invest in the company. Attempts were made to conceal the fraud by acquiring the companies of kith and kin.– Central Bureau of Investigation.
After the mega corporate scam in Satyam Computer Services Limited, corporate governance, a rather arcane theme of ponderous reports with ringing moral tones, suddenly found itself in media glare. It became the subject of screaming headlines, high decibel TV debates and pontificating editorials. The scam unnerved not only the investors but also the government and the Indian corporates. Satyam, so to speak, was one of the poster boys of Indian software industry. Satyam fraud was among the propelling causes of the corporate governance reforms included in the revamped Companies Act which finally saw the light of the day after long wait.
The introductory quotes to the chapter refer to the type of shenanigans which corporate governance seeks to forestall. The quotes mention the perpetrators of the fraud, theircorroborators, the custodians who slept on their watch, the modalities of the fraud and its victims. Frauds are usually financial and involve cooking of accounts or ‘creative accounting’. It is for this reason that
accountants andwatchdogauditors are so important in corporategovernance. To understandthese matters, we need a little background on the structure and processes of corporates. Therefore we begin with these preliminaries.
