According to estimates, India is losing a whopping $40 bn per year because of corporate frauds, which is more than 4% of the country’s gross domestic product. The early warning system, which is going to be mechanised in nature, will help the ministry to detect frauds at early stages, highly placed sources connected to the development told SundayET.
The ministry has begun working on the system after the successful launch of the MCA21 initiative which provides both citizens and corporate an easy and secure on-line access to services including filing and registration.
“As we have all the data in an on-line format, it won’t be difficult to analyse those and detect frauds at early stages. It may take a year or two to give the final shape to the new concept. It will be a Gen-next e-governance initiative which will help the government agencies to curb frauds at an initial stage,” sources in the ministry said.
The frauds include those committed for the company, and those against the company such as embezzlement of funds and payroll frauds which, in turn, affect the bottomline of a company. The proposed early fraud detection system would check the books of accounts to find out whether any company is resorting to fraudulent practices which will adversely affect interest of shareholders, creditors, employees and others.
At present, various government agencies including intelligence bureau under the ministry of home affairs, and Central economic intelligence bureau and financial intelligence unit, both under the finance ministry, detect frauds in financial sector
According to the initial concept, if the early warning system detects evidences or any trends indicating frauds or cheating, the ministry will have the right to initiate an inspection under provisions of Companies Act, 1956. The data on frauds will also be passed over to various Central government agencies dealing with money laundering, auditing and other financial frauds.
According Mayur Joshi, chairman, Indiaforensic Research Foundation, a Pune-based consultancy organisation engaged in fraud examination and forensic accounting in India, the early warning signals are divided in two parts globally - warning signals of the frauds done for the company and indicators of the frauds done against the company.
“Frauds committed for the company broadly covers the financial statement frauds like recognising the revenues too early in the balance sheet in order to meet the analyst expectations or in case of the SME's the frauds which are committed to evade the taxes. Frauds against the company affects the bottomline of the company, for instance travelling claims, inflation, embezzlement of funds and payroll frauds,” he explained.
Types of frauds
Change in financial period: If a co, which has been closing its books on the 25th of every quarter, suddenly changes the accounting period and starts considering the sales till 27th of the quarter, then the additional sales of two days are added in the revenues. This can help a co increase revenues and sometimes even meet the expectations of analysts. Side agreements to the sales transactions: Where the selling co agrees to buy something from the debtor which is of the value more than the sales value deferred in no. of years.
Change in financial period: If a co, which has been closing its books on the 25th of every quarter, suddenly changes the accounting period and starts considering the sales till 27th of the quarter, then the additional sales of two days are added in the revenues. This can help a co increase revenues and sometimes even meet the expectations of analysts. Side agreements to the sales transactions: Where the selling co agrees to buy something from the debtor which is of the value more than the sales value deferred in no. of years.
Payroll fraud : When all the payroll-related payments made on the vouchers have thumb impressions. This is a unique warning signal for the Indian scenario as the person taking salary in cash on the thumb impression is not expected to know what is written on the voucher.
Increase in the number of employees to whom the salary is paid but no comparable increase in the production: This is also called ghost employee scheme where the employee is added in the list of people taking the salaries but actually no such employee exist or contribute.
Difference in the size of the payroll before and after the outsourcing of the payroll starts: Many Indian IT companies have started outsourcing their payroll to outside firms. This process carries the inherent risk of processing the payments to the employees who are actually not working for the companies.
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