Enron scam in US and Satyam scam in India had one thing in common, The mis-statement of financial data.

Financial frauds are most common frauds in companies. Financial fraud may be done by lower management or top management.

The fraud by lower management can be controlled by implementing a strong control system in organisation.

Frauds by top management are most  concerning. These are done to boost the image of organisation to attract fresh investments and higher valuation of organisation in Stock Markets.

What are the main reasons for financial frauds at lower Management level?

The fraud may be due to lose controls, organisations not having enough controls to prevent the frauds are most affected.

Employees tend to claim more money by fake bills, appoiting related vendors, getting contracts on commission basis, not accounting the money received, holding the cash etc.

How these frauds can be controlled?

These frauds can be controlled by implementing strong controls at different levels to scrutinize the transactions.

The controls may like verification of random transactions by higher management or appointing any consultant to perform the task.

Normally chartered accountants in India are appointed to carry the internal audits to determine the frauds happening at lower management.

Example of some frauds and detection:

One of the audit i happened to do was regarding verification of physical stock of a limited company. Employees accompanied me to the stocks. The items were packed in single boxes and single boxes were packed in a larger box.

Everything looked perfect, physical stocks were tallying with the stocks as per accounting books. Than i happened to check few boxes, and around 2 dozen boxes were empty. The higher management was informed on the spot and action was taken.

Employees sold the items and kept the empty boxes, they were sure that it was impossible to detect the few empty boxes out of thousands of boxes.

What are the main reason for frauds at Higher Management Level?

The main reason for frauds at top management level are:

  1. Boosting the image of organisation
  2. Pressure from Investors to achieve higher revenue and profit
  3. Higher revenue to draw high remuneration etc.

How these frauds can be controlled?

The problem here is that corporate governance is implemented by top management. Top management decides the scop of work of Internal audits.

Top management on their will have to stop the frauds at this level. The solutions looks theoritical but can be achieved if management is strong enough to answer the pressure from external forces such as investors.

The estimations should be kept realistic.

Companies Act and SEBI have the guidelines to stop frauds at this level. The corporate governance rules and guidelines by Ministery of corporate affairs control the management activities to some extent.

Posted 3 years, 10 months ago by CA Pulkit Sharma

Financial frauds have destroyed many booming companies. Enron, worldcome and Satyam are classic example of financial frauds.

Frauds not necessary happens in big corporations only, frauds may occur in small organisations too.

Frauds at top management level are the one that affects the survival and continuity of business. Frauds at lower management level can be controlled and a proper system can be implemented.

With the help of some consultant, specially chartered accountant (they audit various companies and have good practical experiance in observing the systems implemented) to design a system to streamline the transactional flow.

Posted 3 years, 10 months ago by Stock Guru

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