Fraud, the word that is good enough to give goosebumps to any entrepreneur, a word that defines the intention of a person, community and sect. But this simple word has different definitions under various statutes. Some of the key definitions are given below, which are provided in most prominent acts of the nation:
As per Section 447 (1) of the Companies Act, 2013, Fraud is defined to be:
“Fraud” in relation to affairs of a company or any corporate, includes
(c)Concealment of any fact or
(d)Abuse of position committed by any person or any other person with the connivance in any manner,
i.with intent to deceive,
ii.To gain undue advantage from, or
iii.To injure the interests of,
The company or Its shareholders or Its creditors or Any other person,
Whether or not there is any wrongful gain or wrongful loss;
Fraud as defined in Section 17 of Indian Contract Act, 1872:
“Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto his agent, or to induce him to enter into the contract.
Explanation — Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence, is, in itself, equivalent to speech.
As per Section 25 Under the Indian Penal Code, 1860“Fraudulently” is defined as:
A person is said to do a thing fraudulently if he does that thing with intent to defraud but not otherwise.
Thus, we noted that above 3 key statute defines the same word in different manner, however, the soul of all 3 remains the same.
Currently in Corporate world, the fraud reporting has become an essential element and to ensure its reporting and monitoring both Chartered Accountant and Company Secretary have to provide their opinion on the same in their respective audit reports to the Shareholders/stakeholders. As reported in past by one of the Big 4 global accounting firms, white collar crime in Indian corporate world leading to accounting and reporting fraud has shown an upward trend thus, the method of reporting and measures to counter the same have been devised from time to time in the form of Sarbanes Oxley Act and Internal Financial Control by the Regulators.
The core principle and ideology behinds these Controls and regulations are to keep the stakeholders motivated and informed about their investment so that the trust is not breached and investment in business sustains else the business will bleed for cash.
There were various sorts of audit which have been prevailing in the corporate world like Statutory Audit, Internal Audit, Management Audit, Stock Audit etc. despite the same, fraud and control failure did not go out of the picture. Due to the same, Control audit, Risk Assessment, Fraud Audit etc. came into frame in order to enhance the reporting about the Controls which exist in the organisation and governs the transactions and acts of a particular segment. The underlying impact of control failure are now highlighted to management so as to bridge the gaps and ensure loops do not prevail in future.
In earlier days, the reported frauds were mainly classified into below categories:
However, in recent years the list has grown with some new concepts, which are enumerated below:
Further, Companies Act, 2013 has tried to get a hint of these frauds by way of mandate reporting through CARO (Companies Auditor’s Report Order) whereby the auditor has to report on below aspects.
In case the matter of fraud gets reported either through method mentioned supra or through other modes, the government agencies like CBI, Serious Fraud Investigation Office (SFIO) or Central Vigilance Commission (CVC) may also pitch in depending upon the quantum and complexity of matter involved.
Subsequent to fraud reporting, a management or those charged with Governance may also call for an Investigation Audit or Forensic Audit whereby the auditor is expected to quantify the amount involved and the methodology used to commit the incident so that the loop can be identified and gaps can be bridged. As a common practice, auditor may use Computer Assisted Auditing tools, Data Mining Techniques and may also conduct Ratio Analysis in order to detect and quantify the volume. However, these may not provide an actual number but only a relative estimate can be ascertained.
To conclude, we can say that the Judicial regulation by way of new law formation providing prosecution and hefty penalties for the fraud committers should be framed. And regulators should also consider the current information technology available so that ample amount of use can be made to ensure that preventive measures and controls are operating effectively rather than detective ones.
T R Chadha & Co LLP