Fraud Revised

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

(a)Any act,

(b)Omission,

(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;

  • “Wrongful gain” means the gain by unlawful of property to which the person gaining is not legally entitled.
  • “Wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.

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.

  • The suggestion as a fact, of that which is not true, by one who does not believe it to be true.
  • The active concealment of a fact by one having knowledge or belief of the fact.
  • A promise made without any intention of performing it.
  • Any other act fitted to deceive.
  • Any such act or omission as the law specially declares to be fraudulent.

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:

  • Securities fraud: Commonly known as stock or investment fraud, where on basis of false information, an investor is pursued to make a decision of sales/purchase of a stock making losses. The deceptive practices followed are in violation to securities laws but still prevails and an uneducated investor finds themselves trapped into this leading to loss of their capital.- Securities fraud: Commonly known as stock or investment fraud, where on basis of false information, an investor is pursued to make a decision of sales/purchase of a stock making losses. The deceptive practices followed are in violation to securities laws but still prevails and an uneducated investor finds themselves trapped into this leading to loss of their capital.
  • Corporate fraud: A very common unlawful activity where by the management of one company provides undue benefits to another company/firm where directly or indirectly the management or policy makers are interested.
  • Bank fraud: These frauds were very much prevalent in the past years and organisations present themselves to be financial institutions before the investor and after a period of time they would fly away with the hard cash lying with them leaving commoners behind searching for them.

However, in recent years the list has grown with some new concepts, which are enumerated below:

  • Cyber fraud: The most prominent and an inevitable threat to today’s world. The fraud committed through networking makes the tracing of culprit a tedious and rock climbing task. The hackers always keep a tap on their financially sound soft targets so as to grab an opportunity given by them in form of card cloning, swiping fake cards, transferring money to accounts existing in areas where access could not be made like Soloman Islands.
  • Identity fraud: A fraud which has shown an unfortunate upward trend whereby the victim has to suffer a mental or financial harm or both.
  • Insurance fraud: With increase in Insurance business in past years the risk and frauds have also shown a positive correlation in form of fake claims, fraudulent claims etc.

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.

  • Whether there was any discrepancy noted out of physical verification of fixed assets and inventory.
  • The loan granted to related parties are not prejudicial to interest of company.
  • All the transactions done with related parties have been disclosed.
  • Whether any fraud was reported to or by the company.

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.

 

Author

Aashish Gupta,
Partner
T R Chadha & Co LLP

Date
Category
blog
Tags
Fraud | Companies Act | Indian Contract Act | Indian Penal Code
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