CORPORATE

FRAUDS
Dr. Vipin Vijay Nair
Assistant Professor & Assistant Dean (Academics)
Jindal Institute of Behavioural Sciences
Assistant Director, Centre for Criminology & Forensic Studies
Associate Educator, Association of Certified Fraud Examiner
Member, Association of Certified Financial Crime Specialist
 Introduction
• In a globalized scenario, corporations need to access resources
and compete in a global marketplace that essentially requires
that it must embrace and demonstrate ethical conduct to grow
and prosper in the long run.

• Corporate frauds and misconduct remains a constant feature

posing a threat both from the macro and micro prospective of
the economy.

• Corporate frauds have become a global phenomenon with the

advancement of commerce and technology
 Fraud Triangle
• (1) Opportunity – Sometimes referred to as perceived
opportunity, which defines the method of committing crimes or
frauds;

• (2) Motivation – The pressure or “need” that a person feels which

could also be a perceived financial need, whereby a person
strongly desires material goods but does not have money or
means to acquire them; and

• (3) Rationalisation – The method and mental process by which an

individual can come to an understanding in their mind and to
justify any act or acts that they take part in.
 Types of Corporate Fraud
• Asset misappropriation fraud involves taking cash and other
assets, and various schemes are used to accomplish this. Assets
misappropriation includes cash skimming, cash larceny and theft
of inventory or equipment, as well as shell-company scams.

• Financial statement fraud is a serious threat to market

participants’ confidence in published audited financial
statements. Capital market participants expect vigilant and
active corporate governance to ensure the integrity,
transparency and quality of financial information
 Types of Corporate Fraud
• Corporate espionage is a threat to any business whose
livelihood depends on information. The information sought after
could be client list, supplier agreement, personal rewards,
research documents or prototype plans for a new product or
service. Companies under the law and different legislations
make applications to the different authorities to cover up the
frauds committed by them.

• Occupational fraud tend to have many similar characteristics,

but they are not all quite as easy to spot or as common as
implied above. Understanding what motivates employees to
steal from companies is the key to detecting and preventing
internal fraud.
 Causation of Fraud
• The causes and the solutions alike can be rooted to the
following 5 major categories:

• 1) Personal Ethics
• 2) Decision Making Processes
• 3) Organizational Culture
• 4) Unrealistic Performance Goals
• 5) Leadership
 Causation of Fraud
• First, business ethics are not completely different from personal
ethics which are the generally accepted principles of right and
wrong governing the conduct of individuals.

• Our personal ethical code exerts a profound influence on the

way we behave as businesspeople.

• It follows that the first step to establishing a strong sense of

business ethics is for a society to emphasize strong personal
ethics.
 Causation of Fraud
• Unethical behavior in a business setting have concluded that
sometimes corporate do not realize they are behaving
unethically primarily because they simply fail put a thought if the
decision that they have made is ethical or not.

• The fault lies in the processes that don’t incorporate ethical

considerations into business decision making.
 Causation of Fraud
• One of the major causes of corporate frauds is that most
organizational cultures have been deemphasizing business
ethics, thus reducing all decisions to the purely economic level.

• Values and norms shape the culture of a corporate entity, and

culture had an important influence on the ethics of business
decision making.
 Causation of Fraud
• Unrealistic performance goals and pressure from the parent
company, the economy and the society at large which can be
attained only by cutting corners or acting in an unethical manner
contribute to a large extent of the corporate frauds ( Satyam
Case).
• Leaders help establish the culture of the organization, and they
set the examples that others follow.
• Other employees in the corporate often adopt and adapt to the
methodology or behavior that the leaders enact and if the
leaders don’t behave in an ethical manner, there is a major
chance the employees of the corporate will not either.
 Technological Fraud
• IT fraud into five major causes:

• (1) incentives of criminals;

• (2) characteristics of victims;
• (3) the role of technology;
• (4) the role of enforcement; and
• (5) system-related factors.
CORPORATE
GOVERNANCE
 Introduction
• “Corporate governance is the system by which business
corporations are directed and controlled. The corporate
governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation,
such as, the board, managers, shareholders and other
stakeholders.
• It spells out the rules and procedures for making decisions on
corporate affairs. By doing this, it also provides the structure
through which the company objectives are set and the means of
attaining those objectives a monitoring performance”.
 Introduction
• Corporate governance mechanism represents organisation’s
culture that establishes code of conduct for employees and
motivates them to place high ethical values.

• If senior managers do not set appropriate tone and do not take

proper action then fraud may have damaging effect. Inefficient
corporate governance will lead to rise in financial statement
fraud.
 Other forms of Corporate Governance
• Internal Audit
• Internal auditors, the first line of defense, have knowledge of
business environment and internal control structure They are
more likely and frequently employed to detect fraud.

• External Audit
• External auditing is a frequently employed method for detecting
fraud but is less effective. They were able to detect only three
percent of fraud cases as per survey by ACFE (2014).
 Other forms of Corporate Governance
• Whistleblowing
• Company’s workforce and outsiders that primarily constitute
customers and suppliers are valuable source for raising alarm
against fraudulent activities going on in an organisation. Whistle
blowing policies motivate them to report fraud.

• Anti-Fraud Policies
• Organisations need to implement anti-fraud policies effectively
in order to distinguish between fraud and misconduct.
Employees often find themselves confused between difference
in fraud and error
 Other forms of Corporate Governance
• Firewall and Password Protection

• Firewall acts as an intermediate between organizational internal

network and less secured external network.
• Firewall is an effective mechanism to protect our system from
network interference.
• It controls traffic between two or more network for security
purpose.
• It keeps corporate system safe from hackers.
 Other forms of Corporate Governance
• Fraud Risk Assessment procedure
• The main objective of fraud risk assessment procedure is to
assess risk of fraud. It requires knowledge about fraud,
identification of red flags and participation of employees at all
level

• Forensic Accounting
• Nowadays continuously increasing fraud and inability of
auditors to detect fraud has resulted in increasing demand of
forensic accountants. Forensic accountant improves auditor’s
ability to detect fraud and acts as a bridge to audit expectation
gap
 Ethics Officer
• To make sure that a firm behaves in an ethical manner, several
firms now have ethical officers. These individuals are responsible
for making sure that all the employees are trained to be ethically
aware, that ethical considerations enter the business-decision
making process, and that the company’s code of ethics is
adhered to.
• Ethics officers may also be responsible for auditing decision
making to make sure they are consistent with this code. They
also act as internal ombudsman person with responsibility for
handling confidential inquiries from the employees,
investigating complaints, reporting findings and making
recommendations for change. E.g. Mukund Rajan of Tata Group
CASE STUDY
 Enron Case Study

Fortune magazine chooses Enron as it’s “Best

Managed and Most Innovative company
 ENRON FIASCO
• August 2000: Stock at $73 billion
• March 2001: FY2000 revenues at $100 billion
• Sep 16, 2001: “Buy more shares”

• October 2001: Enron pays its regular dividend

• October 16, 2001:
• $618 million 3rdQtr Loss
• $1.2 billion reduction in shareholder equity
 ENRON FIASCO
• October 31, 2001: SEC upgrades inquiry into a formal
investigation

• December 2, 2001:
• Enron files for bankruptcy
• 4,000 employees fired
• 20,000 workers lose their jobs
• $73 billion in stock value -gone
 Reason behind ENRON FIASCO
• Enron Senior Management used complex and murky accounting
schemes
• to reduce Enron’s tax payments;
• to inflate Enron’s income and profits;
• to inflate Enron’s stock price and credit rating;
• to hide losses in off-balance-sheet subsidiaries;
• to engineer off-balance-sheet schemes to funnel money to
themselves, friends, and family;
• to fraudulently misrepresent Enron’s financial condition in public
reports.
 Reason behind ENRON FIASCO
• Enron Senior Management used complex and murky accounting
schemes
• to reduce Enron’s tax payments;
• to inflate Enron’s income and profits;
• to inflate Enron’s stock price and credit rating;
• to hide losses in off-balance-sheet subsidiaries;
• to engineer off-balance-sheet schemes to funnel money to
themselves, friends, and family;
• to fraudulently misrepresent Enron’s financial condition in public
reports.
ENRON IN
INDIA
 Satyam Scam
• The biggest corporate scam in India has come from one of the
respected business family.
• Satyam -Fourth largest Indian IT Company listed in India & US.
• Over US $ 2 billion annual revenue size co.
• Established in mid 1980s, grown to 53,000 employees.
• 600 plus customers including 185 fortune 500 Cos.
• Operations in 66 countries across the globe.
• Financial advisor: Merrill Lynch (now Bank of America).
• Auditors: Price Water House Coopers.
• Bankers: Citi bank; BNP Paribas, HSBC & HDFC.
 Reason behind Satyam Scam

• Fudging of Accounts.
• Overstated Assets of Rs. 490 crore.
• Fake cash balances over Rs. 5,000 crore in the Balance Sheet.
• Interest component of Rs. 376 crore which never flowed into the
company’s coffers.
• Understated Liabilities of Rs. 1,230 crore.
 Response towards Satyam Scam
• Investors-Panicked as Stock plummeted.
• Employees -stranded in many ways-morally, financially, legally
and socially.
• The incident resulted in immeasurable and unjustifiable damage
to Brand India and Brand IT in particular.
• Chairman, MD and CEO, CFO, Key associates arrested.
• Partners of Audit Firm were also arrested.
• People lost a staggering Rs 100 billion in Satyam in market
capitalisation as investors reacted sharply and dumped shares,
pushing down the scrip by 78 per cent to Rs. 39.95 on BSE.