1,200 Indian cos indulging in fraud, report said in Sept

Written by Geeta Nair | Pune | Updated: Jan 10 2009, 03:25am hrs
If the Satyam saga has come as an eye opener for the corporate world and investors, picture this. A report by ICAI and India forensic Consultancy Services, a Pune-based anti-fraud education and consultancy service provider and a forensic accounting think-tank, in September 2008 said 1,200 India companies could be indulging in financial statement frauds. But the report was frowned upon and it ruffled a lot of feathers.

Now with the Satyam fraud unfolding, the report does not seem improbable. In fact, Indiaforensic now says this is only a small tip of the iceberg. Satyam is just one component of all those companies which are indulging in such frauds. More than 73% of respondents in our report named Early Warning Signals of Corporate Frauds said companies are indulging into financial statement frauds with the objective to beat the analysts expectation, says Mayur Joshi founder of Indiaforesnsic. That is what Satyam chairman, Ramalinga Raju has confessed to -- cooking books in order to meet the quarterly expectations of the shareholders.

Looking at 6,000-odd listed companies as on March 2007 and keeping in view chartered accountants students survey, around 30% of companies manipulate financial statements, the firm then said. The investors should look for early warning signals of fraud in the balance sheets of the companies they are investing in, warned Indiaforensic. It is difficult to say if a company is indulging in a fraud. However, there are number of indicators that warn the investors, says Joshi.

A financial fraud prevention committee should be incorporated which identifies the warning signals and prevent them, suggests Indiaforensic. In September 2008, Indiaforensic came out with a report along with ICAI saying 1,200 India companies could be indulging in financial statement frauds. The report was frowned upon and ruffled a lot of feathers.

Some of the warning signals one must note are

Co losing out on major customers and still showing an upward trend in profits

Company is negotiating financing based on receivables, accounts receivables growing at the pace which is not consistent with the past trend

Debtors growing at the speed faster than growth of sales

Growing ratio of credit sales to cash sales for last few quarters

Cash decreasing as compared to sales and debtors

Slowing debtors turnover for the consistently few years

Large sales toward the end of the quarter and substantial sales being reversed in the first quarter after the remarkable increase in the sales