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