Guide to Frauds in India

Forensic Accounting in India started with just one word – Indiaforensic.

Before CA Mayur Joshi, founder of Indiaforensic defined the term in Indian context, very few knew about this profession. Today, after the decade, fraud and forensic accounting are used as terms substitute to each other. It is really important to understand how they are associated ?

There are two pillars of the forensic accounting function. Litigation support and investigative accounting which also means investigation of frauds in the books of accounts. In addition to this forensic accounting services are also utilized for the fraud prevention and detection. Hence it is essential to understand the threat of the frauds in various companies.

Businesses are targets for crime because they have something of economic value. Fraud perpetrators believe that they can successfully steal, compromise, or use some of that value.

There is virtually no limitation to the means that may be employed to accomplish a criminal objective. The criminal mind is ever alert to seemingly new and unique ways to separate a business from its assets. Crimes that businesses face generally may be categorized as:

  • “Blue collared crimes,” such as murders, robbery and burglary.
  • “White-collar crime,” such as fraud, conflict of interest, misconduct, and related financial threats.

Research on Frauds

This program focuses on the white collared crimes. White-collared crimes happen at every level of the economy. Corruption is the most popular business crime in India. This money is eventually sent outside the country which results in Money Laundering. In an interesting Study done by the Indiaforensic Center of Studies, efforts were made to quantify the size of money laundering, records of the National Bureau of Crime Records were reviewed and it was observed that size of Money Laundering in India could be as big as Rs.1555 thousand crores.

In the context of the corporate frauds in India, contribution of the Research studies done by the Indiaforensic Center of Studies play a significant role. Most of the studies were well quoted in the Media. These studies always hit the bull’s eye. Their studies have highlighted the following facts

  • India lose more than $40 Billion to occupational or the employee related frauds
  • In the year 2008, the study highlighted that there are more than 1200 companies listed on the stock exchanges indulging in the financial statement frauds
  • Indian Insurance industry lose more than $6 billion to frauds this includes inside and outside frauds in Life and Non-Life insurance sector
  • There is a persistent shortage of forensic accounting skills and India needs more than 60000 forensic accountants by the end of the year 2015
  • Average Salary of the forensic accountant in India was found to be above Rs. 6.89 lacs in the year 2009.
  • In as many as 80% of the cases the forensic accountants are called to the organisation to detect and investigate the financial frauds and in some cases the services of the forensic accountants are also used for assessing the fraud risks or preventing the frauds.

Fraud is the indivisible part of the function of the forensic accountant and it becomes necessary for the forensic accountants to understand the meaning of the fraud, classification of the frauds and symptoms of the various fraud schemes. 

Defining Fraud

India’s companies act was amended after 57 years in the year 2013.Original companies’ act passed in the year 1956 had no definition of the fraud. The act which was amended in the year 2013 had significant provisions related to the corporate frauds.

The definition of the corporate fraud as mentioned in the Section 447 can be divided in five components which explain corporate fraud as:

“Fraud” in relation to affairs of a company or anybody corporate and includes:

  1. “Any act, omission, concealment of any fact or abuse of position
  2. Committed by any person or any other person with the connivance in any manner
  3. With intent to deceive to gain undue advantage from or to injure the interests of
  4. the company or its shareholders or its creditors or any other person
  5. Whether or not there is any wrongful gain or wrongful loss.

No statute except the Contract Act’1872 defined the word fraud before the companies act was amended in the year 2013. In Indian scenario Section 17 of contract act defines the fraud as follows

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.

Most of the Certified Forensic Accounting Professionals agree that fraud encompass activities involving dishonesty and deception that can drain value from a business, either directly or indirectly, whether or not the perpetrator benefit.

Fraud involves the intent to defraud; that is, the perpetrator relies on his or her deception to accomplish—or hide—the fraudulent activity. Fraud is not accomplished via honest mistake or error.

Fraud can manifest itself in a wide variety of ways and originate from a number of different sources. Fraud that is perpetrated by employees, consumers, and vendors dominates most instances of fraud experienced by businesses.

Understanding the fraud threats against your business, as well as why fraud typically occurs, are first steps in analyzing fraud risk and developing an appropriate plan for managing that risk. Hence intention of the person committing the fraud and the financial damage to the victim are two of the most important things to prove the fraud in Indian scenario.