Corporate frauds and remedies

Corporate frauds and remedies

Abstract:

In this article, I am used to highlight the meaning, origin, elements of fraud, causes of fraud, corporate frauds around the world, types of corporate frauds, prevention of corporate frauds, penalties under various laws, the biggest corporate fraud committed in India along with determining corporate liability and important case laws as well. Due to the rise in large and multinational companies in the past five decades corporate frauds seen in recent times. 

Introduction:

Nowadays whether it is a big company or small has become a persisting phenomenon. All must be aware of corporate fraud. Corporate fraud is more happening and it is very hard to identify. Frauds are insider trading and misuse of company belongings for private gain. Corporate fraud is a type of crime mostly committed by a respectable person holding a high position in an organization with a greedy nature. It is done for personal gain by an individual by damaging an organization or a person’s wealth. 

Meaning of Corporate Fraud:

Corporate fraud is an unethical or illegal action committed by a company or an individual in a dishonest manner. It is an intentional omission or prevention of truth to gain unlawful advantage. Corporate fraud is extremely hard to trace out. Lastly in corporate fraud, the victims are consumers or clients, creditors, investors, etc.  

Origin:

Corporate fraud also called White collar crime is a crime by employees or directors of a company to indulge in illegal activities to earn extra money. Nowadays corporate fraud is more common, but there have been various corporate frauds in the past century. Already existed in the 18th century In 1725 London-based institution named Charitable Corporation was accused of corporate fraud. The institution provides loans to the poor at very low-interest rates. The term corporate fraud originated in of 20th century. According to the survey, between 1997 and 2022 an average of 13% of large firms were a part of corporate fraud yearly.

Elements of Fraud:

• Intention to commit fraud

• Unlawful gain or loss

Causes of corporate fraud:

The causes of corporate fraud are as mentioned below:

1. Poor Fraud Policy and Training
2. Poor Remuneration
3. Inexperience Personal
4. Poor Bookkeeping
5. Failure to Check Employee’s Background
6. Annual Auditing

Types of Corporate Fraud:

There are serval types of corporate fraud committed by various means. Some of the common types of corporate fraud are as mentioned below:

1) Financial Fraud

2) Misappropriation of assets

3) Employee frauds

4) Investment frauds

5) Tax frauds

6) Bribery

7) Money laundering

and other types of fraud related to payment, false accounting, bankruptcy-related fraud, cash theft, and corruption. 

1. Financial frauds:

Financial fraud is commonly seen in organizations. Financial frauds are costliest of all. Almost 9% of frauds that occur are financial frauds. Here material alteration or omission is done in the statement of accounts. Financial fraud has a bad impact on the financial health of the organization and cause loss in thousand or lakhs amount then leads to the company being financially ill.

For example:

A technology firm named Isaac Invention has been a standing firm in the market for two decades. It has the best performance in the market, always its share price in the market never falls. The company has goodwill in the market. But here internal frauds occur by four board members involved in bribery and selling intellectual property to their own companies. On the other hand, top management employee makes fake employee records and credits the salary to their accounts. The government seizes the property and offenders declare a firm as bankrupt.  

2. Misappropriation of assets:

It is the most common type of frauds, almost 86% of cases in corporate fraud are misappropriation of assets. Fixed assets are overrated over an actual price in the market making it easy to take money from the company account. In this case, the employee plays a vital role in committing fraud. So business needs to have a strong internal team to avoid fraud. Employees misuse company funds for their gains.  

3. Employee frauds:

Employees are the primary persons to commit fraud both internal and external. Because they know the lope poles of a company, have more opportunity to do than any other. In small cases, altering attendance records, submitting false invoices, a material alteration in accounts etc. In large cases, directors or manager plays a key role because all financial affairs of a company and used company capital for personal gain.

4. Tax frauds:

Tax fraud occurs in companies by avoiding tax payments to the government or stating more tax than actual i.e. overstating a tax. Make changes in bookkeeping or keeping two or more books for a single company. 

5. Investment scams:

In investment scams, every company starts with a certain amount called capital. Director’s accountants and managers are involved in maintaining accounts in a company. In this due process, employees use the company capital for their trade or any personal use by making adjustments in accounts, and adjustments in invoices, by skipping particular transactions in a trading.

Corporate frauds around the world:

According to the 2022 report corporate fraud rate in each country is as mentioned below the US- 36%, Canada-36%, has the highest number of corporate fraud cases followed by Sub-Saharan-23%, Asian Pacific 10%and Western Europe at 8%. The statistics showed that 50% of corruption fraud increases every year. As all said preventing fraud is much easier than recording a loss occurred by fraud.

Prevention of corporate frauds:

Prevention is better than cure so prevention of fraud in a firm is very important to maintain firm goodwill in a market. Now let’s look at some modes of prevention of corporate fraud in an organization:

1. Know your employees
2. Strong management
3. Corruption
4. Take action immediately
5. Implement and update privacy policies
6. Avoid extending credits to unknown
7. Know your employees:

At first, the employer should know the employee’s previous employment and about his/ her nature. By their behavior, we can track whether they have the intention to commit fraud or not. By these, we can avoid fraud in a budding stage. Observing and listening to employees to identify potential fraud risks. Management needs to interact with employees and take time to get to know them.

2. Strong management:

Management should look into company affairs regularly and must establish strong communication portals throughout the management so these employees cannot take risk to commit fraud in an organization. Appoint of secret person to look after the frauds in the backend without revealing his/her face to outside an organization.

3. Corruption:

Corruption is seen more in our surroundings in day-to-day life. Corruption is the third   scam in corporate fraud. Corruption in a company leads to a loss of reputation and goodwill in a market then a downtrend occurs in trading.

4. Take action immediately:

If fraud takes place in a company management should take immediate action on fraud.  Investigate fraud by an expert committee and submit a report on fraud to management.  

5. Implement and update privacy policies:

To avoid fraud in an organization implement strict privacy policies and should update privacy policies regularly like changing passwords to accounts, lockers and any valuable information. Important files should be secured like tender files, audit files and any others related to the organization.

6. Avoid extending credit to the unknown:

Credits are taken by employees in an organization for their personal use. Avoid credit to new employees an organization, should not extend credits to employees beyond their limits and credit to unknown persons is not safe for the organization. 

Penalties and Punishment for fraud:

Penalties and Punishment for frauds committed in a firm by a person under various Acts:

• As per Section 447 of the Companies Act 2013, the person who is guilty of fraud shall be punished with imprisonment of a term not less than 6 months and up to 10 years and a fine not less than the amount involved in fraud and may extend to thrice the amount involved in fraud. If the fraud involves in public interest, the minimum imprisonment is 3 years.
• As per Section 448 of the Companies Act 2013, punishment for false punishment statement.
• As per Section 449 of the Companies Act 2013, punishment for false evidence.
• As per Section 451 of the Companies Act 2013, punishment in case of repeated default.
• As per the Prevention of Money Laundering Act 2012, the person who is guilty of fraud shall be punished with imprisonment up to 3-7 years and with a fine of up to 5 lakhs.

Corporate frauds in India:

Some of the frauds that occurred in India are as mentioned below:

• The Mundhra scam was the first corporate scam that took place in independent India.
• Harshad Metha scam in 1992.
• The Ketan Parekh Scam in 2001.
• Satyam Computers Scam in 2009
• The Punjab National Bank crisis by Neerav Modi. 
• In 2019, the PMC crisis after the HDL Company missed a payment of 25 Croces. 

Case laws:

Some of the case laws for fraud committed in firms or organizations are as mentioned below: 

• SFIO v. Rahul Modi
• Neeraj Singhal v. Union of India and Ors
• Sunair Hotels Ltd. v. Union of India and Anr
• Vikas Agarwal v. Serious Fraud Investigation Office.

Conclusion:

Lastly, concluded that the rapid growth of industries and technology is the main reason for corporate fraud. More steps are taken by the government at the central and state levels and also by the corporations at their organizational level. The central government makes many laws for the prevention of corporate fraud. Corporate frauds and scams cause loss of company wealth and goodwill in a society.

Author: Nagasreelekha Yelliboina, a Student of Sri Padmavathi Mahila Visvavidyalayam, Tirupati