CMA Rakesh Bhalla
CMA Rakesh BhallaFinancial Scams/Frauds in the last few years

We have seen many financial scams during the last few years from Satyam, Saradha, Kingfisher (Mr. Vijay Mallya), NSEL to PNB where public money running into thousands of crores of rupees has been involved. There may be many such scams which still hidden in dark room. These scams have shattered the faith of investors, citizens & other stake holders.

Satyam scam is about corporate governance and fraudulent practices. Satyam’s case has been widely regarded as the debacle of the Indian Financial System. Similarly other scams have put many control systems in suspicious including the internal financial control system & auditing mechanism. Recently, Rs. 11000 crores fraud detected at Punjab National Bank has given the low level of depositors’ insurance & even a fraud of this magnitude has implications for the safety of bank deposits.

Reasons for these Scams/Frauds – One of them is Audit Mechanism Collapsed

Looking at the reasons for all these scams/frauds, one thing is evident that audit mechanism has not only been failed rather collapsed. May it be Statutory/Financial audit, Internal audit, Concurrent Audit & other audits. The continuous failure to disclose the big corporate frauds puts a big question on present auditing mechanism.

Apart from failure of audit mechanism, other reasons for financial & banking frauds may be – -Poor Internal Control mechanism,

– Non adherence to KYC guidelines as prescribed by RBI,

– Lack of oversight by Bank officer’s w.r.t. deviation management,

– Lack of tools to identify Potential Red flags,

– Failure of information technology etc.

It is pertinent to mention that in many of the audits like financial/direct tax/concurrent audit, the monopoly of one of the finance professional Institute is there. We do not doubt the capability/integrity of this Institute or its members but one thing is clear from some of these scams that inspite of charging high remuneration, auditors have failed to discharge their duty/responsibility in a fair & transparent manner & allowed to happen various irregularities/deviations which has resulted into happening of scams/frauds involving thousands of crores of rupees & may affect the economy of our country.

About the recent PNB scam, our honourable Finance Minister Sh. Arun Jaitley ji has said it to be the failure of Auditors & PNB Management. Sh. Jaitley ji questioned about the role of auditors.

Relevant abstract of their statement is given below:

“What are our auditors doing? Both internal and external auditors really have looked the other way or failed to detect… And, of course, there is also an important challenge where the supervisory agencies have now to introspect what are the additional mechanisms they have to put in place to make sure that stray cases don’t become a pattern and it is nipped in the bud”.

(Source: NDTV dated 20th February 2018). 

Even during last year in July 2017, our Honourable Prime Minister Sh. Narender Modi ji while addressing the gathering on Chartered Accountant’s day said to the Chartered Accountants to ensure healthy financial system without any malpractices, to take a command to eliminate corruption.

Some of the relevant abstract of his speech dated 1st July 2018 are given as under:

“Dear friends, you shoulder the responsibility of ensuring that the economic and financial system remains healthy and is not plagued by any malpractices”. 

“It is the moral responsibility of all of you engaged in the profession of Chartered Accountancy to guide one towards righteous conduct and practice”.

“I request you again to take your clients to the path of honesty so as to end corruption. To eliminate corruption, you have to take the command”.

Solution for preventing these Scams/Frauds-Involve Cost Accountants in Financial Audit Mechanism

There may be many other solutions to prevent these scams/frauds. One of the solutions may be to change the monopolistic right of one Institute for financial/direct tax audit and other professional bodies like The Institute of Cost Accountants of India should also be given the equal right to do the financial/direct tax audit work. Cost Accountants have the equal capability & already doing the Cost Audit & other jobs quiet efficiently as assigned by the Government of India. Further, Government has given due recognition to CMA profession in the Companies Act 2013 keeping it at par with other accounting professionals in many assignments.

It is beyond doubt that Government has given equal responsibility in many fields for both the professions (CA & CMA) e.g. it has kept both the professions at par in the GST related work though indirect taxation was earlier in the domain of Cost Accountants. So the Government should act fast & take a decision to give the right of Financial/Direct Tax Audit work to both the professions & stop the monopoly of any one Institute & keep the financial/direct tax audit field open to CMA professionals also for a healthy competition. Moreover, the authority for appointment of auditors should be changed. Government Authorities should appoint the auditors so to give them independence & free hand to do their duty more effectively.

Other solutions for preventing the financial & banking frauds are

 – Strengthening the internal control mechanism,

– Strict punishment for committing fraud,

– Adherence to all the guidelines of RBI w.r.t. KYC and loan proposals,

– Dedicated cell within each bank to monitor the company/firm to which they are lending and the macro-economic environment of the concerned industry or market where products are marketed,

-Triggers should be designed for all transactions having deviations,

– At every regular intervals, RBI should ensure that the process of reporting Red Flagged Accounts (RFA) is being tested considering the parameters that whether a fair balance between Type-1 and Type-2 errors is being adopted by the banks in this process,

– Holistic review has to be done by the Ministry of Corporate Affairs (MCA) i.e. they must review the reporting disclosure standards of corporate, including banks etc.

Steps to be taken by the CMA Institute

The Institute of Cost Accountants of India should also take up the matter with the Government on this issue & also at the same time gear up the young professionals/students of CMA Institute by modifying the syllabus and providing the necessary training to the members.

Steps to be taken by the Government

Government at their end also review the prevalent Auditing mechanism where financial transactions are involved and issue the necessary amendments to various acts so as to have better control & transparency.

Hence, it is the right time for the Government to take some drastic steps so as to prevent these types of scams/frauds in future by improving the internal financial control system & revamping the auditing mechanism.    

With Warm Regards & Jai Hind 

CMA Rakesh Bhalla 

*Member-ZAC Chandigarh, Service Tax, Govt. of India, Member-RAC Chandigarh, Central Excise & Customs, Member SIAM – Indirect Tax committee , Member-ASSOCHAM National Indirect Taxes Committee, Chief General Manager Finance- SML Isuzu Ltd., Winner Achievers Award 2015 by ICAI (CMA).

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96 responses to “From Satyam to PNB -Audit Mechanism Collapse Is Evident”

  1. TVG says:

    Friends ,

    The issue here is not about which accounting profession is better than the other. The issue is about repeated failure of accounting professionals who have been assigned the audit jobs on a large scale. This is what the author is pointing out as well as by our prime minister himself. Speak to your heart and do self introspection. No one is saying do not earn money. It is only expected that you will not cheat for earning money. Cheating includes gross negligence and failing the people of India who repose great respect and faith in your accounting profession even today.

  2. S.Malleswara Rao says:

    Mr. Bhalla, you have neglected to highlight the role of Black Sheeps in the scam i.e employees of the PNB. Had they be cautious and vigilant the scam could have been detected at the early stage. Their negligence and involvement in fraud led to this situation.

  3. CMA/CS Sridharan says:

    Whether it is CA,CMA or CS unless the professional’s mind is not only corrupt free but also free of corrupt ways to bag assignments, the position will not change.

  4. Niku says:

    Basicinternal control required but ignored by one & allwas non rotation of employee having sweeping powers to misuse.

  5. naresh k gupta says:

    with due apologies, writer does not appear to be aware that as the transactions are not recorded in the books of bank to be caught during audit or the knowledge is too shallow and unwanted and avoidable claims are made

    wd avoid to suggest that not being full time course, CMA level vis-a vis CA is known to one and all an lets avoid mud slinging

    • Rakesh Bhalla says:

      Bank charged bank charges on these transactions & these charges are included in income of bank. Rest you are professional can better understand
      Jai Hind

  6. FCA Devang says:

    The root cause of system failure and fraud is the culprit state of mind of the group of people. Unless, that state of mind changes, frauds are going to happen. As, Laws and Systems are implemented by MAN, unless something is done for change in MAN, no good output can be expected further.

  7. Sandeep Goel says:

    Thanks Bhalla ji for putting your concern to stop continued fraud in the country. India ranked 81 in corruption and its ranking has increased by each passing year.

    Corruption can be curved by strong value system among citizens and specially among auditors. Time and again PM/FM is also pointing on the same.
    There should be Role of Professional to curve the scam, however, it has become…
    ‘There is role of a professional behind every scam’

    If we as professionals are determined towards value and commit to deliver such frauds may be averted.

    I don’t want to undermine the work done by our sister profession, however, advocate that CMA role should be supreme to develop the Indiam Economy with optimizing the scare resources.

    A management and system audit is a tool to judge the performance of Management and strengthen the system.

    In various cases from Satyam to PNB it is failure of a) Good Management Practice b) Failure of System c) Integrity of Professionals/auditors

    We have to incorporate all the three in our Management Audit and it should be over and above financial audit to optimze the resources and avert such malpractices/ Frauds.

  8. Bhalla says:

    Bhallaji you go to Narendrabhai and beg for removal of monopoly of ICAI. You ll definitely succeed and India shall progress by inputs of Mr Bhallaji in audit profession.

  9. R S Murthy says:

    Frauds in India are perpetrated by well qualified professional like chartered accountants and Lawers. Senior bankers are also equally responsible. Political leaders are not serious to punish the culprits.Money is the factor that decides all all outcomes.Admissions into colleges or prestigeous institutes is decided only based on money power. Medical facilities are available if one has money. Professional whio aquired the qualification with money power arfe looting the nation.

  10. Sanjeev Nair says:

    I think that there should be a cross verification system between countries using SWIFT facility. If i am transferring “X” amount from one country to another “Y” country, before the beneficiary is getting a credit it should be cross verified between “X” and “Y”

    Tighter controls on audits, even though some are saying that audit has collapsed, i do not think so, the corruption’s’ has really collapsed to a bottom

  11. iidreddy says:

    Hi All our Indian political system is corruptive..always spread its corruption from pin to piller..below ground to sky..even not left the foetus in the womb try to destroy for the sake dirty hunger for power even they were in death bed.. think of having an other 5 years in power.our political system or politicos always cheat and usr tax payers..funds because our law makers always keep loop holes ..provisions not to punish any law is made 100%proof n punish the wrong doer..hang him n family person who encourage wrong doing and get fraud funds to enjoy lavish life at the cost blood money of others..first of finish the culprit then n there with in 3 months..not more than Harcourt cases will take 20 to 25 the time many may not be exists.any wrong or fraud consider as serious case..Like handled n make hang with in 3 months with out any mercy ..rule for all equally whether common man or cm /pm..who ever did wrong is wrong exemption to any one..change all laws nn bring all laws..rules to punish any wrong doer..with in 3 months.unless strict punishment ..India can not escape from this end .no need of blame each other..make punishment of wrong doer fraudsters..attender to cm/pm..then every one is care full for his life n others life..can eliminate for next 1 to 2 years.change 100 to 500 years old act strict laws to punish with hanging the culprit or fraudsters n save India n Indian’s.

  12. Sumegh Agarwal says:

    Dear Sir

    Your concern about failure of indian banking & financial system is good but how it took shape of crticising a particular profession is not appreciated.

    Instead of pointing & focusing on inherent weakness in system, you are only focusing towards accountability of auditors.

    What about the corrupted officers/management of victim entity, the regulators etc? Do their functioning and governance do not require reforms?

    And further, what guarantee can you give that ” inclusion of so called other professionals is one of the solutions to prevent such scams and these persons will be work with 100% integrity & independence” ?

    Also other professionals should not be too proud that they have been kept at par with CAs, as those work do not require high expertise and thus can be done by others if CAs are busy handling expert work.


  13. Purvi says:

    Good article . Sir, In banking industry also for each bank one Compliance Officer should appoint and he will take care and do all the internal check. Like broking industry there should be one dedicated role for compliance officer.

  14. K.LAKSHMAN. says:

    If all the arms of the Audit Mechanism have failed,it cannot but lead one to the conclusion that money power is ruling the roost and professional integrity is a thing of the past,needing to be unearthed from the history of past cases that have brought the auditors’ clan into limelight – perhaps long forgotten and crying for being baled out now from the abysmal depths it has been consigned to.

  15. Sanandan Kukde says:


    I can see this article inspired not from concerns over auditing community; but out of jealousy and inferiority towards CA community. You have mentioned concern about monopoly exercised by ICAI. However, it is because of this monopoly that ICAI has guided and controlled this highly respected profession and because of which the profession has not become a bureaucracy, where corruption and anarchy. We have seen from previous incidents too, that unprofessional members have to face dire consequences in form of cancellation of membership by the Institute. It is in the best interest that ICAI keep its monopoly. I agree that functioning of ICAI needs reforms; but in no case is ICAI’s monopoly over Auditing Profession to end.

  16. Venky says:

    Good Article . But i fail to understand how involvement of other profession will detect fraud. I feel entire audit exercise should be scrapped world over as it has failed to protect the interest of Stakeholders.
    Audit industry may be a trillion dollar industry world wide but what value it adds to the Industry Government and stakeholder is often a straight question that is ducked BIG 4 and Small 400 thousand.
    We need to strengthen internal mechanism empower CFO for independance and accountability who will report only to audit committee and regulators and we need to strengthen audit committees by making them answerable only in AGM and EGM.
    We need lay the parameters of audit as a cross functional exercise and an internal one specially on processes propriety cost Risk and Systems area with deregulating mandate of audit in companies act and resting with the board specially for listed companies.For private enterprise Audit exemption and freedom for management to engage and disengage an audit inspection by choice.CFOs and audit committees should be regulated and audit to be done away with in many cases and de regulated for listed companies.

  17. Pramod Ralkar, CMA says:

    Isn’t it a generic erosion in our value system? With open market economy, market valuations and fat performance bonuses…. there are disproportionate gains to make. We have redefined the success over last 2-3 decades. Measured by a few material and social parameters. So, the ends matter and not the means [anymore]. Everyone wants more in less. Quickly.

    This is then coupled with laggard dispensing of the justice. We have more laws, more lawyers and very little justice. The mightier and connected can get away with anything…. whereas the underprivileged have to live with whatever they can fetch. In fact, the top 1% is garnering more n more year-after-year. We have top SC lawyers fetching 25L for a single appearance. If one was to believe that they were helping dispensing justice… then we are only fooling ourselves. We have Tax Consultants and Fund Managers earning in Crores. If we were to think that they were doing any great service to the nation, they we are only fooling ourselves. Great service to their Clients n themselves? Yes!

    So, if we were to think that Vijay Mallya [MP], Satyam Raju or Nirav Modi… were some isolated cases, then it would be a shame. There are thousands and lakhs of them around us. They know how to manipulate the system. The big brains are helping them synthesise new ways of defrauding the just n fair incomes. And, in turn, get a share of that sin-money. The Law-makers are a part of it all, and use that sin-money to keep coming back to power. So, let’s not single out CAs. They are also human beings and part n product of this very same society. The Law has granted weight to their signature and they monetise it. Most often wrongly. But, then, who is to define what’s right n what’s wrong.

    I’m a CMA. But, I would hate to suggest that any CMA could be any better. Defrauding is a personal choice. A part of your value system. A result of the evolving society. It is not taught in any CA curriculum. If u were to grant the same power to CMA, then they as well will be equally eager to claim a share of that sin-money.

    I don’t see any end to this. You see Lalu’s Chara Ghotala and Rajiv’s Bofors, Advani’s Babri, Bombay Blast and Salman’s Road-kills cases dragging for years. Most of the accomplished in our Society NOW are some kind of cheat. They have a Celebrity status still they are found out. Suddenly the media wakes up…. keeps beating the drum… silently makes money out of the 24’/Hr advert income. Naive public wants to relish flavour of the day. then something new happens… and we all forget these so-called earth-shattering soul-search moments… and get on with our same old life.

    This is all a mere temporary entertainment to the public. The momentum in the erosion of our social standards, purity, probty, accountability will only hasten with passage of time. No Auditor is a safeguard… because as a human… he is also sucked into the lure of making a quick success. So, he is happy to share the booty.

    I am sure, that my views are divergent to the most and will receive loads of flak. But idea is to see it as it is… without making any excuses.

    • Spr says:

      Your views are perfect. These audit authorities and lawyer s are more concerned about their fee. Frauds mainly occures due to some loop holes and some inevitable gaps in systems which are misused by a few unscrupulous people having access to the systems in doing frauds. The same can be checked/controlled by strengthening internal controls only which are part of continuous monitoring machanism of the institution. Further, the people who instigate them in some cases to commit the same should also be punished equally.

  18. Anonymous says:

    I think the author is indirectly soliciting professional work for him through this article. Don’t you follow professional ethics prescribed by your institute? This article itself is violation of provisions.

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