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).