Financial Scams/Frauds in the last few yearsWe 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).
Author Bio
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.
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.
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.
Basicinternal control required but ignored by one & allwas non rotation of employee having sweeping powers to misuse.
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
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.
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.
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.