Mumbai: At least 1,200 companies listed on India’s stock exchanges, which include some 25-30 firms on the benchmark Sensex and Nifty indices, have massaged financial statements to beat market expectations.
That is the conclusion from a study, called Early Warning Signals of Corporate Frauds, which alleges that such improper accounting includes deferring revenue, inflating expenses and avoiding taxes.
The study—conducted by the Institute of Chartered Accountants of India (Icai), and Indiaforensic Consultancy Services, a Pune-based forensic accounting and education firm—started early this year and ended in August.
Fraud Matrix (Graphic)
The study examined 4,867 companies listed on the Bombay Stock Exchange and 1,288 companies listed on the National Stock Exchange, as on March 2007.
The survey’s respondents were 340 chartered accountants who are members of Icai, the regulator for auditors, and some chartered accountancy students.
As many as 73% of the study’s respondents said the motive for committing accounting statement frauds was to exceed expectations of stock market analysts. For unlisted firms, such frauds are typically carried out to avoid taxes, attract foreign investments and mobilize funds from banks, the survey says.
“Accounting fraud is the most egregious fraud because it goes against the basic concept of investor confidence in financial statements,” said Vidya Rajarao, executive director of financial advisory services at consultancy PricewaterhouseCoopers. “If these are manipulated then there is no other information which is trustworthy.”
The study investigated 11 sectors that include real estate, retail, banking, manufacturing, insurance, public sector undertakings, mutual funds, transport and warehousing, media and communications, oil and gas and information technology.
The manufacturing sector, which contributes about 28% of India’s gross domestic production, is the most ridden with fraud, said 20% of the auditors who responded to the survey, largely because of the peculiar nature of the business and the procedural complexities. Realty and public sector undertakings came second.
Vijay Kewalramani, a Mumbai-based independent chartered accountant who participated in the survey, said a lack of enforcement in manufacturing leads to misreporting by firms. “Regulations in sectors such as banking and insurance are stringent and it leaves little opportunity for frauds,” he said. “However, in manufacturing the regulations are hardly strict and there is a lack of enforcement.”
Some 25% of respondents said between 20% and 30% of their clients manipulate financial statements. The report also cited as alarming the reluctance of companies to report incidence of fraud.
Indiaforensic’s chief research officer Apurva Pradeep Joshi said the survey was done as part of research to identify a set of exceptional transactions that will act as benchmark for industry and help reduce losses to organizations.
“This benchmark will help businesses in reducing losses caused by financially fraudulent activities,” Joshi said.