Home / Companies / Govt banks on warning system, stricter norms to avert frauds

New Delhi: Till January 2009, the ministry of corporate affairs (MCA) wasn’t as involved in business activities in the country or considered as important as the ministry of finance, of which it was a part till 2004. Its primary role, as still mentioned on its website, was administering the Companies Act, 1956.

Transparent firms: Corporate affairs minister Salman Khursheed says the country is moving into a regime of greater disclosures by firms. Pankaj Nangia/Bloomberg

The MCA needed to use nearly all its wings—the Company Law Board (CLB), the Serious Fraud Investigation Office (SFIO), the Registrar of Companies (RoC), the Institute of Chartered Accountants of India (Icai), and the Institute of Company Secretaries of India (ICSI)—to find how B. Ramalinga Raju, the founder of Satyam Computer Services Ltd, could have fudged the firm’s accounts for years, undetected.

Early on 7 January, Raju sent a statement to the exchanges admitting he had mis-stated Satyam’s accounts by around Rs7,136 crore. Eleven months later, the Central Bureau of Investigation (CBI) found evidence of an additional undisclosed fraud of Rs4,739 crore.

Also Read Satyam: Road to Recovery

“The Satyam case has shaken us all and there is a constant fear that something of that magnitude does not happen again," said a senior official at MCA who didn’t want to be identified because he is not authorized to speak to the media.

The ministry has since been peering into the shareholding patterns and investments of several companies, especially telecom firms. MCA officials were tight-lipped and wouldn’t name the companies being investigated.

Also See Satyam Timeline: A Recap (PDF)

Salman Khursheed, minister for corporate affairs, is now banking on an early warning system to detect corporate frauds.

“We are moving into a regime of greater disclosures by companies, bigger role for independent directors and separating internal audit from statutory audit," said Khursheed in December in the context of the ministry’s attempt to avert corporate frauds in the future.

The early warning system (EWS), a software that MCA put in place a year ago, signals ministry officials on suspicious developments in companies.

Kursheed added that investigations into the Satyam fraud were nearly complete.

Akil Hirani, managing partner, Majmudar and Co., a corporate law firm, said while the new Bill has taken sufficient care to avoid frauds by requiring companies to report their numbers in a more detailed way and strengthening the role of independent directors on corporate boards, the enforcement of laws through RoC has to be strengthened.

“In the last one year, RoCs have been pulling up companies which have been tardy in their filing of statutory returns such as balance sheets and annual returns," Hirani said.

The registrars, he added, should have the powers to “scrutinize companies’ balance sheets, profit and loss accounts, ask for additional information in case of discrepancies, further verify books of accounts, etc.".

MCA didn’t have an easy task investigating the Satyam fraud.

“While SFIO had captured the whole lot of data from Satyam, lack of access to the same ERP (enterprise resource planning) system tailor-made for Satyam has resulted in problems of reading and interpreting the data," said a person close to the developments at SFIO who did not want to be identified.

This person said trailing the money, which essentially involves reconciliation of Satyam’s bank book and bank statements, had posed a problem. “Thousands of cheques were to be verified and cheque numbers tallied, which can be done only by unbundling piles of cheques for which SFIO needed support from various banks," he said.

In December, SFIO filed charges against Raju, Satyam’s former managing director B. Rama Raju, ex-chief financial officer Vadlamani Srinivas, former company secretary G. Jayaraman and seven other directors under the Companies Act, 1956, for deceiving shareholders, and fudging balance sheets.

Icai conducted its own investigation and in November found four auditors of Price Waterhouse in Bangalore guilty. Its earlier report, submitted to MCA in August, had not shed any new light on the fraud, and, apart from repeating charges made by Central investigating agency the Central Bureau of Investigation, had merely suggested generic measures to improve audit process in firms.

MCA is working towards strengthening SFIO so that it has more teeth to investigate frauds. Besides, the new Companies Bill proposes stringent penalties on promoters and other persons duping the public, more accountability on their part and on that of independent directors, and a better and speedier adjudication process. It also has a provision for class action suits by shareholders.

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