Secretarial Audit – Fraud Detection and Reporting – Secretarial Audit Compliance Management and Due Diligence Important Questions
Analyse the differences between Fraud and Non-compliance.
Fraud vs. Non Compliance:
Fraud: As defined in Explanation to section 447 of the Companies Act, 2013, the “fraud” in relation to affairs of a company or anybody corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any § other person, whether or not there is any wrongful gain or wrongful loss. In general the fraud can be defined as act or course of deception, an intentional concealment, omission, or perversion of truth to :
- gain unlawful or unfair advantage.
- induce another to part with some valuable item or surrender a legal right.
- inflict injury in some manner.
Non-Compliance : The term non-compliance refers to failure to comply with the laws, rules regulations etc. It is commonly used in regard to a failure to meet the compliance requirements or failure to doing compliance be it the failure in following procedures, filing of information, eligibility conditions, reporting etc.
The relationship between the Fraud and the non-compliance can be constructed as the non-compliance in the company may lead to a fraud how ever it may also be noted that the fraud can also be made in the compliant company.
A fraud is punishable offence whereas the non-compliance also attracts the penalties. Differentiate between the two concepts i.e. Fraud and Non-Compliance.
Authors’ Comment for Answer See December 2019 Paper
Write Short note on: “Disclosures in the Board’s Report related to Fraud”.
The following details of each of the fraud reported to the Audit Committee or the Board during the year to be disclosed in the Board’s Report:
- Nature of fraud with description.
- Approximate amount involved.
- Parties involved, if remedial action not taken.
- Remedial actions taken.
What is the procedure for reporting of frauds by auditor involving amount more than INR 1 crore?
If an auditor of a company in the course of the performance of his duties as statutory auditor has reason to believe that an offence of fraud which involves or is expected to involve individually an amount of rupees one crore or above is being or has been committed against the company by its officers or employees in that case the auditor shall report the matter to the Central Government (CG).
The Auditor should report such frauds as soon as possible but not later than 62 days of knowledge about the frauds and the step by step procedure of the same is as below:
1. Report to Board/Audit Committee: Auditor shall forward his report to the board of directors or the audit committee, as the case may be, immediately but not later than 2 (two) days of his knowledge of the fraud seeking their reply or observations within 45 (forty-five) days.
2. Report to Central Government:
(a) After reply of Board/Audit Committee as the case may be: On receipt of such reply or observations the auditor shall forward his report and the reply or observations of the Board/Audit Committee along with his comments to the Central Government (CG) within 15 fifteen days of receipt of such reply or observations.
(b) If no reply received: In case the auditor fails to get any reply or observations from the board or the audit committee within the stipulated period of forty five days then he shall forward his report to the Central Government (CG) along with a note containing the details of his report that was earlier forwarded to the board or the audit committee for which he failed to receive any reply or observations within the stipulated time.
What kinds of transactions involve Fraud?
Fraud has been noticed in many cases of scams in the following kinds of transactions in the past time which are pointed below :
- Related Party Transactions.
- Excessive Managerial remuneration.
- Insider Trading.
- Inter Company transactions.
- IPO frauds.
In addition to above, other means of Corporate fraud are the inadequate disclosures, false or misleading information, theft of assets, false expenses, corruption, theft in formation, fraudulent applications, misuse of assets, dishonest business partners, fraudulent billing.
Write note on: Fraud Vs. Non-Compliance.
The term fraud can be defined as act or course of deception, an intentional concealment, omission, or perversion of truth to gain unlawful or unfair advantage, induce another to part with some valuable item or surrender a legal right or inflict injury in some manner.
The term non-compliance refers to failure to comply with the laws, rules regulations etc., the term non-compliance is commonly used in regard to a failure to meet the compliance requirements or failure to doing compliance be it the failure in following procedures, filing of information, eligibility conditions, reporting etc.
In nutshell, the relationship between the Fraud and the non-compliance can be constructed as the non-compliance in the company may lead to a fraud however it may also be noted that the fraud can also be made in the compliant company.
1. The term “Speculation” is defined as act of trading in an asset or conducting a financial transaction that has a significant risk of losing most or all of the initial outlay with the expectation of a substantial gain.
2. With speculation, the risk of loss is more than offset by the possibility of a huge gain, otherwise there would be very little motivation to speculate.
3. Indian capital markets have tilted towards speculative instruments having implications of a high level of speculative trading activity compared to investment activity.
Example: Foreign Exchange Market, Bond Market, Stock Market and specially the derivatives segment which comprises of futures and options contracts which is typically used by brokerages and high net worth individuals to bet on the direction of the markets.
What kinds of transactions relating to Company formation and management may be considered as the suspicious transactions which may or may not be with the group companies where the detailed audit is required to be performed?
The following transactions relating to company formation and management may be considered as the suspicious transactions which may or may not be with the group companies, where the detailed audit is need to be performed are:
- Subsidiaries which have no apparent purpose.
- Companies which continuously make substantial losses.
- Complex group structures without cause.
- Uneconomic group structures for tax purposes.
- Frequent changes in shareholders and directors.
- Unexplained transfers of significant sums through several bank ac¬counts.
- Use of bank accounts in several currencies without reason.
- Purchase of companies which have no obvious commercial purpose.
- Sales invoice totals exceeding known value of goods.
- Makes unusually large cash payments in relation to business activities which would normally be paid by cheques, banker’s drafts etc.
- Transferring large sums of money to or from overseas locations with instructions for payment in cash.
Write short note on: “Situations when investigation into the affairs of a company is assigned to Serious Fraud Investigation Officer”?
Investigation into the affairs of a company is assigned to SFIO where Government is of the opinion that it is necessary to investigate into the affairs of a company:
- On receipt of a report of the registrar or inspector under section 208 of the Companies Act, 2013.
- On intimation of a special resolution passed by a company that its affairs are required to be investigated.
In the public interest.
- On request from any department of the Central Government or a State Government.
List ten early warning signals of Fraud Detections?
Following are ten early warning signals of Fraud Detections:
- Bouncing of high value cheques.
- Delay observed in payment of outstanding dues.
- Frequent change in the scope of the project to be undertaken by the borrower.
- Default in undisputed payment to the statutory bodies as declared in the Annual report.
- Invoices without TAN and other details.
- Dispute on title of collateral securities.
- Heavy cash withdrawal in loan accounts.
- Non-production of original bills for verification upon request.
- High value RTGS payment to unrelated parties.
- Substantial increase in unbilled revenue year after year.
Who is considered as an Auditor for Fraud Reporting?’
An auditor for Fraud Reporting includes:
1. Statutory Auditors of the company appointed under section 139 of the Companies Act, 2013.
2. Company Secretary in practice conducting Secretarial Audit under section 204 of the Companies Act, 2013.
3. Cost Accountant in practice conducting cost audit under section 148 of the Companies Act, 2013 and the Branch Auditors appointed under section 139 of the Companies
Note : The Internal Auditor or such other professionals appointed under any other statutes rendering other services to the company such as a tax auditor appointed under Income-tax Act, GST auditors appointed under the respective GST legislations are not covered under Section 143 of the Companies Act, 2013.