PREVENTION MECHANISM FOR
FRAUD UNDER COMPANIES ACT,2013
Fraud under the Companies Act
Fraud in relation to affairs
of a company or any corporate body as
defined in Section 447 of Companies
Act, 2013 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 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.
An auditor shall also be
liable for action if the auditor including audit firm of the company for any improper or misleading statement of
particulars made in his audit report or for
any fraudulent, unlawful or wrongful act or conduct
A case study connecting with above subject is given here under:
'X' is a manufacturing company
incorporated under the Companies
Act,1956. The company is having working capital loan (Cash Credit)
limits of Rs 100.00 Cr with a bank. The company has diverted the limits to the
tune of Rs 50.00 Cr and invested in derivatives. In the next balance sheet, Rs 100.00 Cr are reported under the
head Current Liabilities on the Liabilities side and under Current Assets on the Assets side.
The company's audited balance sheet is silent on the diversion of funds. The
auditor has not even reported the diversion of funds in the CARO report as the diverted money was
re- invested in short term funds and not
in long term asset.
Let us discuss the outcome of above case from fraud point of
view under the Companies Act,2013
As per Schedule VI of Companies Act, the working capital loan limits being part of
operating cycle of manufacturing
company, the loan should be reported under the head Current Liabilities /Assets.
In the present case, the company is a manufacturing company and not a
investment company. The bank CC of Rs
50.00 Cr diverted and invested in
derivatives is no more part of
operating cycle..
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There have been number of cases
where the company's management have diverted the
bank working capital loans sanctioned for regular operations to various other
purposes viz., capital market, investment in
subsidiary companies, purchase of fixed assets, as margin money for setting up/expansion/modernisation/technical
up gradation of units and for payment of
term loan instalments. The case of Mr
Ketan Parekh is diversion of working capital loans to the capital market as per JPC Report
tabled before the parliament. Most of the cases
referred to BIFR/CDR /DRT are all the cases of funds diversions only.
The disclosure of working
capital loans diversions in the audited
balance sheets as required by Schedule VI of Companies Act,2013 has not
been taking place except as a note in
the CARO report in the absence of
mandatory disclosure of such diversions.
Since
the auditor is certifying the balance sheet as true and fair one where
in the diversion of working capital loans has not been reported in the balance
sheet as required by Schedule VI of the Companies Act, such non-disclosure amounts
to fraudulent, unlawful or wrongful act
or omission, making improper or misleading statement of particulars that would
finally lead to fraud under the
Companies Act, 2013 on the part of auditor or audit firm.
Penalty or Punishment
Section
447 prescribes that the person who is guilty of fraud shall be punishable with
imprisonment for a term not less than 6 months and up to 10 years and fine
which shall not be less than the amount involved in the fraud and may extend to
thrice of such amount.
Fraud Prevention
A s per Schedule VI of
Companies Act, the current liability/asset that
is no more part of operating cycle need to be identified and it should be
reported under the head Non-Current
Liabilities/Assets. In the present case study, the diverted amount of Rs
50.00 Cr should be reported under the head Non-Current
Liabilities as CC Diversion
and under Non-Current
Assets as Investments in
Derivatives on the Assets side.
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In view of Section 447 of
Companies Act, if not today, the other day, any stake holders of balance
sheet like bank manager or Income Tax Department or any NGOs will call for initiating criminal action against all the companies and
auditors or audit firms for concealment or misleading statements of not
disclosing the working capital loan diversions in the balance sheets as required
by Schedule VI of Companies Act. In case the banking industry files criminal
cases against auditors or audit firms for certifying concealed or misleading statements, the
auditors will be victimised and under
such circumstances they don't have any
other option except to land in the jail.
In the present scenario, like
any other mandatory Accounting Standard, there is a need to introduce mandatory disclosure of working capital loan diversions in
the balance sheets as required by Schedule VI of Companies Act,2013. So
that the companies or its management and the auditors or the audit firms can be made alert of such transactions and they can be saved and protected from the rigorous consequences of "FRAUD" as
it is a
cognisable offence under the Companies
Act, 2013. Since the criminal action for a fraud under the Companies Act,2013 is enforceable from April 2016, there is a
glaring and urgent need for the ICAI to
introduce mandatory disclosure of working capital loan diversion in the balance
sheets.
It is not only the auditors and the company officials alone but their total dependants can be saved and their lives
can be safeguarded in case the disclosure
of working capital loan diversions is made mandatory.
The vigil mechanism shall provide for adequate safeguards
against victimisation of persons who use such mechanism.
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