CA NeWs Beta*: Bank managers can file a case of Fraud against the auditors too

Search This Site

Monday, March 30, 2015

Bank managers can file a case of Fraud against the auditors too



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..
-1-
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.

-2-
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.
-3-
***




No comments:

Post a Comment

Related Posts Plugin for WordPress, Blogger...
For mobile version of this site click here


News Archive

Recommended Post Slide Out For Blogger