FORENSIC ACCOUNTING AND LITIGATION SUPPORT

Fraud - An Inevitable Truth

 

FRAUD

 

 

Fraud - Deceit/Deception (Dictionary Meaning)

 

Dishonest Intention to obtain wrongful gain (more in a legal sense)

 

Numerous aspects of our life are associated with this term and stories will keep emerging till the end of human race.

 

The list of reasons that lead to Frauds are non-exhaustive however the root-cause is just a couple of things:

 

1. Unawareness/Non-Alertness of the victim.
2. Dishonest Intention of the accused.  

 

Frauds can happen and do happen whether we are at work or holiday...so it can happen in any scenario where the intention are malicious, mischievous, full of greed etc.

 

When I use the word malicious, greed etc. it has be to interpreted/judged in terms of ethics, integral standards, moral values and not  in terms of what is legal/illegal.

 

What may be perceived as legally right may not always be ethically correct......

 

One of my colleagues rightly said that crime will only end with extinguishment of human race which I believe is not a solution to the issue under consideration hence no matter the amount of laws or internal controls we have the human race has the capabilities to counter them with their sharp minds.

 

We are the ones responsible for emergence of virus and we are the ones who develop anti-virus to counter it....

 

So not drifting to far from the topic i.e. Fraud - An Inevitable Truth

 

Having worked with FED - Federal Government  in the past for considerable time I made a courageous decision....I have started my own venture...I now conduct training sessions for corporates on Fraud Investigation/s and also provide consultation on strong internal control measures, best business practices, good governance and likewise.

 

The profile I worked on involved investigations....not divulging in too much details as their may be privacy issues however I can definitely share the experiences.

 

I must say during these 3 years I encountered so many stories about fraudulent behaviour of an individual and the elements that force them to pursue such behaviour... the common denominator that I came across was a single lie followed by series of lies.

 

For a fraud to happen the first step is that the perpetrator has to be unethical....though it can be safely stated that the perpetrator/s could be legally right but for sure is morally wrong.

 

For e.g. Speeding through an Orange/Yellow Signal @ traffic would not be illegal but stopping at it is ethically right.

Having a registered office of a multi-billion $ corporation in a Tax Haven as against the place where most of it's operations are finalised...or conducted....

 

So the whole ball game boils down to a debate between ethical vs. legal...

 

To give you an example which we all would associate ourselves to is...try to remember a scenario when you or your colleagues/friends/family fabricated series of excuses to avoid an obvious situation ..this may be work related or otherwise.

 

We all will strongly agree that once we lie about a situation then we have to build a web or series of lies to protect our first lie.....

 

Similarly with fraud the intention is to deceive the user of the information to make wrong decisions.

 

The human greed has no boundaries....we have lost our connection with integrity, moral values, harmonious life.

 

Now a days in a corporate world the fraud happens either at management level or at employee level.....gone are the days when frauds were committed by external vendors.

 

Not to say there are none that fall in the latter category but now a days the major corporate scandals have emerged internally within the organisation.

 

The top management is under tremendous pressure to meet the street expectations and also board's forecasted unrealistic number/s which also sets benchmark for the bonus figures and big fat pay checks.

 

On a bright morning the CEO/CIO/CFO or even the board sit for a meeting on a cup of tea/coffee with snacks and decide some hypothetical targets without taking in to consideration the state of the industry or economy.....The top execs try to impress upon the board they can manage the show and hence justify their own remuneration...the board driven by the greed to increase the value of their individual holdings...try to turn a blind eye to an obvious blunder that is about to take place....

 

Result of these meetings are discussed aggressively with the press...the press by adding it's own spice print/s it in the media....which the market receives positively and in turn the small time investor/s invest their hard earned money based on spiced up unreliable data....

I can quote numerous example/s from our stock market where the price movement/s in a particular script is not justified by it's P/E or it's fundamentals but is solely driven by hyped forecasts....corporates are completely in huge debt/s but yet they are trading @ price which is difficult to substantiated if the true indicator/s are depicted in press and not the spiced up ones....

Let's take an example of a fraud that was I believe the biggest accounting scandal in the history of Indian Corporate World.....the Satyam Case....

 

The CEO & MD came out with a letter to Board and its Shareholders citing the unreliability of audited figures appearing in the books of accounts....result the shares nosedived sharply...

 

A committee was appointed to come out with it's findings and report on the same...

 

It can be safely stated that if not billions...millions of hard earned earnings would have been lost at that stage....who was going to account for it, was a million $ question?

 

Internal Controls, Governance, Ethical Standards, Accountability was overridden by insatiable greed of the mentor/founder member....everyone pointed the finger at one man...well no one discussed the indirect involvement which may have been pushed the perpetrators....no doubt the perpetrators were the face of the scam but the spirit that drove the body was hidden....

 

The financial losses would have been recouped from the personal assets of top execs but what about the non-financial losses....loss of jobs, savings etc.

 

A fraud not only leads to financial loss but also has non-financial repercussions...large economic losses and stigma to the social standing of the nations; we tend to recover the losses which are easily measureable but the vacuum created by the event is always void.  

Strong Internal Controls, Good Governance and Best Business Practices would definitely help but if an organisation wants to reduce frauds to a respectable level then they need to build.... something called an ETHICS DEPARTMENT which would vouch for all other departments like Finance, Legal, Compliance, Administrative, Manufacturing etc.

 

This department would be an autonomous body unrelated to the organisation with members whose appointment and functioning would not be within the organisation's domain/purview.

However it is paramount that these checks may not ensure the  compliance we are targeting but never the less the right amount of check points supported by independent bodies who closely monitor the operations would surely reduce the extent/frequency of frauds. 

We talk, discuss and debate about corporate social responsibility and reporting as eminent part of reporting standards yet we fail to acknowledge the levels of securities that  are being penetrated....day in  and day out in corporate world whereby fraudulent reporting has become a norm and unqualified reports by the auditors a routine....

I believe there needs to be a strong shield for people who intend to become whistle-blowers...the ETHICS DEPARTMENT should provide adequate support and protection to everyone who stands by the truth and values which are fundamental to the existence of the organisation...

I believe in a longer run for sustainable development of the economy at large we should have strong ethical and moral values....to contain our insatiable greed.

All the Best!! Let's Contribute to positive and sustainable growth!!!

As always please share your views and ideas....expand my learning curve:-)

 

 

 

 

Unauthorised Trades by Stock Brokers

I believe the topic may be of an interest to all the investors who have entrusted the brokers with there hard earned money. The paramount issue is of ethics and integrity. 

I have been reading and researching lately on an issue of Unauthorised Trades by Brokers. The geographical location is not an imperative element on this serious issue however my research relates to matter currently being pursued in India (NSE)

The whole discussion can be wrapped up by just posing one question.

Was an approval obtained before or after the trade was executed? 

From the latest article cited in Indian Express the stats suggest that Brokers neither have fear of the regulatory authorities nor do they fear the rules, regulations and bye-laws laid down by these regulators. 

Please visit the below link to obtain the latest stats as to the number of complaints lodged on the issue under consideration in the present blog: 

http://www.indianexpress.com/news/despite-sebi-clampdown-unauthorised-trading-by-brokers-rampant/1126368/

The utmost important factor in such disputes which have resulted in decisions being given in favour of the broker houses is the non-alertness of the investors. 

And to add to the woes of the investors get entangled in the procedural hurdles and the subject matter eventually dies down. 

Nevertheless the laws are always designed in the best interest of the honest litigant but the procedural lapses in the complaint due to lack of legal knowledge are being used by their mischievous opponents. 

Coming back to the ISSUE: 

The Rules, Regulations and Bye-Laws state that for every trade an approval/confirmation needs to obtained before the placement of an order and details of such approval be maintained and also details of such transaction which has been placed subsequent to such approval. (read clause 3.2.1 and 3.4.1 on NSE trade operations)

The above information can be located under the topic of trade operations designed for every relevant exchange. 

The above rule if understood in it's spirit will suggest that the duty on the brokers has to be assessed on following grounds; 

1. The approval/confirmation is obtained prior to the transaction/s; 

2. Details of such approval is retained; and 

3. Details of such transaction executed after obtaining such confirmation is also be retained. 

Results for 99% of matters which I have read and researched on .....unfortunately have focused on historical data which relates to post transaction and the time frame within which disputes/concerns are raised by investor/s upon obtaining such information. 

For e.g. Broker/s or there legal representatives always stress on the fact that the E-mail/s, SMS Alerts, P&L Statements etc. were sent and thus the investor was aware of the transaction. In turn during the proceeding/s they produce EMAIL LOGS, SMS LOGS, P & L STATEMENTS and LEDGER ACCOUNT/S which is nothing but a historical information or after effects of a transaction which lacks approval. 

They also emphasize on the fact that since the investor has not disputed the transaction within a stipulated time the investor has given an implied consent or the investor/s were educated enough about the transaction or they were aware of such risks and never raised concerns when profits occurred but only disputed when losses occurred. 

I believe disputes will only arise when an investor loses his savings and not when his portfolio is in green...

The broker/s and there sales rep are smart and diligent enough that they ensure that they obtain numerous signature from the investor at the time of opening account under the pretext of routine formalities and not educating the investor enough on the repercussions. 

The issue lies in the process, the investor gives almost a blanket authority via his numerous signature/s and which are used against the investor when disputes arise. 

The question however remains is whether the rules, regulations and bye-laws are above such blank authority obtained mischievously by the broker/s or is the agreement between the broker-client which grants blanket authority is paramount? 

I believe any rational person would agree and which also a settled position of law that the clauses in standard agreements which try to negate the spirit of a legislation should not be allowed to stand in accordance to principles of law and equity. The standard agreement/s always should be designed in such a manner that the spirit of legislation is held in highest regards and any deliberate attempts to tweak the law by indulging in such mischievous agreement/s should be set aside.  

Thus the question/s that should be posed and decided on in unauthorised trades is; whether there was enough approval/confirmation to enter into the transaction or whether the transaction was executed and standard information delivered after entering in to the transaction to the investor? 

The important aspect that needs attention is whether such transaction/contract is valid, void or voidable? Knowledge of transaction and dispute would be an after effect which would also raise serious questions about the credibility of the investor/s but does that set right the wrong committed by the broker/s. 

Raising concern upon knowledge is imperative but does not that mean if concern is not voiced in right time frame the broker would have done a right thing even though the NSE, BSE rule states that confirmation should be obtained is being violated. 

I believe that the judiciary and regulators should seriously question the processes adopted by the broker/s and lay strict precedents against even a smaller violation by these strong opponents. 

Another important aspect which I respect and which every individual should respect is that the law needs to adhered to but the law should not act as an obstacle/s where justice is delayed.  I believe the government/s or law makers have done enough to come out with better or best laws but the flaw remains in the implementation mechanism. 

I believe if advocacy is a noble profession and judiciary is an independent review system then justice should and will always prevail. 

What is seen that the procedural hurdles and numerous legalities try to take the steam away from the subject matter of the dispute? 

I do believe that the procedures should be paramount and I do respect them but when it is used to delay the verdict or mischievously postpone the matter to the misery of the honest litigant then I seriously start doubting the spirit of the system and benefits that should flow from it. 

I have complete faith that the results would be positive for a honest litigant but I am not sure whether the  verdict would come at a right time....timing is the issue. 

There is a possibility that the number of pending cases are on rise and the infrastructure in place may not possibly up to the mark but still we could implement strategies that would eliminate the burden on judiciary and still have effective outcome/s by focusing on subject matter of the dispute and not get held up in procedural flaws in the complaint. 

In the present scenario, I do agree that the investor/s should be more aware, alert and understand the risk that are associated with the stock markets. However most of the investor/s get trapped in the heat of the moment and look for short term gains through speculative trading.  

For speculative investor/s I believe they learn the lesson by suffering losses for their actions in a hard way but where the investor/s are driven or influenced by the broker/s the outcome/s should not be affected by procedural lapses. 

I also strongly believe if the duty of investor/s is to be aware and alert then it also the duty of broker/s to ensure that their client/s are equally educated with the risks associated and should understand the financial objective of the client/s. 

As soon as the money is entrusted with the Broker/s they are placed in the fiduciary capacity of a trustee as they are dealing with someone else's money. 

Justice is not only about a favorable outcome for a honest litigant but also to have it within a right time frame. 

To repose the faith that may have possibly being lost in the judiciary; is to deliver result/s based on the subject matter and not create hindrances via legal procedural lapses which can  possibly be corrected even during the pendency of a trial. 

Please post your valuable comments.....