PREVENTION OF CORPORATE FRAUDS & RISK MANAGEMENT 16 th December 2017, IOD CA. PRAMOD JAIN FCA, FCS, FCMA, LL.B, MIMA, DISA
CA. Pramod Jain
RISK MANAGEMENT CA. Pramod Jain Risks are potential events that could influence the achievement of organisation s objectives. Fraud is a major risk that threatens the business, image and reputation. The Board shall be responsible for framing, implementing and monitoring the risk Management plan for the company
CA. Pramod Jain Society Strategic Compliance Political Risk Operational Employee Environmen tal Financial
OBJECTIVE CA. Pramod Jain Identifying, Analyzing and Treating risks appropriately Balancing the risk and reward trade off Regulatory compliances and integrity in reporting Understand the risk profile of the company Framing Risk Management Policy covering: Operational risk Financial risk System/IT process risk
PROVISIONS CA. Pramod Jain Board Report - A statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company Schedule IV Independent Directors - To satisfy themselves on integrity of financial information & ensure that financial controls & systems of risk management are robust & defensible
RISK MANAGEMENT CA. Pramod Jain Board of directors to constitute Risk Management Committee Define roles and responsibilities of RMC Delegation of monitoring and reviewing of Risk Management policy Periodic review of risk assessment and minimization procedures Report of risks faced, measures to minimize and limitation to risk taking capacity certified by compliance officer to the board
MANAGING RISK CA. Pramod Jain Risk Identification Risk Analysis Qualitative & Quantitative Evaluate or Rank the Risk Risk Response Planning (Treat the Risk) Risk Monitoring and Control
FRAUD CA. Pramod Jain
DEFINED (447) CA. Pramod Jain Fraud, in relation to affairs of a company or any body corporate, includes: Any Act, Any Omission, Concealment of any fact or Abuse of position Committed by any person or any other person
DEFINED (447) CA. Pramod Jain With connivance in any manner with intent to deceive / gain undue advantage from, or to injure the interests of: Company Its shareholders Its creditors Any other person, Whether or not there is any wrongful gain or wrongful loss.
CA. Pramod Jain Wrongful Gain Gain by unlawful means of property to which the person gaining is not legally entitled Wrongful Loss Loss by unlawful means of property to which the person losing is legally entitled
PUNISHMENT CA. Pramod Jain Imprisonment not less than 6 months to 10 years + Fine not be less than amount involved in the fraud which may extend to 3 times. If fraud in question involves public interest then the imprisonment shall not be less than 3 years.
PUNISHMENT CA. Pramod Jain Not only Companies Act but: Income Tax Act GST FEMA Money Laundering Benami law IPC
FALSE STATEMENT (448) If any person makes a false statement in any: Return Report Certificate Financial Statement Prospectus Other document under this Act Is false in any material particulars, knowing it to be false Omits any material fact knowing it to be material Action u/s 447 CA. Pramod Jain
FALSE EVIDENCE (449) If any person gives intentionally a false evidence: Upon examination on oath or solemn affirmation In an Affidavit Deposition Solemn affirmation Imp. 3 years to 7 years; and Fine upto Rs. 10 Lacs CA. Pramod Jain
CA. Pramod Jain FRAUDULENTLY INDUCING PERSON TO INVEST MONEY Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into: Any agreement for, or with a view to, acquiring, disposing of, subscribing for,, or underwriting securities; Any agreement, purpose / pretended purpose of which is to secure a profit to any of parties from yield of securities or by reference to fluctuations in value of securities; or Any agreement for, or with a view to obtaining credit facilities from any bank or financial institution, shall be liable for action u/s 447. (36)
CA. Pramod Jain PROVISIONS WHERE ACTION U/S 447 CAN BE TAKEN S.No. PROVISION RELATED TO 1 7(5) Furnishes any false or incorrect particulars of any information or suppresses any material information, of which he is aware in any documents filed with ROC in relation to registration of a co. 2 7(6) At any time after incorporation of a co., it is proved that it got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information in any documents or declaration filed or made for incorporating such company, or by any fraudulent action 3 Proviso to 8(11) Affairs of s. 8 company were conducted fraudulently 4 34 Criminal liability for misstatements in prospectus
CA. Pramod Jain PROVISIONS WHERE ACTION U/S 447 CAN BE TAKEN S. No. PROVISION RELATED TO 5 36 Fraudulently inducing persons to invest money 6 38 Personation for acquisition, etc., of securities. 7 46(5) With intent to defraud issues a duplicate share certificate 8 56(7) Depository or depository participant, with an intention to defraud a person, has transferred Shares
CA. Pramod Jain PROVISIONS WHERE ACTION U/S 447 CAN BE TAKEN S. No. PROVISION RELATED TO 9 66(10) Capital Reduction - Where any officer of company knowingly conceals name of any Cr. entitled to object; knowingly misrepresents nature or amount of debt or claim of any creditor; or abets or is privy to any such concealment / misrepresentation as aforesaid 10 75(1) Deposits accepted with intent to defraud 11 2 Proviso Removal of Auditor after final order passed by to 140(5) Tribunal where auditor has acted in a fraudulent manner or abetted or colluded in any fraud
PROVISIONS WHERE ACTION U/S 447 CAN BE TAKEN S. No. PROVISIO RELATED TO N 12 2 nd Proviso to 206(5) 13 212(6) Business of a company has been or is being carried on for a fraudulent or unlawful purpose 212(6) Investigation into affairs of Company by SFIO 14 Proviso to 213(b) CA. Pramod Jain On Investigation if found that business of co. is conducted with intent to defraud its Crs., members or any other persons or otherwise for a fraudulent or unlawful purpose.
CA. Pramod Jain PROVISIONS WHERE ACTION U/S 447 CAN BE TAKEN S. No. PROVISION RELATED TO 15 229 Furnishing false statement, mutilation, destruction of documents in course of inspection, etc. 16 251(1) Fraudulent application for removal of name 17 Proviso to Delinquent Directors 266(1) 18 339 (3) If found fraudulent conduct of Business during winding up 19 448 False Statement
AMENDMENTS CA. Pramod Jain Companies (Amendment) Act 2015 - Bail restrictions to apply only for offence relating to fraud u/s 447. Companies (Amendment) Bill 2016 - If amount involved in fraud is less than Rs. 10L or 1% of turnover imprisonment upto 5 years or fine upto Rs. 25 Lacs or with both. No minimum amount or term
By Auditor: REPORTING CA. Pramod Jain Report to CG if Auditor (in course of audit) has reason to believe if fraud being or has been committed against Co. by officers or employees < Rs 1 Cr. Copy to Audit committee or to Board By Third Party: Can report directly to CG (SFIO) Copy to the vigil committee constituted as per Whistle Blower policy or to Board If no response then to MCA
CA. Pramod Jain FRAUDS Financial Frauds Misapprop riation of Assets Corruption
CA. Pramod Jain
CA. Pramod Jain Sales of proprietary information Theft of tangible assets by internal or external parties Causing improper payments Misappropriation of Assets
CA. Pramod Jain Making or receiving improper payments Offering bribes to public or Private officials Corruption Aiding & abetting fraud by others Receiving bribes, kickbacks or other payments
SENIOR MANAGEMENT CA. Pramod Jain Financial Statement Manipulation Inflating/pre Inflating/pre-booking revenues Inflating Fixed Assets Diverting loan funds to shell companies Diversion of stock/funds Disproportionate Inventories Unreal debtors / creditors
SENIOR MANAGEMENT CA. Pramod Jain Insider Trading Huge swings in share price before public announcement Block sale of shareholding with price sensitive information Disclosure of financial & other information in advance
JUNIOR MANAGEMENT CA. Pramod Jain Sub-standard quality or higher rejection rate Fictitious invoices Multiple vendor codes with different bank accounts Payroll or expense reimbursement Fraud Data Theft and Leakage High value payments disbursement from Petty cash Absence of adequate supporting documentation for petty cash expenses
SAFEGUARDS CA. Pramod Jain Statutory Audit Internal Audit Cost Audit Secretarial Audit Tax Audits GST Audit Independent Directors
SAFEGUARDS CA. Pramod Jain Audit Committee / Vigilance Committee / Risk Management Committee Internal Financial Controls Govt. Investigations Statutory disclosures in FS including the Board s Report Clause 49 for listed companies
SAFE HARBOR CA. Pramod Jain Good faith / bona fide / no knowledge or consent IDs only matters directly relatable to them Indemnities from the company Director & Officer Insurance
CA. Pramod Jain EXCEPTIONS SAFE HARBOUR - EXCEPTIONS Good faith / bona fide subject to interpretation by Courts based on facts and circumstances Indemnities / Insurances may not cover criminal acts
CA. Pramod Jain ROLE OF INDEPENDENT DIRECTORS Need for the ID's arises due to the need of a strong framework of corporate governance in the functioning of the company Safeguarding the interest of all stakeholders, minority holders Harmonizing the conflicting interest of the stakeholders Analysing the performance of management Mediating in situations like conflict between management and the shareholder's interest
CLAUSE 49 CA. Pramod Jain Applicable to all Listed Companies ID should not have material pecuniary relationship Selling, disposing and leasing of assets of material subsidiaries Formation of Risk management committee Approval through shareholders for material Related Party Transactions Internal Financial Controls and Risk Management
CA. Pramod Jain WHISTLE BLOWER POLICY A VIGIL MECHANISM Applicability under section 177(9) of Companies Act 2013 Listed Company Companies which accept deposit from public Companies which have borrowed money from banks and PFI s in excess of Rs.50 crores Audit committee shall oversee the vigil mechanism otherwise board of directors shall nominate a director
CA. Pramod Jain WHISTLE BLOWER POLICY A VIGIL MECHANISM It provides safeguard against victimization of employees and directors It provides direct access to chairperson of the Audit committee Disclosure The details shall be disclosed by the company in the website and the Board s Report. In case of repeated frivolous complaints by director or employee take suitable action including reprimand
ANTI FRAUD PROGRAM Build a profile of potential frauds CA. Pramod Jain Test transactional data for possible indicators of fraud. Improve controls by implementing continuous auditing and monitoring Communicate the monitoring activity throughout the organization Provide management with immediate notification when things are going wrong Fix any broken controls immediately. Expand the scope and repeat.
CA. Pramod Jain FEW FAMOUS INSTANCES Satyam NSEL Sahara CRB Coal Allocation Scam Commonwealth Games scam
CA. Pramod Jain This Presentation would be available on www.lunawat.com Also may download free mobile app LUNAWAT for all updates since year 2007
CA. Pramod Jain pramodjain@lunawat.com +91 9811073867 2017 CA. Pramod Jain