Corporate Fraud Cases and Forensic Accounting Applications
Major Corporate Fraud Cases in India
1. Satyam Computer Services
Satyam Computer Services was one of the leading Information Technology companies in India. The promoters devised ingenious ways to defraud the company and siphon off approximately $1 billion. The modus operandi involved issuing dummy bills for services not actually rendered to foreign clients. The proceeds were shown in bank accounts opened in various countries, many of which were either nonexistent or had highly inflated balances. In essence, this fraud consisted of two parts: inflating revenue and inflating cash balances with banks.
2. Kingfisher Airlines
Kingfisher Airlines, after its establishment, became one of the finest airlines in India’s private sector, garnering the second-highest market share after Jet Airways. The airline’s downfall began when it borrowed huge sums from banks and related parties, using the Kingfisher brand, an intangible asset, as collateral. This was likely the first time in India’s financial history that banks accepted an intangible asset as collateral. When the promoters failed to repay the principal and interest, Kingfisher’s brand value plummeted and became virtually worthless. Banks were left with non-performing assets (NPAs) exceeding Rs. 9,000 crores.
3. Jet Airways
Jet Airways held the largest market share among Indian airline operators, offering best-in-class services. However, its financial practices were questionable, including:
- Overstating commissions paid to a related party in Dubai, leading to overstated expenses and underreported profits.
- Diverting funds by providing loans of around Rs. 3,353 crores.
- Accounting for fake invoices.
These actions resulted in defaults on payments to lenders, vendors, employees, the Airport Authority of India, and aircraft lessors. The total liabilities defaulted on amounted to Rs. 25,000 crores, including Rs. 8,500 crores to lenders.
4. Bhushan Steel
Bhushan Steel was a profitable company with modern, large-scale plants. However, the promoters engaged in multiple fraudulent practices, such as:
- Transferring borrowed funds to related parties through loans and advances.
- Accounting for capital expenses that were never incurred and misappropriating these funds.
Applications of Forensic Accounting
Fraud detection and prevention are primary areas where forensic accounting is applied, but its scope has expanded in recent years. Some specific practice areas include:
1. Bankruptcy, Insolvency, and Reorganization
Forensic accountants can assist debtors (individuals or organizations) contemplating or already in bankruptcy, as well as creditors. In bankruptcy cases, they primarily perform business valuations to resolve filings, corroborate disclosures and claims, manage financial affairs for trustees, identify pre-bankruptcy transactions, and search for and recover hidden assets and funds. Creditors also use their services to increase recovery amounts.
2. Computer Forensic Analysis
With most transactions now conducted electronically, information can be found in files stored beyond the computer infrastructure of the involved parties. Forensic accountants recover and preserve this information for evidence and litigation support. Their competency lies in knowing the type of electronic information that may exist, its format, location, and how to access it.
3. Economic Damage Calculations
When one party’s actions or inaction in a transaction cause loss or injury to another, damages arise. These can be in the form of lost earnings, lost profits, or physical property loss. Forensic accountants are often called upon to calculate these damages.
4. Family Law
Forensic accountants play several roles in cases involving inheritance, wills, Hindu Undivided Families (HUFs), and marital dissolution. Documentation is often inadequate in such cases, and individuals’ claims can be entangled. Forensic accountants uncover hidden or undisclosed income or assets, disentangle claims, and reach fair asset valuations to satisfy the parties involved.
5. Financial Statement Misrepresentation
Statutory auditors examine financial statements for proper reporting of balances, results, and disclosures. If internal or statutory auditors flag issues like overstatement, understatement, omission, or improper accounting treatment, forensic accountants step in. They calculate the effect of these issues on financial statements and identify the persons and processes responsible. They also uncover any underlying schemes or motives for misrepresentation.
6. Fraud Prevention, Detection, and Response
This is the most prominent area for forensic accountants. They design accounting and control systems to prevent fraud, investigate existing frauds, and redesign systems with better controls and procedures to prevent future occurrences.