Accounting Scams in Indian Context
Accounting Scams in Indian Context
The Investor’s Perspective
The last few months have unearthed a huge number of accounting scams in the world and especially in USA. Although this is not a new phenomenon what has come as a rude shock to markets and investors is the scale and the blatancy involved in these recent scandals. Most of these cases belong to the erstwhile reputed and giant companies and the 'cooking' done by them has surely left the investor with a very bad taste in his mouth. What has certainly not helped is the fact that the numbers involved are in billions and the fall of the company so meteoric that the investor had no time to take corrective action.
This note aims to provide the reader with a deeper understanding of some of the critical issues involved in this subject and the entire discussion has been presented with a clear focus on the Indian context. The key issues covered in this note are:
· Spread of scams: Are the recent discoveries just small blots on a largely clean slate or is there sufficient data to suspect that the practices are more prevalent?
· Methods used in these scams: Are these scams a manifestation of the loopholes present in the current accounting standards or is it a case of illegal accounting done in connivance with the auditors?
· Reasons for these scams: What are the basic reasons for the occurrence of these scams? Is the market itself partly responsible for these scams?
· Possible solutions: Now that these scams have surfaced, what are the various options available with the government and the regulatory authorities to protect the interest of the investor in future?
Spread of scams – How deep does it go
The following facts give an idea about the prevalence of such cases of:
· A recent study conducted last year by Global Data Services, a subsidiary of the credit rating agency CRISIL, has come out with alarming figures related to misreporting of figures. Out of 639 companies included for the study, 139 companies were found to have overstated their profits, some to the extent of 1000 per cent over the norms set by CRISIL.
· Department of Company Affairs (DCA) charged as many as 73 companies last year of fund-diversion, inadequate disclosure of information in balance sheets, misleading reports on utilization of funds/cash-flows and violation of accounting standards.
· Kanpur based Midas Touch Investors' Association has prepared a list of 229 companies that have been identified as 'having vanished ' with investors' funds in the post 1993 IPO mania.
So even though some of the high-profile cases capture the attention of the investor, the problem is deep-rooted.
Methods used - the art of 'creative accounting'
An understanding of the various ways in which the accounts are fudged, is helpful for investors so that they can take a well informed decision. Some of [next page]