Window Dressing- Fraud- Corp

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Window Dressing Accounting Frauds Auditing Corporate Governance :

Window Dressing Accounting Frauds Auditing Corporate Governance PIYOOSH BAJORIA

Limitations of Financial Statements:

Limitations of Financial Statements Based on Historical Costs Human Assets not recorded Personal Judgment of Accountant Deliberate Manipulations Differences in Accounting Policies Window Dressing PIYOOSH BAJORIA

Responsibility of CEO:

Responsibility of CEO Fair (Not false & misleading) presentation of Co’s Financial Statements “Look” of the Co’s Financial Statements in the best interests of the business Use of permissible accounting methods (as per Accounting Standards) to measure Co’s profit PIYOOSH BAJORIA

Window Dressing :

Window Dressing Massaging (manipulating) the accounting numbers to make the short term solvency & liquidity of the business look better than what it really was at the end of the year. Examples: (1) Accounting records of a company kept open for a few days after the end of its accounting year Objective: Record additional cash collection from Debtors. (2) Accelerate sales at the fag end of the year by shipping more products to the company’s captive dealers ( Dumping of goods without orders or stuffing the channels of distribution) (3) Deferring or reducing discretionary expenses e.g. R & M Costs, employee training & development Costs, advertising expenses, etc. PIYOOSH BAJORIA

Window Dressing :

Window Dressing (4) End of year adjusting entries requiring estimates e.g. Provision for expenses, provision for doubtful debts, decline in value of intangibles, etc. Manager’s perception that net income numbers generated from accounting system may behave too erratically year to year and hence, argue that some manipulation required to ensure smooth reported profit year to year. PIYOOSH BAJORIA

Cooking the Books / Accounting Frauds:

Cooking the Books / Accounting Frauds Frauds in Financial Reporting Deliberate Dishonesty Goes beyond window dressing Falsification of accounting records Fabrication of sales revenue & expenses e.g. recording sales revenue when no sales were made or not recording actual expenses or losses during the period. Reporting assets that don’t exist or not reporting liabilities that do exist. Withholding vital information from being disclosed in the financial report. Massaging the numbers – recording legitimate sales revenue & expenses but management takes action to nudge the numbers up or down for the year. If manipulation is carried too far, it can end up being equivalent to accounting fraud. Hence, Window Dressing is a slipping slope that can lead to accounting fraud. PIYOOSH BAJORIA

Fraud in Financial Statements :

Fraud in Financial Statements Committed in 5 ways Fictitious Revenues Fraudulent Timing Differences Concealed Liabilities & Expenses Improper or Fraudulent Disclosures or Omissions Fraudulent Asset Valuations PIYOOSH BAJORIA

Restatement of Financial Reports:

Restatement of Financial Reports Company’s management retracting the originally published financial report and replacing with the revised version In most of these cases, the new net income is considerably lower than the one first reported by the business No of restatements exploded from only 90 in 1997 to 2,000+ by 2010 & most of them by private companies not listed on a major stock exchange Negative market reaction- Investors should be more careful about investing in these companies More skeptical in reading the financial statements of a private company , unless they have been audited by a CPA firm. Consider quality of earnings & not just the magnitude. PIYOOSH BAJORIA

Audits of financial reports in the Post- Enron Era :

Audits of financial reports in the Post- Enron Era Few cases of Accounting Fraud: World .com Enron Tyco Ahold Xerox Rite Aid Global Crossing Health South Adelphia communications Satyam PIYOOSH BAJORIA

PowerPoint Presentation:

Audited by big 5 Audit firms Arthur Andersen was convicted of obstruction of justice for destroying evidence in the Enron case Increase in number & large scale of accounting frauds led to SOX (2002) signed by Mr. George Bush CEO’s compliance report Now, more responsibilities on corporate management & audit committee Risk – Auditors may not discover accounting fraud, especially if the top level managers of the business instigate the fraud. PIYOOSH BAJORIA

Types of Audits:

Types of Audits Statutory Audit Internal Audit/ Management Audit Tax Audit Special Audit/Investigation Forensic Accounting Concurrent Audit (Banks) Propriety Audit Environmental Audit Energy Audit PIYOOSH BAJORIA

Propriety Audit:

Propriety Audit Loans and advances made by the company – whether secured properly and whether the terms are not prejudicial to the interest of the company or its members. Transactions represented merely by book entries are not prejudicial to the interest of company. Personal expenses whether charged to Revenue A/c. Non investment company – whether securities were sold at a price less than the purchase price. PIYOOSH BAJORIA

Auditing & Corporate Governance:

Auditing & Corporate Governance Internal Controls Audit Committee Compliance Report by CEO Due Diligence Audit Report (M&A) Quarterly Financial Reporting Interim Review Code of Ethics & conduct Auditing Practices (SSAP) PIYOOSH BAJORIA

Types of Audit Reports:

Types of Audit Reports Clean Report Qualified Report Disclaimer of opinion PIYOOSH BAJORIA

Corporate Governance Report :

Corporate Governance Report SEBI Code of Corporate Governance requires listed companies to include a separate section of ‘corporate governance’ in their annual reports. This section should include a detailed compliance report on corporate governance. The code provides the following suggested list of items to be included in the report: PIYOOSH BAJORIA

Corporate Governance Report: :

Corporate Governance Report: A brief statement on company’s philosophy on code of governance. Board of Directors Audit Committee Remuneration Committee Shareholders Committee General Body Meetings Disclosures Means of Communication General Shareholder Information. PIYOOSH BAJORIA

Corporate Governance:

Corporate Governance Defining Good Corporate conduct Roles & Responsibilities of Directors Increasing expectations from Directors Investors servicing & investors protection measures Whistle Blowing policy PIYOOSH BAJORIA

Audit Committee :

Audit Committee Sub Committee of the Board Mandatory for every public company with a paid up capital of not less than Rs.5 crore (Sec.292 A of Company’s Act) Minimum 3 directors on the Audit Committee 2/3rds of such directors shall be directors other than MD or WTD A chairman selected by the committee from these directors Composition to be disclosed in the Annual Report The statutory auditor, internal auditor and Director -Finance may attend and participate at the meeting, but have no right to vote. PIYOOSH BAJORIA

Audit Committee :

Audit Committee Clause 49 of the Listing Agreement requires setting up of an Audit Committee. Minimum 3 members, all being non executive Directors, with majority of them being independent and with at least one having Financial & Accounting knowledge. The chairman of the committee shall be an independent Director. He must be present at the AGM to answer share holders’ queries. Invite executives, as felt necessary, to be present at the committee meetings. The Company Secretary would act as the Secretary to the committee. PIYOOSH BAJORIA

Audit Committee :

Audit Committee At least 3 meetings in a year – one meeting before finalization of Annual Accounts and one each every six months. Quorum – either two members or 1/3 of the members, which ever is higher and minimum of two independent Directors. Mechanism of Audit Committee as an overall part of Corporate Governance is acquiring greater significance. Such self – governance structure would enhance the auditor’s independence PIYOOSH BAJORIA

Functions of Audit Committee:

Functions of Audit Committee Discuss quarterly Internal Audit (IA) reports submitted to the management and the report on action taken on the suggestions – appraising the effectiveness of the IA function in the organization. Review quarterly financial statements and disclosures before submission to the Board for its completeness and reliability/ integrity. Ensure compliance with the internal control systems. Review of Statutory and Regulatory compliances. Examine fraud risk assessment and mitigation mechanism. Authority to investigate any matter, including items referred to it by the Board. Access to all the information contained in the company records. Make recommendations relating to Appointment / Removal of the external Auditor and approve his remuneration/ terms of engagement PIYOOSH BAJORIA

Non Standard Items on Audit Committee Agenda :

Non Standard Items on Audit Committee Agenda Review of risk strategy Review of Forex transactions Review of major investments or prospective acquisitions Review of related party transactions Review of third party dealings – Interaction with external consultants/ independent council for forming up opinions, action plans PIYOOSH BAJORIA

Recommended Books of Reading / Research Papers 1. “How to read a financial report for Managers, Entrepreneurs, Lenders, Lawyers & Investors” – John A Tracy, Wiley Publication (2009) 2.Corporate Governance -Global concepts & Practices – Dr. S. Sinha, Excel Books 3.Corporate Governance – Machi Raju – Himalaya Publication 4. The Role of Audit Committee Chair in a fast changing global scenario – Governance Publication by BDO Consulting, India, June 2010 :

Recommended Books of Reading / Research Papers 1. “How to read a financial report for Managers, Entrepreneurs, Lenders, Lawyers & Investors” – John A Tracy, Wiley Publication (2009) 2.Corporate Governance -Global concepts & Practices – Dr. S. Sinha, Excel Books 3.Corporate Governance – Machi Raju – Himalaya Publication 4. The Role of Audit Committee Chair in a fast changing global scenario – Governance Publication by BDO Consulting, India, June 2010 PIYOOSH BAJORIA

Thank You :

Thank You PIYOOSH BAJORIA

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