Project Report

(Submitted for the Degree of B.Com. Honours in Accounting & Finance

under the University of Calcutta)

Title of the Project

“Corporate fraud”

Submitted by

Name of the Candidate:

Registration No. :
Roll No. :
Name of the College:

Supervised By

Name of the Supervisor :

Name of the College : Seth Anandram Jaipuria College

Month & Year of Submission

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 SUPERVISOR’S CERTIFICATE

This is to certify that Mr. / Ms. a student of B.Com Honours in Accounting and
Finance / Marketing / Taxation / Computer Application in Business of (Name of
the College) under the University of Calcutta has worked under my supervision
and guidance for his / her project work and prepared a project report with the title
Corporate Fraud which he / she is submitting, in his / her genuine and original
work to the best of my knowledge.

Place: Kolkatta Signature:

Date: Name:

Designation:

Name of the College:

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 STUDENT’S DECLARATION

I hereby declared that the Project Work with the title (in block letters)
CORPORATE FRAUD submitted by me for the partial fulfillment of the degree
B.Com Honours in Accounting and Finance / Marketing / Taxation / Computer
Application in Business under the University of Calcutta is my original work and
has not been submitted earlier to any other Universities / Institution for the
fulfillment of the requirement for any course of study.

I also declare that no chapter of this manuscript in whole or in part has been
incorporated in this report from any earlier work done by others or by me.
However, extracts of any literature which has been used for this report has been
duly acknowledged providing details of such literature in the references.

Place: Kolkata Signature:

Date: Name:

Address:

Registration No.:

Roll No.:

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 ACKNOWLEDGEMENT

“The satisfaction Euphoria that accompanies the successful completion

of any work would be incomplete unless we mention the name of the
person, who made it possible, whose constant guidance and
encouragement served as a beckon of light and crowned our efforts with
success.”
I consider it a privilege to express through the pages of this report, a
few words of gratitude and respect to those who guided and inspired in
the completion of this project.
I am very thankful to my guide “” for his full support in completing
this Project work.
I would also like to thank my parents, friends and everybody who
helped directly or indirectly for their full co-operation and continuous
support during the course of this assignment .They have also encouraged
me which has persuaded me to work even better and efficiently.

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5
 Chapter :1
INRODUCTION

Background:

White Collar Crimes are those, which are committed by respectable persons,
holding enviable positions, either in public or private concern. It is very hard to
detect these crimes. It is defined by the Federal Bureau of Investigation as
“illegal acts characterized by deceit, concealment or violation of trust, which are
not dependent upon the application or threat of physical force or violence1.” The
FBI says that in cases of white collar crime, “individuals and organizations
commit these acts to obtain money, property or services; to avoid the payment or
loss of money or services; or to secure personal or business advantage.”

The phrase “White Collar Crime” was coined in 1939 during the speech given by
Edward Sutherland to the American Sociologist society. He, in his published
research paper on white collar criminality in the American Sociological Review,
defined the concept as, “a crime
committed by persons of respectability and high social status in course of their
occupation.” White collar crimes by their very nature are such that the injury or
damage caused as a result of them is so widely diffused in the large body of society
that their gravity in regard to individual victim is almost negligible2. It is highly
difficult to prosecute a white collar crime because the perpetrators are sophisticated
criminals who conceal their activities through a series of complex transactions.

Today, the focus of white collar crimes has moved from the individual to the
organization, where individuals alone or in collaboration with others commit acts
that are criminal. One of such white collar crimes is “THE CORPORATE
FRAUDS.”

 FRAUD: WHAT IS IT?

Fraud is defined as the “wrongful or criminal deception
intended to result in financial or personal gain”
Generally, all acts of fraud can be distilled into four basic elements:
1. A false representation of a material nature.

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2. Scientific—knowledge that the representation is false, or reckless disregard for
the truth.
3. Reliance—the person receiving the representation reasonably and justifiably
relied on it.
4. Damages—financial damages resulting from all of the above.

 TYPES OF FRAUD
There are many different types of fraud, and many ways to characterize and catalog
fraud; however, those of the greatest relevance to accountants and auditors are
under two broad categories:
1. Employee fraud/misappropriation of assets.
2. Financial Statement fraud.

 CORPORATE FRAUD: AN OVERVIEW

Activities undertaken by an individual or company that are done in a dishonest
or illegal manner, and are designed to give an advantage to the perpetrating
individual or company. Corporate fraud schemes go beyond the scope of an
employee’s stated position, and are marked by their complexity and economic
impact on the business, other employees and outside parties.

Nature & Scope:

Of all white collar crimes, corporate frauds are the most sophisticated and
adversely affect the society. They are the crimes which are committed by the so
called high profile and sophisticated humans of the society. They reduce the
interest and trust in corporate investments and in turn reduce the confidence on
the government as well as society. Corporate frauds are more dangerous to the
society because financial loss to society from corporate frauds is greater than the
financial loss from burglaries, robberies, larcenies etc.

Corporate frauds have become a global phenomenon with the advancement of

commerce and technology. Like any other country, India is equally in the grip of
corporate fraud. The reason for enormous increase in corporate frauds in recent
decades is to be found in the fast developing economy and industrial growth of this
developing country.

A corporate fraud occurs when a company or organization deliberately changes or

conceals the information in order to make it appear healthy. A company may

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commit fraud by manipulating accounting records, hiding debt, or failing to inform
shareholders of loans and bonuses given to its executives. The falsification of
financial information, including false accounting entries, bogus trades designed to
inflate profits or hide losses and false transactions will help the organization to
attract funds from the lenders and investors.

The motives of committing fraud by a company may be many, but the main motive
is making money and creating a false soundness for the company in order to save
its image in the market and to misguide the government departments to avoid the
heavy tax burdens.

In India, the Commission on ‘Prevention of Corruption’ in its report observed, “the

advancement of technological and scientific development is contributing to the
emergence of mass society with a large rank in file and a small controlling elite,
encouraging the growth of monopolies, the rise of a managerial class and intricate
institutional mechanisms. Strict adherence to high standard of ethical behavior is
necessary for the even and honest functioning of the new social, political and
economic processes. The inability of all sections of society to appreciate this need
in full results in the emergence and growth of white collar and economic crimes
renders enforcement of the laws, themselves not sufficiently deterrent, more
difficult.”

Objectives:

1. To critically analyze the various instances of fraud that had taken place in
the corporate world.
2. To analyze the reason of committing such crimes.
3. To study the role of legislature for the prevention of such crimes.

Research Methodology:

This report is the brief doctrinal project which is carried out by the researcher
after a careful research and analysis of the data and which has been collected with
the help of different books, various articles & journals and number of web
references.

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Limitations:

The only hurdle to complete my project to an accurate level is no access to

primary data viz. only having reach to the secondary sources. Thus I am not able to
deliver the concrete data related to the project.

Hypothesis:

1. That fraud in corporate affects not only to corporate world but also adversely
affects the society and affects the economy of the country at large.
2. That such reduces the interest of the general public into corporate
investment.
3. That legislature has played a vital role to preserve and protect the interest of
the society.

Chapter Planning:

Planning is the first step to undergo any kind of work effectively and efficiently.
Planning of this project is divided into five chapters. They are:

 Chapter 1: “Introduction” refers to the blueprint of the project.

 Chapter 2: “Conceptual Framework” refers to the short description of the

keywords and national and international scenario of corporate fraud.

 Chapter 3: “Presentation of Data Analysis and Findings” is quite

comprehensive and exhaustive, dealing with the relevant fact and figures.

 Chapter 4: “Conclusion and Recommendation” refers to the analysis drawn

from the study of the project and recommendation derived thereof.

 Chapter 5: “Bibliography” refers to the list of books, journals and extracts

helpful as resources.

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 CHAPTER : 2
CONCEPTUAL FRAMEWORK

According to Oxford dictionary, a fraud is defined as, “the use of false

representations to gain unjust advantage and criminal deception.”
According to the Internal Resources Service
(IRS) Department of the US Department of the treasury, “A corporate fraud is
violation of the Internal Revenue Code (IRC) and related statutes committed by
large, publicly traded corporations, and or by their senior executives.”

Top five fraud risks:

 Data or information theft and IP infringement.

 Bribery and corruption.
 Fraud by senior management and conflict of interest.
 Vendor fraud or kickbacks.
 Regulatory non-compliance.

Top five factors facilitating bribery and corruption:

 Weak law enforcement.

 Numerous government.
 Complicated taxes and licensing system.
 Lack of will for making an effort in getting permission in the right way.
 To get unfair advantage in business.

NATIONAL SCENARIO
Because of these risks and factors “fraud” is very prominent in the
corporate world. Studying fraud incidences occurred in India, top five corporate
fraud are enlisted below:
 Indian Coal Allocation Scam (2012)
 2G Spectrum Scam (2008)
 Wakf Board Land Scam (2012)
 Common Wealth Games Scam (2010)
 Telgi Scam (2002)

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INTERNATIONAL SCENARIO
Fraud is not limited only within the boundaries of India. It can be seen in
massive amount internationally too. Navigation menu of the top 5 Business
Scandals in United States:
 Yazoo Land Scandal
 Credit Mobilier.
 Civil War Profiteering.
 Black Friday.
 Charles Ponzi Postal Coupon.

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 Chapter : 3
PRESENTATION OF DATA ANALYSIS & FINDINGS
WHAT IS COALGATE?

Coal is an important natural resource owned by the Government of India. In view

of heavy demand for coal blocks it was proposed to allocate it through competitive
bidding in a fair and transparent manner. However, this decision, in spite of
repeated request of the expert groups including senior officials both in the Coal
Ministry and the PMO; was deliberately delayed for eight years and in the
meanwhile coal blocks in very large number were allotted to those private
companies having high connection with Congress politicians, Union Ministers,
Members of Parliament of the ruling party and other highly placed. This was done
in a very non-transparent way.
This will be evident from the fact that in between 1993 to 2005 (11 Years)
only 70 coal blocks were allotted while in a small period of 2006 to 2009 (3 Years)
as many as 142 coal blocks were allotted. Out of these 70 coal blocks were allotted
to 145 private companies none of which have started production till date. These
coal blocks were allotted almost free of cost because a small bank guarantee was
taken from the allotees who were required to pay royalty only when their coal mine
will become operational. These coal blocks contain approximately 1700 crore
tonne of coal worth 51 lac crore. As a result the share price and financial worth of
these companies rose very high though many of them had fabricated documents
and suppressed facts to get these coal blocks.
The most significant aspect of this scam is that during the period when these
coal blocks were allotted to many of the favourite companies Dr. Manmohan Singh
was himself the Coal Minister. The two Ministers of State, at that time were Mr.
Dashri Narayan Rao and Mr. Santosh Bagrodia also belonged to Congress.
Therefore, those who had high connections and were favourites of the Congress
Party were granted coal blocks by deliberately delaying the competitive bidding
scheme for eight years.

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TOP 10 SCAM FROM INDIA

SCAM STANDS FOR

S-SCHEMING
C-CRAFTY
A-AGGRESSIVE
M-MALICIOUS

TO GET AN IDEA OF ITS SCALE LET’S SEE WHAT

THIS MONEY COULD HAVE BOUGHT

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Background:

Coal allocation scam or Coalgate is a major political scandal concerning

the Indian Government’s allocation of the nation’s coal deposit to public sector
entities (PSEs) and private companies. In a draft report issued In MARCH 2014,
the comptroller and Auditor General Of India (CAG) office accused the
Government of India of allocating coal blocks in an inefficient manner. During the
period 2004-2009. Over the summer of 2012, the opposition BJP lodged a
complaint resulting in a Central Bureau of Investigtion probe into whether
allocation of the coal blocks was in fact influenced by corruption.

1992-2010- Background to COALGATE: History of Coal allocation

in India

THE COAL ALLOCATION PROCESS:

• In July 1992, Ministry of Coal, issued the instructions for constitution of

a Screening Committee for screening proposals received for captive
mining by private power generation companies.
• The Committee was composed of government officials from the
Ministry of Coal, the Ministry of Railways, and the relevant state
government.
• A number of coal blocks, which were not in the production plan of CIL
and SSCL, were identified in consultation with CIL/SSCL and a list of
143 coal blocks were prepared and placed on the website of the MoC for
information of public at large.

Companies could apply for an allocation from among these blocks. If they
were successful, they would receive the geological report that had been
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prepared by the government, and the only payment required from the allocatee
was to reimburse the government for their expenses in preparing the geological
report.

In simple we, can follow the following diagram to understand the coal
allocation process:-

COAL ALLOCATION GUIDELINES:-

The guidelines for the Screening Committee suggest that preference be given
to the Power and Steel Sectors (and to large projects within those sectors).
They further suggest that in the case of competing applicants for a captive
block, a further 10 guidelines may be taken into consideration:
 status (stage) level of progress and state of preparedness of the projects;
 net worth of the applicant company (or in the case of a new SP/JV, the
net worth of their principals);
 production capacity as proposed in the application;
 maximum recoverable reserve as proposed in the application;
 date of commissioning of captive mine as proposed in the application;
 date of completion of detailed exploration (in respect of unexplored
blocks only) as proposed in the application;
 technical experience (in terms of existing capacities in coal/lignite
mining and specified end-use);
 recommendation of the administrative ministry concerned;
 recommendation of the state government concerned (i.e., where the
captive block is located);
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  track record and financial strength of the company.

RESULTS OF THE COAL ALLOCATION PROGRAM:-

Year of
Government
allocatio Private Companies Power Projects
Companies
n
No. of No. of GR (in No. of GR (in
GR (in MT)
blocks blocks MT) blocks MT)
Up to
2005 29 6,294.72 41 3,336.88 0 0
2006 32 12,363.15 15 3,793.14 6 1,635.24
2007 34 8,779.08 17 2,111.14 1 972
2008 3 509.99 20 2,939.53 1 100
2009 1 337 12 5,216.53 3 1,339.02
2010 0 0 0 0 1 800
Total 99 28,283.94 105 17,397.22 12 4,846.26

MARCH 2012: COALGATE EXPLODES-THE DRAFT REPORT

OVERVIEW
The CAG report is a performance audit focusing on the allocation of coal
blocks and the performance of Coal India in the 2005-09 period. The Draft Report,
stretching to 110 pages—far more detailed and containing more explosive
allegations than the toned-down Final Report of some 50 pages—was the
document that sparked the Coalgate furore. The Draft Report covers the following
topics:

 Overview (pp. 1–2)

 Audit Framework (pp. 3–4)
 Institutional Framework (p. 5-10)
 Gaps in Supply and Demand (p. 11-17)
 Coal Blocks-Allocation and Production Performance (p. 18-55)
 Production Performance of CIL (p. 56-83)
 Conclusion and Recommendations (pp. 84–88)
 Annexure (pp. 89-110)

FIRST CAG CHARGE:-

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 • The most important assertion of the CAG Draft Report : Government had
the legal authority to auction the coal, but chose not to do so.

 Any losses as a result of coal allocations, then, between 2005 and 2009 are
yseen by the CAG as being the responsibility.

SECOND CAG CHARGE:-

• If the most important charge made by the CAG was that of the Government's
legal authority to auction the coal blocks, the one that drew the most
attention was certainly the size of the "windfall gain" accruing to the
allocatees. On pp. 32–34 of the Draft Report, the CAG estimates these to be
1,067,303 Crore with details in the following table-

Parties Accused of Involvement:

 Politicians involved:

1) Mr. Subodh Kant Sahay

2) S.Jagathrakshakan
3) Ajay Sancheti with Nitin Gadkari
4) Naveen Jindal
5) Premchand Gupta
6) Vijay Darda and Rajendra Darda

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ROLE OF MR. SUBODH KANT SAHAI

 In September 2012, it was revealed that Subodh Kant Sahai, Tourism

Minister in the UPA government sent a letter to Prime Minister Manmohan
singh trying to persuade him for allocation of a coal block to a company.
The letter was written on 5 February 2008. On the very next day, PMO sent
a letter to the coal secretary on 6 February 2008, recommending allotment of
coal blocks to the company in favour of SKS Ispat and Power limited with
which his own brother Sudhir Sahai.

 On 15 September 2012,an inter ministerial group (IMG) headed by Zohra

chatterji (Additional Secretary in coal ministry) recommended cancellation
of a block allocated to SKS Ispat and Power

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ROLE OF S.JAGATHRAKSHAKAN:

 In September 2012, several news reports alleged that family of

S.Jagathrakshakan, Minister of State for Information and Broadcasting in the
UPA government is a part of a company named JR Power Gen Pvt. Ltd.
which was awarded a coal block in Orissa in 2007.

 It was the same company which formed a joint venture with a public sector
company, Puducherry Industrial Promotion Development and Investment
Corporation (PIPDIC). On January 17, 2007, Barely five days after, PIPDIC
was allocated a coal block.

 According to the MoU, JR Power enjoyed a stake in this allotment. However

JR Power had no expertise in thermal power, iron and steel, or cement, the
key sectors for consumption of coal. Later in 2010, JR Power sold 51%
stake to KSK Energy Ventures, an established player with interest in the
energy sector.
In this way, the rights for the use of coal block ultimately passed on to KSK.

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ROLE OF AJAY SANCHETI:-
 Ajay Sancheti’s SMS Infrastructure Ltd. Was allegedly allocated coal
blocks in Chhatisgarh at low rates. He is a BJP Rajya Sabha MP and
is believed to be in a close relation with Nitin Gadhkari.

 According to the CAG, the allocation of the coal block to SMS

Infrastructure Ltd. has caused a loss of Rs. 1000 crore.

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ROLE OF NAVEEN JINDAL:-

Jindal Steel and Power got a coal field in February 2009 with reserves of 1500
million metric tones while the government-run Navratna Coal India Ltd. was
refused.

• On February 27, 2009, two private companies got huge coal blocks. Both the
blocks were in Orissa and while one was over 300 mega metric tones, the
other was over 1500 mega metric tones. Combined worth of these blocks
was well over Rs 2 lakh crore and these blocks were meant for the
liquefaction of coal.

• One of these blocks was awarded to Jindal. Naveen Jindal's Jindal Steel and
Power was the company which was allotted the Talcher coal field in Angul
in Orissa in 2009, well after the self-imposed cut off date by the Centre on
allocation of coal blocks.

• The Opposition alleged that the Government violated all norms to give him
coal fields. Naveen Jindal, however, denied any wrongdoing.

• On 15 September 2012, an Inter Ministerial Group (IMG) headed by Zohra

Chatterji (Additional Secretary in Coal Ministry) recommended cancellation
of a block allotted to JSW (Jindal Steel Works), a Jindal Group company.

• Naveen Jindal's company has filed an FIR against Zee Business channel for
allegedly demanding Rs 50 crore for not doing a news story on coal scam.

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• As per the FIR, the HR head of the Jindal company has alleged that Sudhir
Chaudhry and Sameer Ahluwalia met officials of the Jindal Group and told
them that they had stories against them which could be dropped if a certain
amount of money was paid.

 The official alleged that when the company refused to pay, the channel ran a
series of malicious news items targeting the Jindals.

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 ROLE OF PREMCHAND GUPTA:-
UPA partner Rashtriya Janata Dal’s leader Premchand Gupta's sons'
company, new in the steel business applied for a coal block when
Premchand Gupta was the Union minister for corporate affairs and bagged it
about a month after his tenure ended along with that of his government.

• The company in question is IST Steel & Power - an associate company of

the IST Group, which is owned and run by Premchand Gupta’s two sons
Mayur and Gaurav. IST Steel, along with cement majors Gujarat Ambuja
and Lafarge, was allocated the Dahegaon/Makardhokra IV block in
Maharashtra.

• The company, which applied for a block on January 12, 2007, and was
awarded it on June 17, 2009, is sitting on reserves of 70.74 million tonnes.
The reserves it controls are more than the combined reserves held by much
larger companies - Gujarat Ambuja and Lafarge.

• Mr Gupta maintains he had no involvement in IST Steel and denies

influencing the coal-block allocation process.

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ROLE OF VIJAY DARDA AND

RAJENDRA DARDA:-

 Vijay Darda, a Congress MP and his brother Rajendra Dardra, the education
Minister of Maharastra, have been accused of a direct and active
involvement in the affairs of three companies JLD Yavatmal Energy, JAS
Infrastructure and Power Ltd., AMR Iron & Steel Pvt. Ltd, which received
coal blocks illegally by means of inflating their financial statements and
overriding the legal tender process.

 The above are only by way of sample. The entire allocation

process was done with massive irregularities.

Dr. Manmohan Singh was also the Coal Minister

when the above allocations were made:-

`
 It is to be remembered that the above allocations were made when Dr.
Manmohan Singh apart from being the Prime Minister was also the Coal

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 Minister. The other Minister of States, Mr. Dashri Narayan Rao and Mr.
Santosh Bagrodia also belonged to Congress. The Screening Committee
only recommends and the final allotment is done only when the Coal
Minister puts in his signature. No investigation was made in the
antecedents, credentials and eligibility of most of the companies. No
verification was even made as to whether any serious attempt was being
made by the allottees to do coal mining or not.

CBI INVESTIGATION:-
 On 31st may 2012, Central Vigilance Commission(CVC) based on
complaints of two BJP Member of parliament Prakash Javadekar and
Hansari Ahir directed a CBI enquiry.
 There were leaks of the report in media in March 2012 which claimed the
figure to be around 1,060,000 crore. It is called by the media as the Mother
of all scams.
 Discussion about the issue was placed in the parliament on 26th august,2012
by the Prime Minister Manmohan Singh with wide protests from the
opposition.
 According to the comptroller and Auditor General of India(CAG), this is a
leak of the initial draft and the details being brought out were observations
which are under discussion at a very preliminary stage.
 On 29th may 2012, Prime Minister Manmohan Singh offered to give up his
public life if found guilty in this scam.

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FORMATION OF INTER-MINISTERIAL GROUP (IMG):-

• At the end of June 2012, coal ministry decided to form an Inter-Ministerial

Group (IMG), to decide on either de-allocation or forfeiting the Bank
Guarantees (BG) of the companies that did not develop allotted coal blocks.
• Zohra Chatterji, additional secretary, coal ministry was named as Chairman
of the IMG. Other IMG members include representatives from power, steel,
departments of economic affairs, industrial policy and promotion, and law
and justice.
• Significantly, the decision was taken after the CVC had already ordered a
CBI enquiry into alleged irregularities.

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