Creative Accounting

Financial Accounting Management

Report on Creative Accounting

Name: - Aniket Dharmadhikari Section: - D, Roll no. 2010183
Page 1 of 5

all contributing to increased profits and a perception that the new management is doing a great job. some of these errors would have a positive effect on profits. Wrongful use of off. Creative accounting tends to shoot up when the economy starts slowing down. the assets can be reinflated. These fraudulent schemes can be devastating to users like shareholders. higher incentive compensation for executive management. whose shares witnessed a spectacular ascend recently. The motivation of management and accountants typically include bonuses.Creative Accounting Creative Accounting refers to accounting practices that seem to follow the letter of the applicable accounting standards but deviate from the spirit of those standards. The motivation to indulge in these practices is anticipation of rewards which may include higher share prices. increased profits. This has raised concerns that many companies may resort to creative accounting in a bid to check further slide in their stock prices. improved credit rating resulting in lower borrowing costs. Takeovers and acquisitions also create opportunities for creative accounting. are now under pressure to justify those valuations.      To keep the company¶s financial results within agreed limits set by creditors To fulfill public listing requirements To help negotiations with regulators To pay less tax To push the company towards insolvency Creative accounting always starts with human intervention.balance-sheet arrangements. the new management and accountant have a bias to show a dismal picture .low profits. The most prevalent are 1) 2) 3) 4) 5) 6) 7) Booking revenues before they are materialized Booking fictitious sales Expense manipulation Cash manipulation Invisible restatements of previous records Faulty accounting in connection with business combinations. promotion. even the most advanced accounting system. lenders. etc. inflated provisions. Creative Accounting Scope: Different types of creative accounting practices are used by companies to window dress their financial performance. This helps the new buyers negotiate a lower purchase price. Creative accounting can be caused by human errors. Page 2 of 5 . Then in the years after the takeover. and perhaps an impacted stock value. others would have negative effects. deflated asset values. Indian companies. understated liabilities etc. The above technique may also be used before a management buy-out. a typical creative accounting incident involves both human effort and a bias towards some objective. employees. but statistically. Rarely can a system. create profits and assets out of thin air. There are other reasons for creative accounting. Therefore. and increases their return after the buy-out. salary rises. In the year of the takeover. inflated asset values. provisions released. board of directors and other stakeholders.

Faulty Accounting in Business Combinations Besides DSQ Software Limited. Mr. falsification of accounts.595 Crore DSQ Software accused of dubious acquisitions and biased allotments in 2000-01 MD Mr Dinesh Dalmia was arrested in 2006 and is currently serving jail sentence Introduction The main business of the company includes activities related to development of software programmes and packages.. Funds amounting to Rs 242 crore were diverted in the form of investment in group / associate company shares at a very high value and subsequently over a two-year period the same were diminished to nil. non-transfer of unpaid dividend to special dividend account. This helped Mr. indulged in cheating. The SFIO report said the accounts of the company for the period1998-99 to 2001-02 were inaccurate. Inaccurate accounts The SFIO report indicated that DSQ Holdings / DSQ Software transferred funds worth Rs 85. SFIO recommended prosecution against DSQ Software Ltd (DSL) for manipulation of share price. fraudulently creating the shares to take advantage of the manipulated share price and lastly by selling 1. all under the control of Dinesh Dalmia.K.Suryanil Ghosh-Trustee Softec Corporation.Creative Accounting Creative Accounting Case Company Involved: DSQ Software Year of Scam Expose: .. Hulda Properties and Trades Ltd and Powerflow Holding and Trading Pvt. and unallotted shares in the name of Dinesh Dalmia Technology Trust and Dr. three companies were cited as accused in a charge sheet filed by the Central Bureau of Investigation in a stocks scam. As per the Serious Fraud Investigation Office (SFIO) report.595 crore. Ltd. Dalmia obtained wrongful gain through partly paid shares of DSQ Software Ltd.2003 Amount Involved: Type of Fraud: Impact: Rs.67 crore to two Ketan Parekh Group companies . and Powerflow Holding and Trading Pvt Ltd. Violations of Acts The investigation brought out several violations of provisions of the Companies Act such as failure to bring amount reduction in share capital despite submitting an affidavit in this regard before the Company Law Board.Classic Credit Ltd and Panther Fincap and Management Services Ltd. and investments and loans given by the company were in excess of the limits prescribed. According to the charge sheet. Page 3 of 5 . submission of documents to Registrar of Companies containing misleading and false information. U. in the name of New Vision Investment Ltd.. DSQ Holdings Ltd. Hulda Properties and Trades Ltd.3 crore shares in the market at an exorbitant price.. Ketan Parekh to manipulate the share price of the company through brokers of various exchanges. diversion of funds and violations under the Companies Act. The companies are DSQ Holdings Ltd. Mr Dinesh Dalmia along with group entities of DSL are guilty of cheating investors by manipulating share prices. failure to distribute dividend within 30 days of its declaration. involving Rs. Mr Dinesh Dalmia became its Managing Director in March 1992.

Investments Unable to comment upon the adequacy of the provision for diminution in the carrying out value of the investments since the realisability /marketability of such unquoted shares is uncertain. none of the shares was actually allotted by DSQ Software. purchase of products/ services and reimbursement of expenses amongst these entities and in the view of the Management such transactions are not prejudicial to the interests of the Company. 4. the validity. Relied on the representations given by the management that the investments made are not prejudicial to the interests of the Company.30 crore shares dematerialised. 1956 and on the basis of examination of the books and records of the company. showing them as fully paid and allotted by the company. Also. relating to sale of services / products. entered into between the Company and its overseas subsidiary /business associate companies and by its overseas branch.51.225 was paid by brokers to Hulda Properties and Trades Ltd.88. he sold the shares to the trading system and cheated the shareholders of the software company and also the purchasers of these shares. Dinesh Dalmia is alleged to have made false representation to the National Securities Deposito ries Ltd and fraudulently got the 1.37. Basis for Preparation of Financial Statements: As required by the Companies (Auditor's Report) Order 2003 issued by Central Government in terms of section 227(4A) of the Companies Act. Mr. Later. A total of Rs. But Mr.61. Subsidies Based on the representations given by the Management in respect of transactions. None of the sale proceeds of the shares was received by DSQ Software Ltd. The shares were sold by brokers for Rs. Ltd.572. the p artly paid equity shares were forfeited / cancelled in March 2001. Dalmia had fraudulently got these shares dematerialised as fully paid in May 2000.Creative Accounting Fictitious Share Allotment The CBI investigations revealed that 1. 3. Accounting Policies (Auditor Report -2004) Significant Accounting Policies 1.999.30 crore shares of DSQ Software Ltd had not been listed on any stock exchange.. Sales and Service Income The revenue recognition / adjustment of receivables by credit notes is based on management representation as to the arms length price of the transactions Page 4 of 5 . the charge sheet said.594. except the 30 lakh shares allotted to New Vision Investment Ltd. DSQ Holdings Ltd and Powerflow Holding and Trading Pvt. Even in the transaction relating to the allotment of 30 lakh shares. 2. completeness and the values thereof.

has prohibited the company from accessing the capital market for a period of 10 years.cms http://en. making it difficult for the company to raise financial resources from public. Warranty Claims The company has been saddled with legal proceeding from various Government agencies. SEBI vide its order dated 9.Creative Accounting 5.thehindubusinessline. Under these conditions there is a significant uncertainty whether company will be able to continue its operations as a going concern and therefore may be unable to realize its assets and discharge its liability in th e normal course of its business.com/quickiearticleshow/3959714.indiainfoline.04.wikipedia.htm http://economictimes. References: http://www. the financial institutions and creditors.com/2006/04/26/stories/2006042603700900. 6.org/wiki/Creative_accounting http://www.com/Markets/Company/Fundamentals/Auditors-Report/DSQ-SoftwareLtd/523864 Page 5 of 5 .09.indiatimes. The fixed assets have been physically verified by the management during reasonable interval. Fixed Assets and Depreciation The company has maintained proper records showing full particulars including quantitative details and situation of fixed assets.

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