PROJECT REPORT ON ACCOUNTING FRAUDS IN INDIA

Submitted in partial fulfillment for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION UNDER THE GUIDANCE OF: Mrs. Swati Narula Faculty, GIBS SUBMITTED BY:
DEEPIKA RANA GEETIKA RATHORE NEHA GARG PRASHANT BANDHU PRATEIK

GITARATTAN INTERNATIONAL BUSINESS SCHOOL

(Affiliated to Guru Gobind Singh Indraprastha University.) ROHINI, NEW DELHI 110085 (2011-2013)

TABLE OF CONTENTS

Chapter: 1- Objective of study Chapter: 2- Introduction to Accounting

2.1 What is Accounting 2.2 Features of Accounting 2.3 Importance of Accounting

Chapter: 3- Accounting Frauds

3.1 Accounting Frauds-Concept 3.2 Common Accounting Frauds

Chapter: 4- Accounting Frauds in India

4.1 Some Major Cases 4.2 Case Study

Chapter: 5- Conclusion
Bibliography

CHAPTER-1

OBJECTIVES OF STUDY

Our study has the following objectives:

To know what is accounting. To know the importance of accounting. To know the meaning of accounting frauds. To know some common type of accounting frauds. To study some frauds that happened in India.

CHAPTER 2

ACCOUNTING

Accounting communicates the results of the business to the users of accounting information to enable them to make reasoned decisions. Accounting is often called the language of business. To communicate information ,accounting follows a systematic process of recording ,classifying and summarizing of numerous business transactions resulting in creation of financial statements. The two most important financial statements are Profit & Loss account and Balance Sheet. Profit & Loss account depicts the net results of the business operations i.e. net profit during an accounting period and Balance Sheet depicts the nature and amount of assets, liabilities and capital of a business and indicates the financial position of the business at a particular date. Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, part at least of a financial character and interpreting the results thereof.-AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (A.I.C.P.A.)

FEATURES OF ACCOUNTING: IDENTIFYING TRANSACTIONS OF FINANCIAL CHARACTER Only those transactions and events are recorded in accountings which are of a financial character and which can be expressed in terms of money. RECORDING Accounting is the art of recording business transactions according to some specified rules. The various books of recording are journal, cash book, purchases book, sales book, purchases return book, sales return book, etc. CLASSIFYING Classification is the process of grouping the transactions of one nature at one place, in a separate account. The book in which various accounts are opened is called ledger. SUMMARIZING Summarizing is the art of presenting the classified data in a manner which is understandable and useful to management and other users of such data.this involves the balancing of ledger accounts and preparation of trial balance with the help of such balances. INTERPRETING THE RESULTS In accounting, the results are prepared in such a manner that the parties interested in the business such as proprietors, managers, banks, creditors, etc. can have full information about the profitability and the financial position of the business. COMMUNICATING It refers to transmission of summarized and interpreted information to a variety of users who have an interest in the enterprise to enable them to make reasoned decisions.

OBJECTIVES OR FUNCTIONS OF ACCOUNTING The following are the main objectives or functions of accounting: THE MAINTENANCE OF SYSTEMATIC RECORD OF BUSINESS TRANSACTIONS. Complete record of business transactions helps to avoid the possibility of omission and fraud. For this purpose, all the business transactions are first of all recorded in journal or subsidiary books and then posted into ledger. CALCULATION OF PROFIT AND LOSS To ascertain the net profit earned or loss suffered on account of business transactions during a particular period trading and profit and loss account of the business is prepared at the end of each accounting period. All the items relating to purchases, sales, expenses and revenues of the business are recorded in trading and profit and loss account. If the amount of revenue exceeds the expenditure incurred in earning that revenue, there is said to be a profit. In case expenditure exceeds the revenue, there is said to be loss.in addition, a businessman is able to get the following information by preparing a trading and profit and loss account-purchases -sales -unsold goods and their value -expenditure and revenue By attaining these information a businessman can keep effective control on expenditure. DEPICTION OF FINANCIAL POSITION OF BUSINESS After preparing profit and loss account a statement called balance sheet is prepared which shows the assets and their values on one hand and the liabilities and capital on the other hand. A balance sheet is usually I picture of the financial position of the business. At one glance, one would know the following by looking at the balance sheet: 1. how much the business has to recover from debtors. 2 how much the business has to pay to creditors. 3 .how much the business has in form of cash in hand, cash at bank, closing stock and fixed assets. TO PORTRAY THE LIQUIDITY POSITION

To provide information about how an enterprise obtains and spends cash. For this purpose it prepares a cash flow statement depicting inflows and outflows of cash from operating, investing and financing activities. TO FILE TAX RETURNS To provide bases for filling tax returns relating to income tax, sales tax, VAT, service tax, excise duty, etc. COMMUNICATING ACCOUNTING INFORMATION TO VARIOUS USERS

To communicate the accounting information to various interested parties like owners, investors, banks, etc. the information helps them in taking sound and judicious decisions about the business entity.

CHAPTER 3

ACCOUNTING FRAUDS

The intentional misrepresentation or alteration of accounting records regarding sales, revenues, expenses and other factors for a profit motive such as inflating company stock values, obtaining more favorable financing or avoiding debt obligations. Employees who commit accounting fraud at the request of their employers are subject to personal criminal prosecution.

COMMON ACCOUNTING FRAUDS

ACCOUNTS RECEIVABLE The accounts receivable number that shows up in the asset section of a balancer sheet is almost always an estimate of what accounts are actually collectable. the number is an estimate Because even if management can identify the precise amount its customers or clients owe the business, usually it is less than certain that this is the actual number that will ultimately be collected. Sometimes the valuation of accounts receivable goes beyond simply making a good faith estimate of collectability. In some situations management may be tempted to commit outright fraud. Because no cash is collected when sales are made on account, a corrupt management can record fraudulent additional sales by simply creating fictitious customers and recording fictitious sales. Another time honored-means of inflating accounts receivable and sales revenue involves keeping the books open at the end of the accounting period. In this case the customers and sales are real, but January sales are recorded as December sales so the end of year financial statements include inflated assets and revenue. Part of the audit function is to test the existence and collectability of accounts receivable and this can serve as a brake on such fraudulent practices. In the audit of large companies with millions of dollars of receivables and hundreds of thousands of individual accounts, the audit process relies on statistical sampling, which usually provides a reasonable, but not exact, estimate of collectable accounts. ACCOUNTS PAYABLE Management may have a motive to understate payables, as this understates expenses and overstates net income. Usually the amount of payable understatement is not too great and such understatement can easily be detected. DEFERRED REVENUE AND PREPAID EXPENSES

A manager can overstate income and understate liabilities by treating deferred revenue as earned revenue. Essentially, this shady practice seeks to recognize revenue before it is actually earned. Such mischief often is not easy to detect, because it is not always clear when the earnings process is fully complete. A manager also can understate current year expenses by claiming they are prepaid expenses. This amounts to a fraudulent claim that payments for a certain service benefit future accounting periods when, in fact they do not. Recently a large telecommunications company incurred significant cash expenses on maintenance of its utility lines. It fraudulently classified most of the outlays as prepaid expense, rather than current period expense. Since prepaid expenses are recorded as an asset rather than an expense, expenses were understated; hence, profits were overstated. FIXED ASSETS so many different methods of depreciation and the useful life of assets is subject to varying estimates, there is plenty of opportunity for management mischief. Management can make a firm appear more profitable than it really is by understating depreciation expense. Depreciation expense can be understated by overstating the useful life of assets. Management can also overstate its assets by keeping obsolete and no longer used assets on its balance sheet. Maintaining obsolete assets on the balance sheet also overstates net income because losses on the disposal of these assets are not recorded. INVENTORY Inventory offers a big opportunity for management to air brush their financial statements. If they want gross profits and, hence, operating profits to appear higher, the value of ending inventory simply needs to be overstated. There are many ways this can be done. The ending inventory value can be fudged upward by overstating the amount of inventory on hand. Unit costs assigned to ending inventory can be inflated as well. Or obsolete or damaged inventory can be included in the ending inventory count. Sometimes for income tax purposes, management may want to show lower gross and operating profits. Ending inventory mis-measurement can be used for this purpose as well. In this situation, management seeks to undercount and undervalue ending inventory.

YPE OF ACCOUNTING FRAUDS

1. MANIPULATION REVENUE AND ACCOUNT RECEIVABLES Areas and common methods used to fraud: AREA: SALES MANIPULATION

Recording fictitious revenue ( related parties, sales with conditions, consignment or sham sales),

Recognize revenues too early by having improper cut-off, Overstating real revenue by altering contracts and inflating the amount, etc) Omission to record returned goods, Record returned goods after financial year end closes, Do not recognize discounts given hence increasing revenue,

AREAS: ACCOUNTS RECEIVABLES

Understate provision for doubtful debts thus overstating receivables, Not writing off uncollectible receivables or wrote off after financial year end closes, Record bank transfers or manipulate cash received from related parties as cash received from customers

Example of such Accounting Fraud: GLOBAL CROSSING & QUEST

2. MANIPULATION OF STOCK AND COST OF GOODS Areas and common methods of fraud: AREA: MANIPULATION OF INVENTORY AND OR COST OF GOODS SOLD

Over-counting physical inventory, Over-valuation of inventory, Not writing off obsolete inventory, Not providing for slow-moving inventory, Incorrect costing of inventory, Record fictitious inventory into the books of account,

Under-record purchases, Record purchases after financial year end closes, Omission of recording purchases, Overstating returns to suppliers, Record returns in an earlier period by ignoring the proper cut-off, Overstate discounts, Record very low amount of costs of goods sold, Omit to records cost of goods sold or reduce inventory

Example of such Accounting Fraud: PharMor

3. UNDERSTANDING LIABILITIES AND EXPENSES Areas and common methods of fraud: AREA: UNDERSTATING LIABILITIES/EXPENSE FRAUD

Not recording accounts payable Not recording accrued liabilities Recording unearned revenues as earned Not recording warranty or service liabilities Not recording loans or keep liabilities off the books Not recording contingent liabilities Example of such Accounting Fraud: Enron

4. OVERSTATING ASSETS Areas and common methods of fraud: AREA: OVERSTATING ASSETS

Overstatement of current assets (e.g. marketable securities) Overstating pension assets

Capitalizing as assets amounts that should be expensed Failing to record depreciation/amortization expense Overstating assets through mergers and acquisitions Overstating inventory and receivables Example of such Accounting Fraud: WorldCom

5. DISCLOSURE FRAUD-WINDOW DRESSING PURPOSE AND SOME OF THE WAY S TO DO IT Areas and common methods of fraud: AREA: OVERALL MISREPRESENTATION There are three (3) categories of disclosure frauds which comprises the following:

Overall misrepresentations about the nature of the company or its products, usually made through news reports, interviews, annual reports, and elsewhere

Misrepresentations in the management discussions and other non-financial statement Sections of annual reports, 10-Ks, 10-Qs, and other reports Misrepresentations in the footnotes to the financial statements Example of such Accounting Fraud: Bre-X Minerals

6. What Is Teaming And Lading & How To Prevent it We often hear of one common accounting fraud which is called Teaming and lading. So what is Teaming and Lading? Teaming and lading is a term normally used for borrowing from cash to repay by cheque at a later date. When a business received incomes receipts, it can come from both cash and cheques and if the internal check is lacking then the fraud perpetuator can divert the cash cheque for his/her personal use. So how do we prevent Teaming and Lading fraud?

To prevent teaming and lading, the following internal controls/checks should be instituted:

The cash and cheque received should be split into two different types re: cash and cheque banking in slip. The cash/cheque split on paying in slips will allow the school to ensure that staff have not been encashing personal cheques against income collected;

There should be reconciliation which should involve the matching of the income receipts/other documentation to accounting records on the one hand and bank statements and paying-in slips on the other;

If any income is unaccounted for, the separate listing of all individual cheques on the paying-in slip allows the identification of the missing income element;

There should be proper segregation of duties. The person carrying out this reconciliation should not be the person who banked the income;

These reconciliations should be reviewed by someone independent of income process

CHAPTER 4

BIBLIOGRAPHY

BOOK: FINANCIAL ACCOUNTING

Websites: