What is Accounting Fraud?

learn about Accounting Fraud with Madhuri Dixit

Case Breakdown: Movie Beta

The scene that you just saw shows how Raju (played by Anil kapoor) is shouting at the accountant (Munim) to explain to him the loss in the books of accounts of Rs. 2,00,000. The accountant says that loss occurred due to fire in the warehouse. Raju accuses the accountant of fraud as there was no fire accident in the company. Accountant clarifies that it was not him but Totaram (played by Anupam Kher) who had influenced him to change the accounts.

What are Accounting frauds?

Accounting frauds are characterized by manipulating the financial statements. This is done to create false image of the company. It could either depict  good or a bad health of the company to benefit some people. It can mislead all the investors, shareholders, lenders, employees etc.

A company can do this by  overstating revenues or not recording expenses. This could be vice-versa too. It depends on the intent of the fraud. In majority of cases, it is to make money but  it could also be a case of misleading investors and lenders to get more capital. Many times companies are under pressure to maintain capital adequacy ratio and they may also resort to manipulating the figures of the company.

Real-Life Example- Satyam Scandal:

Satyam case is a classic example of accounting fraud. Satyam computer service company came into existence in 1987. Ramalinga Raju was the founder of the company. It became successful quite quickly. Share price of Satyam in January 2003 was close to Rs. 138 which shot-up to Rs. 526.25 during March 2008. This was a 300% increase and compounded annual growth rate of operating profit was 35%. Net worth of the company was $2.1 billion.

Ironical to the name of the company (Satyam means truth in sanskrit), Ramalinga Raju started cooking the books. He falsified accounts for 7 years straight. This included overstating revenue, which meant showing revenue that were non-existent through counterfeit receipts. Price Waterhouse Coopers (PWC) was the auditors of the company but they did not do a good job of uncovering the Satya(m).

This is a Hindustan times report from 2009.

Uncovering of Staya:

He was left with no choice, when board of directors refused to invest in Maytas (mirror name of Satyam). Maytas was a company his family had created. The idea was to merge with company and their assets and liabilities can be taken to cover up Satyam’s. In 2009, Ramalinga Raju confessed to the entire fraud that he had committed. Below is a snapshot of the letter he wrote:

 

As one can clearly see, As of September 30, 2008 means in the balance sheet of September 2008, he had shown non-existent cash of Rs. 5,040 crore as against 5,361 reflected in the books. This means that Rs. 321 crore is fictitious (Rs5,361-5,040).  Debtors are assets of a company, which are overstated by Rs. 490 crore. This is a 5 page letter in which Ramalinga Raju takes complete responsibility of the fraud.

After this letter, SEBI sprung into action and removed Satyam from Sensex and Central Bureau of Investigation (CBI) took over the case.

 

Written by: Gitika Chandra

References:

Full text: This letter Ramalinga Raju wrote uncovered the Rs 4,676 cr Satyam scam-Business News , Firstpost

 

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