NATIONAL LAW UNIVERSITY ODISHA, CUTTACK

Dissertation on- CORPORATE FRAUD- A CRITICAL

ANALYSIS

Baby Khan
LL.M /006/14

ABSTRACTS

The goal of the dissertation is to shed some light upon the corporate fraud in India. To
achieve this purpose, this dissertation evaluates various independent factors which leads to
the corporate fraud and where the implementations are necessary for the proper guidelines of
corporate fraud. There are 697 cases of fraud filed under the Companies Act and 70
complaints logged in with Indian Penal Code, corporate India is under a cloud. Corporate
frauds rose by over 45 per cent in India in the last two years and the lurking risk has been
dissuading global companies from investing in India, said a study.
Corporate frauds arose out of corruption, money laundering, tax evasion, window dressing,
financial reporting fraud and bribery due to weaknesses in internal controls, scarcity of
resources and over-riding powers of senior management1
Procurement frauds, payrolls frauds, asset misappropriation, financial misstatement,
corruption, bribery, tax evasion, piracy, intellectual Property (IP) fraud, kickbacks,
accounting frauds, counterfeiting, white-collar crimes etc are swiftly threatening business in
both the private and public sectors, it added.
"Corporate wrongdoing inevitably ends up creating a vicious cycle that hurts shareholders
value, damages investor's trust, leads to locking-up of capital in litigation, and ultimately
causes wider financial market instability; eventually becoming part of much larger problems,"
Assocham Secretary General D S Rawat said. Over 66 per cent of the respondents
highlighted their concerns about the impact of frauds on their brand and market reputation.
Moreover, 26 per cent were concerned about the financial losses that businesses suffer as a
result of frauds.2

1 The Economics Times URL athttp://articles.economictimes.indiatimes.com/2015-0114/news/58066216_1_corporate-frauds-strong-internal-controls-tax-evasion (last

visited on 9th february 2015)
2 Id

INTRODUCTION

A fraud is a false representation of a matter of fact

whether by words or by conduct, by false or misleading allegations, or
by concealment of whatshould have been disclosedthat deceives and is intended to deceive an
other so thatthe individual will act upon it to her or his legal injury.
Fraud is commonly understood as dishonesty calculated for advantage. A person who is disho
nest may be called a fraud.
The term corporate fraud means 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. The term fraud commonly includes
activities such as theft, corruption, conspiracy, embezzlement, money laundering, bribery
and extortion. Identity theft this type of fraud works by obtaining information about an
individual and using this information to apply for identity cards, accounts and credit in that
persons name. Various ways of obtaining the required information are possible (e.g.
indiscreet insiders or phishing.
The corporate fraud committed in some very old accounts of the U.S like the fraud relating to
Southern Investment Company, the Ponzi schemes and then it run on to the financial fraud
and its manifestation in the books of account. These types of white collar/ economic crime
are targeted against individual and employ deception for the purpose of obtaining financial
gain. They involve the misrepresentation of facts and the deliberate intent to deceive with the
promise of goods, services, or other financial benefits that in fact do not exists or that they
were never intended to provided. This includes various telemarketing frauds, frauds involving
consumer goods and services, and frauds dealing with financial advice, insurance coverage,
and investment or business schemes. Like the offers they give as free prizes that costs
unwanted, scams involving credit assistance and loans. Fraudulent beauty products, health

products are also a kind of frauds.The corporate fraud may be classified into various ways
because the term fraud is covered in a wide connotation and in a wider perspective like
Corporate frauds can include:
Account takeover, Application fraud, Bankruptcy-related fraud, Betting scams, Business
directory fraud, Charitable publication scams, Cheque fraud, Cheque overpayment fraud,
Domain name scams, Exploiting assets and information, Fake invoice scams, False
accounting ,Fixed line fraud, Government agency scams, Insurance fraud,Intellectual
property fraud, Long and short firm fraud, Mobile phone fraud, Mortgage fraud, Office
supply scams, Payment fraud, Personnel management, Plastic card fraud, Ponzi schemes,
Premium rate phone line scams, Procurement fraud, Pyramid schemes, Receipt fraud, Share
sale fraud, Travel and subsistence fraud.
There are many types of corporate fraud, as stated above including the following common
frauds:
Theft of cash, physical assets or confidential information, misuse of accounts, procurement
fraud, payroll fraud, financial accounting mis-statements, inappropriate journal vouchers,
suspense accounting fraud, fraudulent expense claims, false employment credentials, bribery
and corruption. The role of an independent directors also gives a rise to corporate fraud.3
In India too its increased day after day top scams in India like Satyam scam, Saradha chit
fund, Rebook India, Sify Scam, Sahara India are the examples.
The large and numerous corporate frauds that emerged in the United States at the onset of the
new millennium provoked an immediate legislative response in the Sarbanes-Oxley Act
(SOX). This law was predicated upon the idea that the existing institutions designed to
uncover fraud had failed, and that their incentives as well as their monitoring should be
increased.4
3 Anand Sharma url at -http://www.claonline.in/DisplayArticle.aspx?
ID=MzUyMQ==&FileName=MjAxM18xOTUuaHRt

4 ALEXANDER DYCK, ADAIR MORSE, and LUIGI ZINGALES , Who Blows the Whistle on Corporate
Fraud? Url at- Who Blows the Whistle on Corporate Fraud?Author(s): ALEXANDER DYCK, ADAIR MORSE
and LUIGI ZINGALESSource: The Journal of Finance, Vol. 65, No. 6 (DECEMBER 2010), pp. 22132253Published by: Wiley for the American Finance AssociationStable URL:
http://www.jstor.org/stable/23324409 (last visited on2nd january 9pm)

(I)Scope and object:

The research will provide an understanding of why and how corporate frauds have happened
what are the reasons for its growth and the failure of the various authorities. This will give an
idea of the research work done so far in this field and will further help comprehend why
suggested mechanisms to control frauds have failed. By explaining a critical analysis on the
case laws.
To bring a complete focussed view over the corporate fraud that happened in the recent days.
To find out the causes and kinds of corporate fraud.
To study the hurdles and problems in of it and critically evaluation of the corporate scams.
To suggest remedial measures for combating the problems with regard to the controlling of
corporate scams in India.
(II) Limitation:
Researchers main aim is to highlight the concept of corporate fraud and its impacts on
society. Researcher wants to confine her research only to the impact on the companies and
what are the needs to be done to check corporate fraud, and who are sufferers under the
corporate fraud. The regulatory bodies how failed to detect the scams.
(IV) Chapterisations
This dissertation is divided into six chapters with conclusions at the end.
I.

Introduction:

The first chapter of my dissertation contains the basic introduction of fraud, historyof
corporate fraud and its emergence . The various kinds of corporate frauds that is now
prevailing in the world.
II.

Who are responsible and ultimate who suffers?

In the second chapter the researcher has tried to find out the answer that whether the directors
or the employees or any other members of a company is liable for corporate fraud or not.
III.

Insider tradings, False auditing and Independent fraud

The third chapter should be dealt with Insider trading (with reference cases), False Auditing
(with reference cases) and Advertisement Fraud (with reference cases) as a increasing matter
related to corporate scam
IV.

Prevention of Corporate Fraud

The fourth chapter will be consist of various Methods of Preventing Frauds with Role of
Regulatory Bodies like Securities and Exchange Board of India (SEBI), Serious Fraud
Investigation Office SFIO, The Central Bureau of Investigation CBI and etc. In America to
identify the most effective mechanisms for detecting corporate fraud, I study a few reported
fraud cases in large U.S. companies between 1996 and 2004.
V.

Punishments

The fifth chapter should be dealt with Punishments under various Acts for committing fraud.
VI.

Conclusion

Lastly researcher has concluded her study by giving some suggestions and explaining how
the country can control corporate fraud from further growing.
(V) Research Questions:
(1) What is corporate fraud and its classification and impact in the world?
(2) Who are mainly responsible and who are the main victim and target of Corporate Frauds?
(3)Comparison of Fraud between India and America
(4) The particular fraud like insider trading and auditors fraud, independent directors fraud.
(5) What are the role of the regulatory bodies in detecting fraud?
(6) Is there any strict punishments (provisions) for such frauds under the various Acts?
(VI) Hypothesis:
In the recent years the rate of corporate fraud in India has increased to a considerable extent.

Corporate fraud effect th overall growth and development of the countrys economy.
The publics are the main sufferer because they invest their money while behind the
various companies, and they are the ultimate sufferers because there is not any proper
provision under any law or Acts, to detect the fraud of the corporate world and if a
person suffers by fraud then the final destination, he knocks the court, there is lengthy

procedures.
There must be a proper authority, which will govern and detect the companies and
strict punishments must be imposed to such Fraudulent Companies.

(VII) Research method:

A research at present day depends not only upon any particular method for the preparation of
the dissertation. A combination of different methods is required to achieve the possible best
results. Thus practical research is not possible, so historical cum analytical method has been
applied mainly in the preparation of this dissertation. This approach deals descriptive analysis
with formal sources of law like legislations, case laws, text books, articles.
Sources:
Both the primary and secondary sources will be used, followed by the internet sources.
(VIII) Citation Method
The citation format of Bluebook (19th edition) is used.