Corporate Fraud & Its Types

India’s economy is growing at a fast pace. But this fast pace sometimes comes with the significant fluctuations in the economy with the considerable financial surge in and out of the economy. GDP surely delivers a path for economic rise in our country, but also some people use the loopholes in the system to get the advantages. Frauds impact the economy, and that also stresses the government to implement more laws to decrease the probability of frauds.

The Companies Act, 2013 delivers safety by regulation and all relevant legal requirements. The aim of making the Companies Act is to deliver a legislative framework for the structure of companies, addressing the layers of incorporation, adherence, accountability, administration, management, etc. A company is a non-human entity legally formed and is legally independent, with endless continuity, an official seal, and limited liability.

What is Corporate Fraud under Companies Act 2013?

Corporate fraud refers to any criminal activity or dishonest acts committed by an individual or corporation in order to cheat norms and regulations and gain unethical profits. Corporate fraud refers to criminal activities committed by firms or its officers in order to gain a profit or suppress earnings in order to deceive tax authorities. Insider trading, misleading financial data, and bribery are among the most common types of corporate fraud. These activities are intended to mislead stakeholders. Corporate fraud has substantial consequences, including financial loss for shareholders, a tarnished business image, an influence on the market as a whole, and legal issues for the firm and shareholders. Corporate fraud is a severe and pervasive problem in business, not only in India but throughout the world. Corporate fraud is a major concern for international organizations such as the EU, G20, SAARC, QUAD, and others.

Types of Corporate Fraud

Fraud on Financial Statements

Financial statement fraud is defined as the intentional falsification or alteration of financial data in order to suppress or exaggerate sales or to fool the financial statement’s intended user. The goal of committing financial fraud is to deceive stakeholders such as investors, loan officers, regulators, or tax officials. Financial statement fraud makes a company’s financial situation look better than it is. This helps to increase income, indicate a greater value for the assets, or eliminate debt from its initial existence.

Misuse of assets

It is a criminal action in which workers or management use their power to steal or misuse corporate assets. Asset misappropriation refers to any theft or abuse of the firm’s assets. Corporate fraud can occur in a variety of ways, including the use of phony bills, payroll frauds, recording additional costs in books of accounts, stealing stock, and so on. This type of action may harm a company’s financial stability and undermine confidence.

Corruption and Bribery

Corruption and bribery are terms that allude to the misuse of authority for personal gain. This generally entails soliciting for or accepting unlawful money. People at many levels of a corporation, including senior executives, employees, suppliers, and government officials, might be engaged. Corruption and bribery generate opportunities for black money and harm the economy.

Insider Dealing

Insider trading occurs when individuals with classified information or vital data about a firm buy or sell its securities illegally. This is commonly witnessed among firm management and personnel, such as executive officers, board members, and employees. They have classified knowledge that they trade for money to get an unmistakable advantage in the stock market.

Tax Avoidance and Fraud

Tax evasion and fraud occur when businesses illegally decrease their tax liabilities in order to fool tax authorities. It might include falsely declaring the wrong revenue, which reduces earnings, recording too many costs, concealing proceeds or profits in offshore accounts, or engaging in abusive tax procedures.

Cybercrime and Breach of Data

Cyber fraud and data breaches are the unauthorized access or theft of sensitive information about a firm, such as client data, trade secrets, intellectual property, receivables records, and so on. Cyber fraud is perpetrated through cyberattacks. This scam can cost businesses money, harm their reputation, result in penalties, and land them in legal problems.

Instances of Corporate Fraud

The 1992 Harshad Mehta Scam

Harshad Mehta was a stockbroker who put up a massive money swindle in India. He was well-known as the “Big Bull.” Harshad Mehta took advantage of loopholes and scams on the Bombay Stock Exchange by identifying and exploiting faults in the banking system. He mostly did this through the criminal conduct of ‘circular trading’ and misappropriating bank revenues.

The 2013 Saradha Group Scam

The Saradha Group was a collection of firms from Eastern India. The firm participated in a large Ponzi scam that defrauded millions of clients who invested in it. The group’s main executive, Sudipta Sen, promised investors a guaranteed profit. The corporation stated that investments will be made in areas such as real estate, media, and hotels. However, this was not true in actuality. Instead, the funds raised by the general public were utilized to compensate other investors.

The Kingfisher Airlines dispute (2012)

The demise of Kingfisher Airlines is a well-known corporate disaster in India. It is tied to financial problems and misbehavior by its owner, Vijay Mallya. The airline has massive debts and failed to repay loans or dues to suppliers and lenders. During the search, the investigative authorities discovered that the cash had been transferred and that the money regulations had been breached.

Questions to Understand your ability

Q1.) What exactly does “corporate fraud” mean under the Companies Act, 2013?

a) Legal ways to boost profits

b) Illegal activities by a company or its officers to make money unfairly

c) Smart investment decisions

d) Proper financial reporting to the authorities

Q2.) Which of the following is a classic example of corporate fraud that happens often?

a) Developing a new product

b) Insider trading, using confidential info to make money

c) Running marketing campaigns

d) Training employees to be more productive

Q3.) What type of fraud was the Saradha Group Scam (2013) mainly about?

a) Hiding actual financial performance from stakeholders

b) Stealing company assets for personal use

c) A Ponzi scheme where investors were scammed with fake returns

d) Trading company shares with insider knowledge

Q4.) What is the true impact of financial statement fraud on a company?

a) It paints an unrealistically good picture of the company’s finances

b) It helps to reduce operational costs

c) It increases employee satisfaction

d) It raises the value of the company’s stock instantly

Q5.) Which fraud involves stealing private company data, like customer info or trade secrets?

a) Embezzling funds from company accounts

b) Bribery and corruption to influence decisions

c) Cyber fraud where data gets hacked or stolen

d) Hiding company profits to avoid taxes

Conclusion

Corporate fraud, a serious issue affecting both India and global markets, involves criminal activities aimed at deceiving stakeholders for unethical profit. Types include financial statement fraud, asset misappropriation, bribery, insider trading, tax evasion, and cyber fraud. Notable examples in India include the Harshad Mehta Scam, Saradha Group Ponzi scheme, and Kingfisher Airlines debacle. Such frauds harm businesses, tarnish reputations, and trigger legal consequences, stressing the need for stricter laws.