Mohammed Almalki
Corporate Fraud
COLLAPSE
Corporate Fraud
Organizations suffer a big blow when faced by corporate fraud. Corporate fraud can involve the
activities of manipulating accounting and financial statements to portray an attractive outcome. Corporate
fraud can also involve dishonesty and illegal activities that can affect an organization’s reputation and can
also incur losses to investors. For example, Satyam Scandal was among the biggest scandal in the business
world where Indian IT services were involved in corporate fraud (Bhasin, 2013). The main perpetrator was
the company’s founder and chairman, Ramalinga Raju. He falsified the revenues, margins, and cash
balances of $1.1 billion which caused the company to incur a loss of $2.2 billion to the investors (Bhasin,
2013). The scandal has attracted various red flags in the accounting choices as the company intended to
invest $1.6 billion in real estate. The choice seemed lucrative but the time indicated a vicious motive to the
investors. Also, the company had failed to utilize accounting systems that would have helped in financial
reporting.
Moreover, the implementation of accounting and financial reporting systems could have helped in
preventing corporate frauds. Accounting and finance systems are seen as elements that enhance the
procedures of data collection, storage, and processing. The systems also help in enhancing the process of
preparing and reporting the financial statements in an organization. The systems can be useful as they would
help the external auditors, internal auditors, inspector generals, and the accounting departments in detecting
fraud and illegal financial reporting (Engels, Kumar, & Philip, 2019). Accounting and business policies and
procedures can also be useful in detecting or preventing fraud. Business policies can involve the availability
of internal controls, corporate culture, the use of independent audit system, effective reporting systems,
monitoring the bookkeeping strategies, and the use of a hired fraud prevention expert (Halbouni, Obeid, &
Garbou, 2016). The strategies would have been useful in detecting and preventing corporate fraud.
Therefore, business policies and procedures can help in reporting and identifying malicious acts and fiscal
irregularities that would result in corporate and financial fraud.
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References
Bhasin, M. L. (2013). Corporate accounting scandal at Satyam: A case study of India’s enron. European
Journal of Business and Social Sciences, 1(12), 25-47.
Engels, C., Kumar, K., & Philip, D. (2019). Financial literacy and fraud detection. The European Journal
of Finance, 1-23.
Halbouni, S. S., Obeid, N., & Garbou, A. (2016). Corporate governance and information technology in
fraud prevention and detection. Managerial Auditing Journal.
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Abdullah Hassan
MODULE 9
COLLAPSE
A relevant case of corporate fraud is related to $2 billion Punjab National Bank, India. The case revolves around
Nirav Modi, an internationally recognized jewelry designer. Apparently, Nirav Modi defrauded the Punjab National
Bank (PNB) of $43 million. However, the actual amount of fraud was $2 billion. Modi conspired with two of Punjab
bank’s staff members who would fraudulently give Letter of Undertaking (LoUs) to Modi. The LoUs is a form of
guaranty on behalf of the issuing bank (businesstoday.in, 2018). The scandal broke in early 2018; however, Modi
has been a proclaimed absconder in this case.
The fraud was detected by PNB back in February 2018 when the bank doubted the issuance of LoUs to three
diamond firms in the past. Three diamond firms approached the bank and requested for issuance of LoUs. However,
PNB representatives told them the 100% cash requirements of the bank on LoUs. Nevertheless, the firms maintained
that they had been issued LoUs in the past without this requirement. Upon this, the bank suspected regulations and
launched an inquiry that led PNB to fill a complaint with the Central Bureau of Investigation. Before the fraud
broke out, various red flags appeared as a warning to the bank. In this regard, a prominent income tax investigation
by the IT department raises suspicion on various transactions by the diamond jewelers. The report surfaced several
months before the scandal originated. However, the findings of this report were not shared (thewire.in, 2018).
The nature of this fraud is purely financial, and every transaction that occurs with a back is recorded in digital
systems. Thus, an appropriate and relevant accounting and financial system maintained by PNB could have avoided
this fraud by analyzing LoU transactions occurring without cash (Dutta, 2018).
The fraud occurred due to weak internal policies, which allowed the employees to record financial transactions
without cash. Thus, a defined policy that takes into account the cash flows and undertaking for LoUs could have
been placed to avoid the scam.
References
businesstoday.in. (2018, 3 15). Nirav Modi case: How PNB was defrauded of Rs 11,400 crore. Retrieved from
businesstoday.in: https://www.businesstoday.in/sectors/banks/nirav-modi-case-pnb-fraud-11400-crorescam-ed-cbi-raid/story/270708.html
Dutta, P. K. (2018, 2 27). PNB-Nirav Modi fraud: How future banking scams may be prevented. Retrieved from
indiatoday.in: https://www.indiatoday.in/india/story/pnb-fraud-done-nirav-modi-fled-but-can-futurebanking-scams-be-prevented-1178674-2018-02-27
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thewire.in. (2018, 12 3). IT Dept Raised Red Flags Over Nirav Modi Months Before PNB Scam Broke: Report.
Retrieved from thewire.in: https://thewire.in/government/i-t-dept-raised-red-flags-over-nirav-modimonths-before-pnb-scam-broke-report
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