Frauds Redefined: A Definitive Guide to Understand Deception

There are two pillars of the forensic accounting function. Litigation support and investigative accounting which also means investigation of frauds in the books of accounts. In addition to this forensic accounting services are also utilized for fraud prevention and detection. Hence it is essential to understand the threat of fraud in various companies.

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Overview of the Business Scenario

Businesses are targets for crime because they have something of economic value. Fraud perpetrators believe that they can successfully steal, compromise, or use some of that value.

There is virtually no limitation to the means that may be employed to accomplish a criminal objective. The criminal mind is ever alert to seemingly new and unique ways to separate a business from its assets. Crimes that businesses face generally may be categorized as:

• “Blue-collared crimes,” such as murders, robbery, and burglary.
• “White-collar crime,” such as fraud, conflict of interest, misconduct, and related financial threats.

This post focuses on white-collared crimes. White-collared crimes happen at every level of the economy. Corruption is the most popular business crime in India. This money is eventually sent outside the country which results in Money Laundering. In an interesting study done by the Indiaforensic Center of Studies, efforts were made to quantify the size of money laundering, records of the National Bureau of Crime Records were reviewed, and it was observed that the size of Money Laundering in India could be as big as Rs.1555 thousand crores.

In the context of corporate frauds in India, the contribution of the Research studies done by the Indiaforensic Center of Studies plays a significant role. Most of the studies were well-quoted in the Media. These studies always hit the bull’s eye.

Important Statistics on Frauds

Their studies have highlighted the following facts.

• India lost more than $40 Billion to occupational or employee-related frauds.
• In the year 2008, the study highlighted that there are more than 1200 companies listed on the stock exchanges indulging in the financial statement fraud.
• Indian Insurance industry loses more than $6 billion to frauds including inside and outside frauds in the Life and Non-Life insurance sector.
• There is a persistent shortage of forensic accounting skills and India needs more than 60000 forensic accountants by the end of the year 2015.
• The average Salary of the forensic accountant in India was found to be above Rs. 6.89 lacs in the year 2009.
• In as many as 80% of the cases, forensic accountants are called to the organization to detect and investigate the financial frauds and in some cases, the services of the forensic accountants are also used for assessing the fraud risks or preventing the frauds.

Fraud is the indivisible part of the function of the forensic accountant, and it becomes necessary for forensic accountants to understand the meaning, classification, and symptoms of the various fraud schemes.

India’s companies act was amended after 57 years in the year 2013. The original Companies Act passed in the year 1956 had no definition of fraud. The act which was amended in the year 2013 had significant provisions related to corporate fraud.

The definition of corporate fraud as mentioned in Section 447 can be divided into five components that explain corporate fraud:

“Fraud” in relation to affairs of a company or anybody corporate and includes:

1. “Any act, omission, concealment of any fact or abuse of position
2. Committed by any person or any other person with the connivance in any manner.
3. With intent to deceive to gain undue advantage from or to injure the interests of
4. the company or its shareholders or its creditors or any other person
5. Whether or not there is any wrongful gain or wrongful loss.

Frauds as per Contract Act

No statute except the Contract Act’1872 defined the word fraud before the Companies' act was amended in the year 2013. In the Indian scenario, Section 17 of the contract act defines fraud as follows.

“Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto his agent, or to induce him to enter into the contract.

• The suggestion as a fact, of that which is not true, by one who does not believe it to be true.
• The active concealment of a material fact by one having knowledge or belief of the fact.
• A promise made without any intention of performing it.
• Any other act fitted to deceive.
• Any such act or omission as the law specially declares to be fraudulent.

Most Certified Forensic Accounting Professionals agree that fraud encompasses activities involving dishonesty and deception that can drain value from a business, either directly or indirectly, whether or not the perpetrator benefits.

Fraud involves the intent to defraud; that is, the perpetrator relies on his or her deception to accomplish or hide the fraudulent activity. Fraud is not accomplished via honest mistakes or errors.

Forms of Fraud

Fraud can manifest itself in a wide variety of ways and originate from a number of different sources. One that is perpetrated by employees, consumers, and vendors dominates most instances faced by businesses.

Training to Fight Frauds

Indiaforensic provides various certification courses to educate people about fraud in a way that is easy to understand. These courses are designed to help individuals gain knowledge and skills related to detecting, preventing, and investigating different types of fraud.

By enrolling in the Certified Bank Forensic Accountant course, you can learn about the common techniques used by fraudsters, the red flags to watch out for, and the best practices to safeguard yourself and your bank against fraud.

Originally published at https://indiaforensic.com on December 19, 2009.