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Journalism of Courage
The much-hyped early warning system (EWS), developed in the aftermath of the Satyam scam, for early detection of fraud has been shelved and now the government is instead working on implementing a new mechanism to detect frauds at the initial stages through its research unit in the serious fraud investigation office (SFIO).
Official sources told The Sunday Express that the Market Research Analysis Unit (MRAU) set up by the SFIO will be the “new mechanism for brining in certainty and finality in instituting effective fraud prediction and prevention model. This will help in generating alerts for detecting cases of potential fraud and malfeasance”.
The software-based fraud detecting system, EWS, was tested in-house to scan unusual developments in companies and alert the ministry of corporate affairs of any possible wrongdoing. The EWS sent signals if a company was found to be faltering any of the 40 parameters set by the MCA including more than 5 per cent of domestic sales through related party transaction, or more than half of the company’s directors resigning in a year, or if there was a discrepancy in earning-per-share ratio.
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However, the sources said that the system showed “unsatisfactory results” and was therefore shelved. “Now a fraud detection module has been prepared by the SFIO while the MRAU is being revamped to have greater surveillance over corporate frauds through examination and analysis of media reports, scrutinising quarterly results of companies, their public announcements, filings with exchanges, and tax returns,” the sources said adding that a forensic lab with some basic forensic tools has also been set up in the SFIO.
An analysis shows that most of the fraud cases have been reported in West Bengal (82) and Delhi (66) even though Maharashtra, Gujarat and Karnataka account for almost 50 per cent of total companies in India.
During the last three years some 194 cases were referred to the SFIO for investigation of which it has already investigated 162 cases.
During the last financial year, the ministry referred some 31 cases to the investigating agency, which has been given statutory status in the Companies Act 3013, while the SFIO submitted investigation reports in 43 cases while 83 cases are still under its consideration.
To strengthen the fraud detection, the ministry has taken measures including mandatory Directors Identification Number for every existing and prospective director, verification of details of a new company by professionals, who will have to personally visit the premises and certify that the premises are at the disposal of the company.
Registrar of Companies have also been asked to scrutinise balance sheet and other records of the company who raise money through public issue and monitor the utilisation of such funds.
