Satyam Chairman B Ramalinga Raju has admitted to have inflated non-existent cash and bank balances by Rs 5,040 crore in the books that reflected Rs 5,361 crore as balance. Is it possible to do so?
Cash and bank balances are difficult to falsify. Auditors usually carry out physical verification of cash and bank balances by calling for statements from the bank. As a general practice, an auditor would call for balance confirmation statement. The auditor writes a letter to the company, directing it to ask the bank to pass on the relevant period-end information to the auditor’s address.
The information forwarded by the bank includes the account holder’s name, account number, balance in account and the date up to which the balance is available. The only possible scenario in which the auditor may fail to detect the discrepancy is if the statement itself is fake, or forged.
Raju has admitted to non-existent accrued interest of Rs 376 crore. Is that possible?
The same procedure is followed to establish the genuineness of accrued interest. Banks issue statement on the interest and auditors verify it with the deposits. Any inaccurate statement can only indicate to the fraud rather than a misstep on the part of the auditors.
How is this understatement of liability of Rs 1,230 crore and overstatement of debtors position of Rs 490 crore (as against Rs 2,652 crore reflected in the books) possible?
Historically, corporate frauds, including those by financial entities, have revealed tinkering of debtors and liabilities. Overstated debtors or understated liabilities are a possibility. Raju has said he has borrowed for the company. If so, then it should have been reflected in the books of the company. For example, if he brings in Rs 1,200 crore, then it has to be credited to somebody or some account. He says the company had been overbooking revenue. If one forges deposit receipts and other vouchers, then it is a different matter.
An auditor would have to look at contracts based on manpower billing, or bytes transmitted and other similar services rendered. The auditor would have to tally revenue generated with the documentation provided by the company and balance confirmation with the debtors.
The ICAI framework for auditors emphasises the importance of preparing a cash flow statement, which helps in enhancing the comparability of reporting of operating performance by different enterprises as it eliminates the effects of using different accounting treatments for the same transactions and events.
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Apart from the statutory auditors, a company also has internal auditors, who, in large organisations, are outsourced to external agencies. The internal auditors follow the audit procedures practiced across the globe to verify the accounts. These matters are also discussed at the audit committee meetings of the board held at least four times a year.
How many people are involved in auditing of a balance sheet?
It is hard to give a number. It depends on the processes and practice followed by a company. In companies where several processes are automated and internal audit process is strong, auditors don’t need to deploy large number of staff. But on the other hand, a small company with little automation and smaller transaction may require higher number of people.
Price Waterhouse has indicated that the audits were conducted in accordance with applicable auditing standards and were supported by appropriate audit evidence.
The Institute of Chartered Accountants of India (ICAI) has laid down certain procedures to be followed by all auditors. Global audit firms usually have stringent measures benchmarked internationally. It may be difficult to detect if a company has fudged vouchers, statements and other relevant documents.
Raju has said the gap in the balance sheet has arisen purely on account of inflated profits over last several years. Is it possible?
He is trying to justify higher expenses. To make it real, he was incurring higher expenses to keep the size big. The auditors would have gone through his books and found out the discrepancies. Only a thorough investigation will reveal the real issue.
(With inputs from Rakesh Rathi of Shailesh Haribhakti & Co, Ashutosh Pednekar of M P Chitale & Co and other auditing experts)