Auditing and

Assurance
Assignment
1. Corporate Governance and
professional ethics
2. Corporate Frauds - Types &
prevention measures
Case Study and Concept Explanation
By Riddhi Dugar
21/UBHA/139
Index

Serial number Topic Page number

1) Corporate 3
Governance
and
Professional
Ethics
2) CFPL Energia 7
Case Study
3) Corporate 11
Frauds – types
and Prevention
measures
4) Satyam 15
Computers
Case Study
1)Corporate Governance and Professional Ethics

What Is Corporate Governance?

Corporate governance is the system of rules, practices, and processes by which
a firm is directed and controlled. Corporate governance essentially involves
balancing the interests of a company's many stakeholders, such as shareholders,
senior management executives, customers, suppliers, financiers, the
government, and the community.

Since corporate governance provides the framework for attaining a company's

objectives, it encompasses practically every sphere of management, from
action plans and internal controls to performance measurement and
corporate disclosure.

The Principles of Corporate Governance

While there can be as many principles as a company believes make sense, some
of the more well-known include the following.

1)Fairness

The board of directors must treat shareholders, employees, vendors, and

communities fairly and with equal consideration.

2)Transparency

The board should provide timely, accurate, and clear information about such
things as financial performance, conflicts of interest, and risks to shareholders
and other stakeholders.

3)Risk Management

The board and management must determine risks of all kinds and how best to
control them. They must act on those recommendations to manage them. They
must inform all relevant parties about the existence and status of risks.

4)Responsibility

The board is responsible for the oversight of corporate matters and

management activities. It must be aware of and support the successful, ongoing
performance of the company. Part of its responsibility is to recruit and hire a
CEO. It must act in the best interests of a company and its investors.
5)Accountability

The board must explain the purpose of a company's activities and the results of
its conduct. It and company leadership are accountable for the assessment of a
company's capacity, potential, and performance. It must communicate issues of
importance to shareholders.

6)Social Responsibility
Apart from the main principles, there is an additional principle of corporate
governance. Company social responsibility obligates the company to be aware
of social issues and take action to address them. In this way, the company
creates a positive image in the industry. The first step towards Corporate Social
Responsibility is to practice good Corporate Governance.

Corporate Governance Advantages

1.Compliance with laws:

With corporate governance in place, compliance with various laws is simple, as

corporate governance encompasses the rules, regulations, and policies that
allow a corporation to stay compliant and operate without any hassles or legal
inconveniences.
2.Less fines and penalties:

As the legal compliance component is taken care of thanks to corporate

governance standards, businesses can save a lot of money on unnecessary fines
and compliances and devote those funds to more important company goals.
3.Better management is an advantage of corporate governance :

With a structure in place for how the entity runs and how it functions on a day-
to-day basis, managing operations and meeting targets becomes a lot easier.
Under effective corporate governance principles, the work environment takes
care of itself, creating teamwork, unity, efficiency, and a desire to succeed.
4.Reputation and relationships:

Companies with effective corporate governance are able to recruit investors and
external financiers with relative ease, thanks to their excellent reputation and
brand image. Transparency, or the practice of sharing crucial internal
information with stakeholders, is one of the pillars of corporate governance.
This strengthens the entity’s relationship with its stakeholders and sows the
seeds of trust between the company and the general public.
5.Conflicts and deceptions of a lesser magnitude:

Employees are encouraged to be morally mindful in every circumstance they

meet by the norms imposed in the workplace, which eliminates the chance of
fraud and conflict between employees.

Disadvantages of corporate governance

1. Separation of ownership and management

The officials and executives who oversee a company’s internal affairs and make
the bulk of its policies are not necessarily shareholders. For can, publicly traded
corporations, this may become a problem. In the absence of a controlling
shareholder, and the majority of shareholders vote by a proxy, the company’s
assets shall be managed by the board of directors and the officials. The
ownership-management distinction will lead to a conflict of interest between
management’s obligation to maximize shareholder value and increase its
revenue.

2. Illegal Insiders’ Trading

The word “corporate insiders” applies to corporate executives, managers and

employees as they may have access to sensitive, non-public information about
the company that could impact their share value. Company insiders are not
explicitly forbidden from trading in corporate securities but must notify
the Securities and Exchange Board of India of these transactions. Illegal insider
trading occurs when a shareholder sells a stock without access to the
information and in possession of sensitive information relating to the potential
value of his shares. An actioner not directly associated with the company such
as an external auditor, a government regulator or a relative of a corporate insider
may also participate in unlawful insider trading. Since access to confidential
corporate information is widely distributed, it can be difficult to enforce
legislation against insider trading.

3. Misleading Reports
There are many ways of presenting factually, accurate financial statements in a
way that misleads investors.

4. Regulation Costs

The misuse of corporate governance has led to the adoption of a broader range
of federal and state laws to discourage such abuses from repeating. Compliance
with this legislation can be burdensome and costly for companies.
Professional Ethics

Professional ethics are principles that govern the behaviour of a person or group
in a business environment. Like values, professional ethics provide rules on
how a person should act towards other people and institutions in such an
environment.

The Code is an example of a codified set of professional ethics for those who
choose to enter the immigration advice profession.

The five fundamental principles of ethics for professional accountants set out in
Section A of ACCA Code of Conduct and Ethics are:

 Integrity – to be straightforward and honest in all professional and

business relationships.

 Objectivity – not to compromise professional or business judgments

because of bias, conflict of interest or undue influence of others.

 Professional Competence and Due Care – to:

(i)  Attain and maintain professional knowledge and skill at the level
required to ensure that a client or employing organization receives
competent professional service, based on current technical and
professional standards and relevant legislation; and

(ii)  Act diligently and in accordance with applicable technical and

professional standards.

 Confidentiality – to respect the confidentiality of information acquired

as a result of professional and business relationships.

 Professional Behaviour – to comply with relevant laws and regulations

and avoid any conduct that the professional accountant knows or should
know might discredit the profession.
Corporate Governance Case Study
Reason for choosing this case study
CPFL Energia is an example of a company that had several corporate
governance practises that it had designed and implemented. As a result of these
practises, it witnessed an improvement in it’s financial performance and
improvement in non-financial factors as well
About CPFL Energia

CPFL Energia’s (CPFL) origin goes back to 1912, with the founding of
Companhia Paulista de Força e Luz (CPFL Paulista) following the merger of
four domestically-owned electricity distributors located in the upcountry area of
the state of São Paulo. At privatization, VBC Energia, 521 Participações and
Bonaire Participações took a con-trolling interest and, from that date forward,
the company began an accelerated process of expansion, culminating in August
of 2002 in CPFL Energia’s creation as a holding company for the generation,
distribution and trading of electricity.

The company had 5,838 employees as of 31 December 2005.CPFL adopted

good corporate governance practices rapidly and thoroughly for several reasons.

First and foremost, the company considers corporate governance as a means

of creating value and, secondly, it is a strategic way for the company to
achieve its goal of turning CPFL into a benchmark for the electricity sector
in Brazil. Finally, corporate governance serves to help establish CPFL
Energia as a holding company that equitably treats each of its
shareholders, including the controlling shareholders—each one with their own
distinct and respectively differing objectives and characteristics.

Initiatives that display good corporate governance

Subsequent to the creation of CPFL Energia in August 2002, and in the
following years, the company took a series of initiatives to implement its system
of corporate governance. Many of these initiatives were structured before the
listing of the company’s shares on Novo Mercado and the NYSE. Additional
initiatives were taken after these listings. These later initiatives are highlighted
below:

1)The alignment of the corporate by-laws of the subsidiaries, i.e., CPFL

Paulista,CPFL Piratininga, CPFL Geração and Rio Grande Energia with
CPFLEnergia’s corporate by-laws;

2)The structuring of Board’s Advisory Committees.

3)The implementation by the Board of Directors of a self-evaluation system.

4)Change in the structure of the company’s annual report, prepared in the

Global Reporting Initiative (GRI) format.

5)The implementation of the Board of Directors’ website.

6)The introduction of an anonymous and confidential channel for employees,

to enable them to raise questionable accounting and/or financial conduct
issues to the Fiscal Board (a Brazilian analog of the Audit Committee), in a
move towards closer Sarbanes-Oxley Act compliance.

7)The migration of minority shareholders of the subsidiaries CPFL

Paulista,CPFL Piratininga and CPFL Geração to CPFL Energia following a
share swap arrangement worth R$ 553 million (US$ 242 million) and involving
56,800shareholders.

8)The implementation of a compliance division responsible for meeting

regulatory requirements in all markets in which the company’s shares are
traded. Among these regulations is section 404 of the Sarbanes-Oxley Act.

9)The structuring of the succession plan down to the managerial level.

10)The structuring of several company education plans.

11)The structuring of a process of performance evaluation.

12)The preparation of an insider trading policy.

13)The systematizing of the comparison of corporate governance practices

with national and international benchmarks. The Board of Directors
currently has 7 members, three of whom are appointed by VBC Participações,
two by 521 Participações and one by Bonaire Participações. The last member is
an independent director also representing the minority shareholders. Each Board
member’s term of office is one year with the possibility for re-election. At
present, the Board of Directors has three advisory committees:

1)Personnel Committee,
responsible for analysing matters related to the company’s personnel
management, the evaluation of the performance of the principal executives and
the mechanism for choosing the CEO;
2)Processes Committee,
responsible for monitoring main processes and controls;

3)Related Parties Committee,

responsible for evaluating related party transactions.

Since the company’s privatization, different individuals have held the positions
of Chairman of the Board and CEO. The CEO is chosen and elected by the
Board of Directors, but is not a member of the Board itself. In addition to the
CEO, who is a statutory director, the remaining statutory directors (five
Executive Vice-Presidents) are similarly not Board members. All enjoy two-
year terms of office and are eligible for re-election. There are two important
aspects to be noted:

1) While the remaining statutory directors are formally elected by the Board
of Directors, in practice they are appointed by the CEO; and

2)There exists a clear distinction between decisions that can be taken by the
statutory directors and those of the Board of Directors, this distinction being
spelled out in the corporate by-laws and the shareholders’ agreement. With
respect to compensation, the following points are important:

3)The Board members receive fixed monthly compensation, irrespective of

the number of Board meetings held, the compensation being fixed in accordance
with market parameters. The Board of Directors is not compensated in any other
manner;

The statutory directors and the remaining officers of the company receive fixed
and variable (a bonus for meeting performance targets) compensation based on
market parameters. Since 2006, the statutory directors have also enjoyed a
supplemental form of variable compensation that is calculated on a phantom
stock basis. The estimated overall compensation of the Board of Directors,
statutory directors and Fiscal Board is disclosed (all combined) at the
company’s Annual General Meeting, held in April of each year.

Defining Responsibilities for Corporate Governance

CPFL has assigned clear responsibilities to various bodies regarding corporate

governance policies and practices. In particular, since April 2003, the company
has had an active Corporate Governance Department, under the direction and
leadership of Marcoda Camino Ancona Lopez Soligo, who is directly
accountable to the CEO, Wilson P.Ferreira Júnior. The company
systematically and continuously evaluates its corporate governance
practices and is always considering modifications for further
improvements.

Corporate Governance Recognition

In 2005, in a survey conducted by Institutional Investor magazine involving

more than100 analysts and portfolio managers, the company was recognized as
the best in Latin America in Corporate Governance—taking 1st place in
‘Corporate Governance - Latin American Electric Utilities’. In 2006, the
company received an honourable mention in the ‘Best in Corporate
Governance’ awards based on a the survey carried out by IR Magazine, one of
the top publications covering capital markets in Brazil, involving more than 200
domestic capital markets’ leading experts.

After math of Good Corporate Governance

While not solely because of good corporate governance, CPFL has had a very
good share performance record in recent years. CPFL’s share price rose
from R$ 16.43 (US$ 6.22)on31December 2004 to R$ 27.06 (US$ 11.56) on 31
December 2005, an increase of 64.7%. Additionally, CPFL’s shares
(BOVESPA - CPFE3; NYSE - CPT) are included in the following indices:

IBrX 100—100 shares with the highest tradability;

IEE—electric energy stock index;

IGC—corporate governance stock index;

ITAG—special tag-along stock index; and

In 2005, the company’s shares outperformed the leading capital markets’ stock
indices. In the domestic market, the shares reported an appreciation of 64.8%,
com-pared with 42.9% for the “Indice de Energia Elétrica (IEE)” and 27.7% for
the BOVESPA Stock Index (Ibovespa). The company’s ADRs posted an
appreciation of 85.5% compared with 47.5% for the Dow Jones Brazil Titans 20
ADRs Index and a depreciation of 0.6% for the Dow Jones Industrial Average.
At the end of 2005, the company registered a market capitalization of R$
12,982million (US$ 5,548 million), up from R$ 7,420 million (US$ 2,800
million) in 2004,with 479,756,730 common shares priced at R$ 27.06 per share
on the BOVESPA (US$34.69 per ADR on the NYSE).

Projected cash for 2006 at year-end R$ 323 million (US$ 145 million).In 2005,
highlights were the growth in electricity power sales of 4.7% as well as a
114% rise in CPFL’s Brazil sales to the free market. The result was also
boosted by an increase in installed capacity with the commissioning of the
Monte Claro hydro plants for commercial operations at the end of December
2004.Overall, the growing and consistent results posted over the past few years
are a reflection of the company’s business strategy based on advanced corporate
governance practices and the capture of increasing synergies flowing from
combined corporate financial discipline, corporate sustainability and
responsibility practices

1)Corporate Frauds – Types and Prevention

Measures
Meaning
Corporate Fraud refers to the illegal and unethical activities undertaken by any
company or individual which is mostly done to gain a competitive advantage
over other corporations in the industry. This may also be done to showcase a
better identity of the company in the market in order to attract better investors
also.
Types of Corporate Frauds
1. Payroll Fraud

Payroll fraud can manifest in a variety of ways. An employee could lie about their
productivity, sales or hours worked to get a higher pay. Some may request for a
pay advance without any intention of paying it back. Others may even take it a
step further by enlisting a co-worker to manipulate their attendance records by
clocking in and out for them.

According to most studies, payroll fraud disproportionately affects small

businesses because they are less likely to have anti-fraud measures and systems.

How to avoid it: Do background checks on every potential employee. Have

managers closely monitor time sheets and use secure automated payroll services.

2. Asset Misappropriation/Skimming

Asset misappropriation is one of the most common types of business fraud, but
it is also one of the easiest to spot. Watching out for forged checks, missing
inventory and accounts that simply don’t add up is key to identifying asset
misappropriation. You could also fall victim to skimming, which is the act of
taking money from either a customer or the company without recording the
transaction.

How to avoid it: Rotate cash-handling staff and do not entrust all financial tasks to
one employee.

3. Invoice Fraud Schemes

This type of fraud happens when the fraudster (often an employee in sales or
accounting) creates fake invoices to steal money from the business. This could
mean invoicing for products and services that were never bought, creating a fake
supplier/shell company to funnel the money to, or awarding over-inflated
contracts to personal friends and family.

How to avoid it: Cross-check every invoice with actual goods and services
purchased. Do comprehensive background checks before approving a new
supplier.

4. Financial Statement Fraud

Financial statement fraud involves fudging important numbers like sales,

revenues, assets and liabilities. Usually, this is done to dupe investors or the
public, manipulate stock or increase bonuses. While this is one of the rarer kinds
of business fraud, it is also one of the most damaging.

How to avoid it: Delegate different accounting functions to different employees.

Closely examine financial statements for inconsistencies or inaccurate information
before publishing.

5. Tax Fraud

Tax fraud (also known as tax evasion) is a type of fraud that happens when an
individual or company’s earnings and expenses are misreported to the IRS, often
to take advantage of lower tax brackets and special exemptions.

How to avoid it: Do not over-report expenses or under-report earnings. File your
taxes completely, accurately and on time.

6. Data, Intellectual Property and Identity Theft

A lot of businesses handle sensitive information, whether personal data or

intellectual property (IP). IP theft can damage your business if an employee leaks
trade secrets and patents to your competitors. Identity theft can hurt your
reputation due to lower customer trust.
How to avoid it: Restrict access to high-level documents. Have a security policy in
place for the classification and handling of sensitive information. 

7. Insurance and Banking Fraud

Most companies offer health insurance or workers’ compensation to their

employees. Sadly, there are employees who try to profit off insurance by filing
false claims or lying about injuries and illnesses, resulting in higher premiums and
more out-of-pocket expenses for small business owners.

How to avoid it: Be strict about the requirements for filing insurance
claims/workers’ compensation. Check all submitted documents to ensure they’re
real.

8. Money Fraud

Money fraud is a type of fraud where a customer uses fake bills to make a real
purchase. If you don’t check regularly, you won’t notice the notes are counterfeit
until it’s too late.

How to avoid it: Train cash-handling employees on how to check for counterfeit
bank notes. Invest in a counterfeit money detector if you handle large amounts of
cash regularly.

9. Return Fraud

Many retail businesses have some sort of return, refund or exchange policy that
allows customers to send back defective items. Some people take advantage of
this by lying about purchases, returning stolen goods, stealing receipts, or using
items and then returning them before the return period is up to get their money
back.

How to avoid it: Require receipts for all returns and exchanges. In the case of
refunds, give store credit instead of cash.

10. Bribery and Corruption

Bribery and corruption encompasses a variety of practices such as

skimming/getting kickbacks from projects, using money to influence major
company decisions, and manipulating contracts to favour some people over
others.

How to avoid it: Implement stricter compliance programs and gifting guidelines.
Conduct due diligence with all employees, management and third-party vendors.
Prevention Measures for Corporate Frauds
One of the best ways to develop policies and procedures that are effective in
prevention corporate fraud is with the assistance of an experienced anti-fraud
professional who has investigated hundreds of frauds to develop the most
relevant and most effective anti-fraud controls including:

1. Establish clear and easy to understand standards from the top down.
Have an employee manual that clearly outlines these standards and keeps the
rules from becoming arbitrary.

2. Always check references and perform background checks that include

employment, credit, licensing and criminal history for all new hires.

3. Secure physical assets, access to data, and money at all levels including
monitoring and using pre-numbered checks, keep checks locked up, have a
“voided check” procedure and never sign blank checks. Review all
disbursements regularly.

4. Segregation of duties of employees. Divide activities so one employee

doesn’t have too much control over an area or duty. Separate important
accounting and account payable functions. Small-business owners and
managers should review every payroll check personally. The person who has
custody of the checks should never have check signing authority. The person
opening the mail should not record the receivables and reconcile the accounts.

5. Proper authorization of transactions, ensuring that employees aren’t

exceeding their authority.

6. Independent checks on performance, using audits, surprise check-ups,

inventory counts, or other procedures to verify compliance with policies and
procedures, as well as accuracy.

7. Instill an anonymous reporting mechanism, such as an employee fraud

hotline.

8. Small-business owners should control who first receives the bank

statements and other sensitive documents. Consider a separate post office
box for the purpose of receiving bank statements, customer receipts or any other
sensitive documents.

9. All account reconciliations and general ledger balances should have an

independent review by a person outside the responsibility area such as an
outside accountant. This allows for reviews, better ensuring nothing is amiss
and providing a deterrent for fraudulent activities.

10. Conduct annual audits to motivate all bookkeeping- related staff to keep
things honest because they can never be sure what questions an auditor is going
to ask or what documents an auditor may request to review.

11. While no company, even with the strongest internal controls, is completely
protected from fraud, strengthening internal control policies, processes and
procedures will go a long way towards making your company a less attractive
target to both internal and external criminals.

Case Study
Satyam Scam

Reasons for choosing this case study

The case study involves several frauds committed including financial frauds,
accounting frauds, forgery , bribe and criminal conspiracy. Hence, from the case
study we can understand how these corporate frauds were committed and
detected.

Background

Satyam Computer Services Limited, an IT services company based out of

Hyderabad, India, was incorporated in 1987. It was listed on BSE and NSE. It
was India's fourth largest outsourcer. In 2008 Satyam's revenues crossed $2
billion. In 2009, World Bank barred Satyam from doing any business with it on
the grounds of data theft and bribery to staff. Later in the year, the company
decided to buy-out Maytas Infra- a company owned by then promoter
Chairman, B. Ramalinga Raju's sons. But the deal could not get approval of
board members and investors. Satyam's shares plunged to a record low. Raju
resigned and confessed to Rs7000 crore accounting fraud resulting in
overstatement of profits and window dressing by inclusion of fictitious assets in
balance sheet

Description of Crisis

1. The con game might have started in April 2002, when Satyam issued ADRS
to lure foreign investors.

2. SCSL's chairman Raju used to maintain two sub-accounts under a single

bank account which was in the name of company. The main bank account was
maintained by Raju and his confidants. They used to get two set of statements
and genuine set was kept by them. The finance team was given the other
statements by the promoter himself

3. Fake invoices, in the name of genuine clients but with an overstated amount,
were generated by using in-house software

4. Non-existent/fictitious cash and bank balance was shown in the balance

sheet through fake fixed deposits. The accounts department used to accept the
FD receipts given by Raju and his team and it never verified the cash at bank
directly with bank.

5. Publication of fudged accounts for many years led to substantial increase in

stock price of the company and promoters sold some of their shares at these
high prices. Thus, cheating the innocent investors.

6. A web of more than 350 companies of the group was used to divert funds
from Satyam.

7. Raju told the investigators that by selling Maytas Infrastructure and Maytas
Properties to Satyam for an estimated 7800 crores, he tried to replace fictitious
assets with real ones. But the proposal fell through and Raju resigned.

Interpretation of major corporate frauds committed

Few months before the Satyam Scam broke out, the World Council for
Corporate Governance chose Satyam for prestigious "Golden Peacock Award
for Excellence in Corporate Governance". It is certainly a strange paradox.
After the scam broke out multiple flaws in corporate governance came to light.
Some of these are:

1. Board of Directors failed in its fiduciary duty: Satyam's BOD never

questioned Raju on murky group investments. Though there were six non-
executive directors on the BOD, they failed to check Raju's misdeeds.

2. Dubious role of auditors: The auditors were paid very high audit fee as
compared to other auditors by the companies in the same industry. They
skipped basic audit procedures like confirming bank balances
independently, proper vouching of invoices and even debtors' contraptions
were not obtained. PWC failed in their duty as an auditor. Hence, financial
statement fraud was committed by PWC.

3. Concentration of power in the hands of Chairman: Raju was responsible for

maintaining complete details of Satyam's accounts and minutes of Board's
meeting since 2002. He himself handed over the bank statements to accountants
and auditors. Concentration of power in Chairman's handled to revenues,
operating profits, interest, liabilities and cash balances being grossly
inflated to show company in good health. Hence, bank fraud and asset mis-
appropriation were also committed.

4. Unethical conduct: The promoters incorporated more than 350 companies.

There were several transactions in the form of inter-corporate loans and
investments within group companies. They connived with some top executives
and auditors to misrepresent facts and present manipulated accounts to
shareholders, BOD, stock exchanges, investors, bankers and other
stakeholders. Raju and other promoters got involved in insider trading.
Investigators also came across evidence of inclusion of fake employees, the
actual number of employees was found to be 40,000 against 53,000 claimed by
SCSL. Raju had been alleged withdrawing an amount of Rs 20 crores every
month for paying salaries to these 13,000 non-existent, fictitious employees.
Therefore , corruption and payroll fraud also occurred.

Aftermath

1. In April 2009, 46% stake in Satyam was purchased by Tech Mahindra and
both the companies legally merged in June 2013

2. The consequences were faced by wrongdoers and Indian Government acted

proactively to protect the interests of investors and reputation of IT companies.

3. In 2016, Raju and his associates were sentenced to seven years of

imprisonment by the court as they were found guilty of window dressing of
accounts.

4. Price Waterhouse Coopers, auditors of SCSL were fined $ 6 million by the

SEC, US for professional misconduct. The Disciplinary Committee of ICAI
found the four auditors of PWC, who audited Satyam's accounts, guilty of gross
negligence in discharge of their duties. They have been debarred from
practicing as Chartered Accountants.

5. The Indian Government and SEBI have taken a slew of measures to improve
corporate governance standards in India
Conclusion
Corporate governance is the system of rules, practices, and processes by which
a firm is directed and controlled. Corporate governance essentially involves
balancing the interests of a company's many stakeholders, such as shareholders,
senior management executives, customers, suppliers, financiers, the
government, and the community.

Through the case study of CFPL Energia, we understood the good corporate
governance system due to of duty of Board of Directors, Ethical Conduct and
Remuneration Scheme.

Corporate Fraud refers to the illegal and unethical activities undertaken by any
company or individual which is mostly done to gain a competitive advantage
over other corporations in the industry. This may also be done to showcase a
better identity of the company in the market in order to attract better investors
also.
Through the case study of Satyam Computers , we understood how financial
statement fraud , bank fraud , forgery and mis-appropriation frauds were
committed by Mr Raju.