Unethical practices in all forms of Business accounting

Accounting is known as the language of Business organisation and mainly concerned with the recording and maintaining of the financial data and communicating  the information or data to the users. Though it is not an easy process as it involves various set of steps between them. Like it starts from 1].Identifying the transaction 2]. measuring and analysing the transactions which involves measuring the transactions in terms of money because as per the money measurement concept only those transactions, which can be measured in terms of money/monetary terms, can be recorded in the books of accounts. 3].Recording the identified and measured transactions in the journal. Journal is a book of primary recording, mainly concerned with writing the transactions for the first time in the books. 4].Posting the information into ledger accounts which is considered as a book of secondary entries. 5].Summarising the information by making trial balance and preparing the income(profit and loss account) and position (Balance sheet) statement. 6].Communicating the information to the users.

Under the Full disclosure and materiality principles every material and relevant information that will be useful to the users in making decision should be disclosed in the proper foot noting style.

Many business organisation are indulge in unethical and fraudulent activities in the business. They follow fraudulent and manipulative practices. There are various reasons for indulging in fraudulent activities. Like to avoid tax liability,  to earn more profit and to earn more and more wealth. One can earn more money in short duration of time only by applying illegal methods. This was done by many but caught red handed one day.

Many frauds and scams have come to light in the 21^st century. There is no possibility that accountant in sole proprietorship or partnership can commit fraud, but yes they can evade tax liability who knows. Unethical practices arises when law enters into the game. When some limitations are imposed by law then those limitations are breached and that act is turned into unethical act. There are no special laws Governing the Sole propertitorship business and partnership business so they would not indulge in big illegal matters. But indeed they can also commit some minor unethical offences like adulteration in products, charging high prices for products, selling expired products, selling wrong products or giving wrong information and evading tax liability. Now a days almost all the sole propertitorship businessman indulge in unethical practices to avoid tax liability. Though Income tax act 1981 covers their business but they could not be curbed until and unless the consumer himself become aware. Customers should take receipt of almost every products purchased, a proof of receipt means income tax paid. But now a days no customer demands such a receipt because it takes time and thus such businessman gets an opportunity to avoid tax liability. This is unethical practice which became very common. And it is difficult to impose control over such activities, customers are required to become aware about it.

The same unethical practices are committed by lawyers and other professionals like doctor. They offer services and take payment in cash only, they don’t accept Bank payment, Demand draft or cheque because they know that if they deposit the money in Banks then they will have to pay the tax, although they have no problem in paying the tax, but with payment of tax the taxpayer is required to site the source of his income and since they take bribe and unnatural money they can’t expose it so they avoid tax liability and keep themselves indulge into corrupt and unethical practices. Such frauds are committed by even famous lawyers and doctors, big politicians and ministers.

Company form of Business is Governed by companies act 1956 and also Income tax act 1981 imposes various rules on it to be followed. Unlike other business forms companies are required to publish the account of their daily business after the end of their business period, which could last ranging from 3 months to 12 months, in national newspaper. But most of the companies do it quarterly-that is once in every 3 months. It is obligatory for them to disclose the information of their business to general public. They are required to appoint an Auditor, who is a registered Chartered accountant or company secretary, he audits the accounts prepared by the company to check that company Is not indulge in any fraudulent activities and not manipulating its figures and providing accurate and relevant information to its users. Usually companies do not change their CA/auditor because after auditing he knows about all the intricacies and secrets of the company and in order to prevent leakage of such information, companies stick with the same auditor.

It is not like that if a company has an auditor, who is an outsider &  checks companies account, then it can’t indulge in unethical or illegal acts. Company can also indulge in fraudulent activities. Like they can manipulate the figures shown in their accounts. They can inflate as well as deflate the figures. A company can deflate the figures of its profit in order to reduce the tax liability because tax is paid out of profit and if profit is reduced then tax liability shall be reduced ultimately. A company can inflate the figures of profit to show the users that company is doing well, and to earn goodwill in the market and to increase the prices of its securities in the market. But these are unethical activities and company act and SEBI(Security and exchange board of India) imposes various laws and regulation to keep such activities under control. Some board of directors, who have knowledge of increase in share price in future purchase shares immediately and sells them at a higher price later on. SEBI strictly bars this activity of insider trading by directors, in order to protect the interest of investors. Even the auditors can commit unethical acts by approving company committing illegal acts. Like it was done by privatewaters auditors house in Satyam case. In India Auditors do not face stringent punishment if found guilty. Not even a single auditor is punished so far by ICAI in India, and the punishment prescribed for them also is so low- that is Rs.10,000 or 2 years of jail unlike US where the punishment is of 20 years.

We all know about satyam that committed a real life big fraud through its company maytas. Satyam was specialised in engineering and product developing IT company, supply chain management, business process quality, business intelligence, enterprise integration, and infrastructure management. The company was founded by ramalingam raju. Raju along with his CFO and other management members showed inflated accounts (cash and bank balances and profits) to show higher profitability and higher cash reserves of Satyam. They inflated their profit from 69 crore to 169 crore to show good profitability of the company.
Then, he also tried to use Satam's money to buy his son's company 'Maytas' at a very high valuation.

Raju and his family diverted huge funds out of the company on the names of various business related expenses. They showed that employees provident fund amount was paid to 53,000 employees which was a wrong figure instead the actual figure was 40,000 employees, the funds of other 10,000 were diverted in formation of other companies under the name of Maytas. Satyam was a technical and IT related company. Its operating profit was just 3% while the good working other firms had 20-30%, if its operating profit was more, then also they were diverting the public funds to somewhere. No one could find out about the fraud. Even privatewaters which was satyams auditor keeps on giving A+ rating to the company. They then took a big step and announced 100% stake in Maytas properties and 51% in Maytas infrastructure (which was a company of stayam’s sons) for Rs.1.6 billion. SO they diverted that much funds into maytas This investment decision was in gross violation of the Companies Act 1956, under which no company is allowed without shareholders' approval to acquire directly or indirectly any other corporate entity that is valued at over 60 percent of its paid-up capital. Raju illegally transferred huge funds from the company which belongs to the shareholders.

There is one more scam one should not forget.

Harshad Mehta scam Harshad Mehta was a registered broker in a stock exchange. He was indulged in buying and sharing of securities on behalf of customers. New scheme was launched by the central bank called ready forward (RF) which was a 15 day secured loan involving transactions from Bank to Bank. One Bank could borrow a short term 15 days finance from other bank by selling Government securities/shares or debentures, and after 15 days the borrower bank would purchase back the securities from the lender bank at a slightly higher price. These transactions are usually done through an intermediary called as broker. Broker used to perform all the steps on the behalf of both the bank, sometimes the borrower did not even know who the lender would be. Borrower bank used to sell the security to the broker who again sell it to the lender bank and in return the Borrower bank issues BR(bank receipt) as a proof that the payment has been received by a bank. Broker harshad Mehta made a profit out of this system. He got fake BR(bank receipt) prepared from some local and small banks and sold the securities on his own to the banks. He used the Bank finance to purchase securities heavily which increased the Market price of the securities and strengthen the bull in the sensex. Then he purchases the securities back from the bank after 15 day period of RF scheme and used to sell the securities again in the market at a higher market price. He succeed in channelizing funds from Banks. Sensex was rising and prices of securities was increasing. No one paid heed to such unusual thing. Then one day the scam exposed and market suffered a loss of Rs.4000 crore. Market crashed with a large amount, many banks were still holding the fake BR(bank receipts) and did not know what to do next. Many bankers of small banks who issued fake BRs committed suicide after the scam exposed. Harshad Mehta died in 2002 when many suits were still pending against him.

That was the biggest unethical scam India could ever face.

Our system needs improvment. We want strict regulations to curb such activities. Surprise auditors should be appointed to audit the company in any time. Also rotation of auditors should be made compulsory in every 3 years.

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