MC EXCLUSIVE Turn chartered accountants into whistleblowers: ICAI’s solution to Sebi’s corporate fraud problem

The market regulator is of the view that if frauds are prevented or they are spotted early, companies would be spared damage which impacts thousands of public shareholders.

The Institute of Chartered Accountants (ICAI) is working with market regulator the Securities and Exchange Board of India (Sebi) on proposals that could lead to early detection of corporate frauds in listed companies, sources have told Moneycontrol.

The proposals are likely to advise chartered accountants and auditors, who are in constant touch with company management, to alert regulators whenever they perceive that a fraud is being committed, they said. Early signs of corporate fraud could be a sudden surge in borrowing or related party transactions among others.

“Chartered accountants can contribute a great deal in tackling corporate fraud as they are aware of a lot of developments happening in the company. Even now, there have been some cases where CAs have acted as whistleblowers but there is a need for a more formal and structured approach towards it,” one of the persons cited above said.

Potential fraud can also be gauged by auditors based on their interactions with the management of companies.  Top officials of the company not taking calls from auditors or not providing complete information could indicate that something is amiss.

Sebi is of the view that if frauds are prevented or spotted early, companies can be spared damage, which impacts thousands of public shareholders, the sources said.

Last month, ICAI president Charanjot Singh Nanda met Sebi chief Tuhin Kanta Pandey and said the institute would set up a working group to discuss various proposals with the market regulator to help tackle fraud.

Emails sent to Sebi and ICAI remained unanswered.

“In most cases, the fraud was detected one or two years after it happened and by the time regulators stepped in, the damage was done. ICAI will also analyse past corporate fraud data to pick up various patterns in the fraud,” the source quoted above said.

Corporate fraud, in listed as well as unlisted space, has been a major challenge for regulators in India.

In one such recent case, allegedly fraudulent actions by promoters of Gensol Engineering started as early as FY23.  Sebi detected the fraud nearly two and a half years later. In an interim April 15 ex parte order, Sebi said the promoters transferred Rs 382 crore to various entities in FY23 and FY24.

Other enforcement bodies have also been working closely with Sebi. The Serious Fraud Investigation Office(SFIO), which works under the corporate affairs ministry, is probing more than 70 cases. The National Financial Reporting Authority(NFRA) also investigates corporate fraud cases from an auditor's point of view.

“We will form a research group within ICAI to identify areas where ICAI can have a meaningful discussion with SEBI. It is important for SEBI to ensure that investments are safe,” Nanda has said after meeting the Sebi chairman on May 4. “As a regulator for accounting, they always want to rope in ICAI, so that we can together create an environment which can reduce the number of frauds.”