The high-tech early warning system (EWS), currently being tested by the corporate affairs ministry to identify instances of frauds/potential frauds by companies, aims to equip each of the two dozen Registrar of Companies (RoCs) with a specialised computer-based dashboard programme that will be able to quickly identify and red-flag dubious entities based on their mandatory filings.
Developed in association with Serious Fraud Investigation Office and other partners, the EWS will come equipped with specialised software and programmes to analyse balance sheets, liabilities, adverse auditor remarks, frequent transactions, inter-group and intra-group loans and cash advances, among a host of parameters.
“The red-flagged names will then be probed at multiple levels, including by the respective RoC, regional director or special auditors. A detailed report of the short-listed entities will then be shared with the MCA and SFIO for necessary action. The EWS is expected to be implemented within the current financial year,” a senior employee at a technical support firm said.
The EWS will be based on the principles of forensic accounting, a specialised accounting and auditing field involving procurement and analysis of electronic data to reconstruct, detect, or otherwise support a claim of financial fraud.
On Monday, corporate affairs minister Sachin Pilot informed the Parliament that EWS will be tested within the current financial year. The need for putting in place an EWS is to tackle the growing menace of financial frauds and ponzi schemes, in which thousands of small and medium investors lost money.
According to a senior official, the mandatory filing of information and accounts in the eXtensible Business Reporting Language (XBRL) has also helped in the development of EWS. Filing information with RoC in the XBRL format has been enforced for close to one year now.
“The accounts are cleaned up to a great extent by XBRL, which is a reporting standard and not an accounting standard. XBRL does not improve the level of disclosures, but it improves the quality of information available to you,” said a senior chartered accountant. Incidentally, the institute of chartered accountants (ICAI) has also provided its feedback and inputs to MCA on forensic auditing and the creation of EWS.
On Monday, the MCA said that various government agencies were looking into complaints of financial frauds against 154 companies, including group companies of Saradha and Rose Valley in West Bengal. Informing Parliament, the MCA gave a list of 154 companies, including 14 entities related to Rose Valley Group and 10 belonging to the Saradha Group. Other entities mentioned in the list included Vaishnavi Corporate Communications, SpeakAsia, Reebok India and Alchemist Infra, among others.
