ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Auditing Fraud

The Serious Fraud Investigation Offi ce needs the government’s attention to fulfi l its mandate adequately.

Over the last 15 years, but more so since 2013, the Serious Fraud Investigation Office (SFIO) has emerged as India’s premier corporate fraud investigation agency, investigating several high-profile cases. Why, then, is an organisation that is entrusted with uncovering corporate wrongdoing being left to function with inadequate personnel and is, therefore, being able to fulfil only a fraction of its potential?

Inadequate staffing is not new in government agencies, but the responsibilities of the SFIO have increased ever since it was granted statutory powers under the Companies Act, 2013. Data from parliamentary questions shows that about 447 company investigations were assigned to the SFIO between April 2014 and January 2018, accounting for 67% of the 667 total investigations assigned to it since its inception in 2003. The number of sanctioned positions, however, has remained stagnant at around 133 since 2014–15 and 69 positions lie vacant.

The SFIO, which comes under the Ministry of Corporate Affairs (MCA), describes itself as a “multi-disciplinary” organisation that investigates and guides prosecution in white-collar fraud requiring expertise in forensic auditing, corporate law, information technology, capital markets, taxation, and other allied fields. It was established by the Atal Bihari Vajpayee–led National Democratic Alliance government on 2 July 2003, based on recommendations by the Naresh Chandra Committee on Corporate Audit and Governance. Although it received statutory powers under the Companies Act, 2013 during the tenure of the Manmohan Singh–led United Progressive Alliance government, the rules giving it the power to make arrests came into effect only in August 2017. Since its inception, the SFIO was understood to be a specialised organisation that would require a wide spectrum of expertise, and recruitment would be in large part deputation-based, drawing on expertise from various civil services cadres, and on consultants with the required expertise.

Cases are assigned to the SFIO based on the scale of financial misappropriation or extent of public interest that is at stake. The most recent high-profile corporate fraud by Nirav Modi and Mehul Choksi, who have allegedly defrauded Punjab National Bank, is also being investigated by the SFIO. Over the last 15 years, several such high-level cases of corporate fraud have been investigated by the SFIO, including the companies involved in the 2G spectrum allocations, the Kingfisher Airlines case, the Saradha chit fund scam, and the Satyam computers fraud, to name a few. In many of these cases, the SFIO has invariably found that much of the crime is perpetrated along with auditors who actively collude or look the other way. According to a 2015 SFIO report, a third of the top 500 companies in India were “managing” their accounts, including those in the top 100. In some cases, the SFIO advised the Institute of Chartered Accountants of India to investigate the role of errant accountants. This should not surprise us: the financial sector in the United States and the world boomed while corporations and pliant auditors colluded, and it all came tumbling down in what we know as the global financial crisis of 2007–08, when the audit reports of company after company were found to be worthless.

An independent well-functioning SFIO will keep corporate greed and colluding auditors in check, and will be one way of upholding the law, as well as the interests of the retail investor and the public at large. To do this, it needs to draw on experts who are capable of executing such investigations. One of the explanations for vacancies in the SFIO is the dearth of personnel with adequate experience and expertise for this kind of work. With the number of cases mounting, the SFIO will need to look beyond a deputation-based recruitment system, to one that recruits full-time, specially trained personnel. Drawing on the private sector may be fraught with its own difficulties (pay disparities are high since the private sector pays lavishly, conflicts of interest, continued loyalty to private employers, etc). That the SFIO should move away from the deputation system to having a permanent cadre of its own has been recognised early on, but remains unfulfilled. The Standing Committee on Finance, chaired by Veerappa Moily (33rd report, in December 2017; 59th report, in March 2018) “found that despite finalisation of the Recruitment Rules, there were still huge vacancies within the organisation which crippled its capability to swiftly dispose off cases.” There is a real need for the creation of a permanent cadre, which will eventually be a way to ensure that more of the sanctioned positions are filled.

Even as the recruitment systems will ensure that more positions are filled in the SFIO, there are other agencies that also suffer from understaffing. The Central Bureau of Investigation (CBI), for instance, a much older organisation with a pool of specialised cadre is also lacking adequate trained personnel. As of March 2017, over 20% of 7,274 sanctioned positions in the CBI lay vacant.

Clearly, a part of the problem of staffing stems from deficient political will. For a government that claims to take financial fraud and corruption seriously, not enough is being done to ensure that the key investigation organisations, like the SFIO and CBI, are adequately staffed to perform their functions efficiently.

Updated On : 11th Jun, 2018

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