Cook Books and the Bulging (Corporate) Belly
Hustling up by rustling up
By the turn of the 20th Century, corporate giants began hustling up the corporate performance by rustling up some innovative methods in presenting financial figures. “Book cooking” is a phrase often used to describe numerous activities that corporates engage in with the intention to minimise taxes and maximise profits. When a company knowingly manipulates its income and expenses to show better earnings, it is said to have cooked it books. Methods that look seemingly legal are put in place to avoid tax or evade tax and launder money. Invariably such activities are fraudulent in nature.
Leading the (in) famous path was the energy giant Enron. Another corporate – WorldCom, the telecommunications company both leaders in their respective spaces are believed to have cooked their books to show inflated financial figures. It was done continuously and so well that they began crumbling under their own weight and ended up filing for bankruptcy in the early 2000’s. In both cases the Board and the Auditors got hammered for looking the other way and not raising flag when required. Back home, the Satyam saga unfolded by the close of the decade. The founder had confessed to a staggering Rs. 7,000 crore accounting botch up. Jolted out of slumber the government and the public / investors had come down hard on Satyam’s Board. A few years later majority of promoters, a few board members and the auditors were found guilty and convicted. In fact, in January, 2018 the auditors were slapped with a 2 year ban on auditing in India. The repercussion felt long after the promoters got arrested and released on bail.
It takes very educated and conniving minds to camouflage financial performance of the company. That coupled with circumventing (not brazenly flouting) laws was sure shot recipe of success. A bird’s eye view of the same:
Government strategy to plug the lacunae
The budget 2018 offers more than it meets the eye. The government has announced measures to plug the loopholes in law. It has made it expressly clear that from 2018-19, any payments made post amalgamation of entities shall be taxed, irrespective of the reserves of the profitable company. This will ensure that any dividend declared consequent to the amalgamation will very much be taxed. Similarly the government has announced that all companies which incur tax liability will have to pay up or face the heat. Hitherto, all companies which had less than Rs. 3,000 tax liability were not prosecuted, even if they did not pay tax. All these, coupled with the government’s head on collision with shell companies and black money is to ensure that corporates do not side step the tax liability and have to pay up. Amidst alleged fund diversion by a corporate hospital- listed company to third parties, in the second week of February, 2018 SEBI announced its intention to take to task those companies in which it’s noticed falsified or incorrect financial reporting. The regulator has in no uncertain terms stated that it will pull up all involved – Management and professionals alike.
It is not the sole responsibility of the government to detect corporate accounting policies that tweak tax liabilities in their favour. Irrespective of the size of the Company, a vigilante Board and ethical professionals are the major players who can protect stakeholder interest. They have to places investor / public interest ahead of their own individual interests. Professionals shall ensure effective internal controls and periodic audits and raise the flag and intimate the Board at early stages itself. Similarly the Board, individually and collectively should refrain from self-indulgence and work for the betterment of all stake holders concerned. Don’t cook the books. Cook by the Book!
A tête-à-tête with
Mr. K K Balu
Former Vice-Chairman of the Company Law Board
Senior Legal Advisor, A K Mylsamy & Associates LLP
What has been the turning point of your life?
Joining service upon leaving the legal profession
What do you consider your greatest achievement?
Success at work as well home front
What is your definition of success?
One’s absence not to be felt
What is the one principle that has carried you this far?
What is the one character trait or strength of yours that you admire the most?
What is the most valuable lesson learnt so far?
To put it effectively in Tamil language, one must be ”Nallavanaga" as well as "vallavanaga" irukkavendum.
What is the best indicator of your leadership?
Sense of togetherness
What are your top two regular practices that have helped you in life?
Workmanship and Worship
What is your most important advice for time management?
To inculcate the universal reality that time will wait for none. If lost, it will be lost forever.
What is the single most important factor that clinches a deal?
What is the most important factor in resolving conflicts?
What is the most important indicator of performance of an organization?
Growth of both organization and men/women behind organization
What is the most important factor to foster innovation?
Dream big and act differently
What is a key factor in building and maintaining a strong team?
Tolerance and due appreciation of other side's view point
If you are given an opportunity to live all over again what would you have done?
Strongly believe that opportunities shall never be missed, but definitely not to grab any such opening after life time.
What is that one thing that you wish to change in this world using your talent and potential?
To impart self-discipline
How important is legal affairs to an organization and what should organizations do to attend to their legal affairs?
As essential as oxygen. Organizations need to be up to date and accurate.
What is one professional tip that you would like to share?
In the fortnightly podcast, Mr. A K Mylsamy shares details, judgement and on the case between Wynn's Mekuba India Pvt Ltd and its promoters. Listen in!
AT THE HELM OF AFFAIRS
In contract law, unless otherwise agreed or provided by law,acceptance of offer is effective when deposited in mail if properly addressed.
Natura appetit perfectum; ita et lex
Nature covets perfection; so does law also.
To destroy; wipe or rub out;erase. Erasure or blotting out of written word. A method of revoking a will or a clause therein if accompanied by the required intent to revoke.
Term has meaning similar to “alimony”except that award, settlement or argument arises out of non marital relationship of parties.
Written by John Grisham, “The Rooster Bar” is the lawyer turned author’s 31st novel (and 25th legal thriller). The core of the plot is about “for profit” law schools.
Three students with dreams of making it big in the legal world pay and enrol in a law school after being charmed by their promises – opportunity to intern in good law firms, graduate and earn fat pay cheques. In the process they borrow lot of money to attend law school.
However, in their last year at school, they realise that the law school is so mediocre that their students rarely pass the bar exam and almost no one from the law school has ever made it to being a lawyer. They further learn that this school is run by a sleazy hedge fund operator from New York, who also owns a bank that hands out student loans. It is then that they realise that they are in the midst of a law school scam. Since they cannot afford to attract attention towards themselves by leaving school in the fag end, they come up with a novel but very risky idea of exposing the scam while not repaying the debt. Read on to know how they manage to do so. Legal knowledge… rather enlightenment for all!
The greater your storm the brighter your rainbow.
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One must always be “fit” as the fittest alone can survive in a competitive world.