FRAUD AT CG POWER - MARKET UNPLUGS

The employees fraud at CG Power, especially in this atmosphere of doom and gloom could not have been more ill-timed. The fraud did not shock – that’s the shocking part. We all have become desensitized and completely immune to such frauds and corruption. We see so much of it at all walks of life that we take it as a part of life, something we all have to deal with.

How do we react to such frauds? If listed, the stock price is beaten down to pulp but a few weeks later, some order receipt announcement or other positive news will come and all will be forgotten. That’s the only way we know – punish for some time and then forget and forgive. Like someone on Dalal Street said yesterday, “It will be impossible to find a “clean” company to invest; take the company with the lowest degree of fraud and invest.” More golden words, “it’s the ability of the company to emerge out of this fraud which should decide the future. If the fundamentals are intact, in fact buy when the news of fraud comes out!”

Is this really how we all behave when we come across a fraud company? Like CG Power is a sound company and it is deplorable that shareholders are being punished because some employees decided to defraud the company. The extent to which these employees have cheated CG Power is shocking; something which we saw in PNB too and so many companies where mid-level employees become the conduit for outsiders cheating or they themselves resorting to fraud.

The findings made at CG Power:

• The total liabilities of the company and the Group may have been potentially understated by approximately Rs.1053.54 crores and Rs. 1,608.17 crores respectively as at 31 March 2018; and by Rs.601.83 crores and Rs.401.83 crores respectively as at 1 April 2017.
• Advances to related and unrelated parties of the Company and the Group may have been potentially understated by Rs.1,990.36 crores and Rs.2,806.63 crores respectively as at March 31, 2018; and by Rs.1,479.34 crores and Rs.1,331.47 crores respectively as at April 1, 2017.
• Certain assets of the Company that were purportedly provided as collateral without due authority; and the Company was made a co-borrower and/or guarantor for enabling ostensibly unrelated third parties to obtain loans without due authorisation. The moneys so obtained were immediately and without due authorisation routed out of the Company, either by itself or from its subsidiaries or ostensibly unrelated parties to certain related parties.
• The net worth of the Company was potentially understated due tb unauthorised and inappropriate write offs and charges debited to the Profit & Loss statement of the Company during the year ended March 31, 2018 and April 1, 2017.
• The most damaging part – the financial results of the previous quarters for FY19,FY18 and FY17 could be impacted  and the opening balances of FY19 could also change.

The question which comes to mind when you read this list is what were the auditors doing and was the top management completely unaware of this? How come with fraud happening at such a level, the management or the senior level employees never even got a whiff of it? Or is it that they just decided to turn a blinds eye?  The UPA Govt was full of only corrupt ministers while Manmohan Singh remained squeaky clean – we asked the question and we ask now, what’s the point of this leadership when they allow fraud to happen right under their nose?

When we spoke to a few auditors to learn how to detect these frauds before all hell breaks loose, they said the most obvious and foolproof way is by top management itself conducting regular inventory checks and book audits, reconciling cash daily, and personally reviewing financial statements each month.

These apart, the management needs to put in place a code of conduct, put down in writing the dos and donts. Give the code to everyone upon hire, and periodically thereafter, and require written acknowledgement that they have read, understand and agree to comply with it.

Another rule is to that no one person should control many aspects of the business -  same person handling purchasing and vendor payments, or allowing the same employee to manage accounts payable and accounts receivable is trouble.

Over and above all these checks and codes, what is most pertinent is the moral compass of the promoters – if they themselves are not ethical, that’s exactly the sentiment which will percolate down to the junior most employee. If employees see the top management take home merchandise or use company property for personal reasons, they may follow your lead—or worse. If they treat employees with respect, compensate them appropriately and offer opportunities to advance their careers, they’ll have less motivation to steal or cheat.