FORENSIC ACCOUNTING

CHAPTER 4
FINANCIAL STATEMENT FRAUDS
ICAI CA Final | SET C | Comprehensive Study Notes
 SECTION 1: INTRODUCTION TO FINANCIAL STATEMENT
FRAUD

Definition
Financial statement fraud is a crime in which a company INTENTIONALLY misrepresents its financial
performance to deceive investors, creditors, or other stakeholders. It involves overstating revenues,
understating expenses, improperly valuing assets, or concealing liabilities.

Common Motives (4 Key Motives)

• To inflate the company's stock price
• To make the company appear more profitable than it actually is
• To hide losses or other financial problems
• To avoid paying taxes

Consequences of Fraud
• Investors who rely on fraudulent statements may lose money
• Creditors may be reluctant to lend money to the company
• Company may face criminal penalties and civil lawsuits

Red Flags Indicating Financial Statement Fraud

• Management pressure to meet or exceed earnings targets
• Weak internal controls
• A history of fraud
• Unusual accounting ratios
• Changes in accounting methods, especially if done frequently
• Red flags in management behaviour

⭐ EXAM TIP: All 4 motives and all 6 red flags are MCQ-testable. Memorize them!

SECTION 2: CHARACTERISTICS, NATURE & REASONS

2.1 Key Characteristics (4 Attributes)

(i) Intentionality: Fraud is a DELIBERATE act. Perpetrators are aware of their actions with a
specific goal — usually to make the company appear more profitable/financially healthy. Example:
Enron created shell companies to hide billions in debt.
(ii) Concealment: Involves creating false records, altering existing records, or failing to disclose
important information. Methods: shell companies, off-balance-sheet accounting, false disclosures.
Example: Satyam inflated revenues by $1.4B using false invoices and bank statements.
 (iii) Opportunity: More likely in environments with weak internal controls, lack of oversight, or a
culture tolerating unethical behaviour.
(iv) Motivations: See motivations listed in Section 1 + Bear Stearns example: inflated asset values
to boost executive bonuses.

2.2 Nature of Financial Statement Fraud (5 Types)

(i) Overstatement of Revenues

• Creating fictitious sales — fake sales orders/invoices
• Recognizing revenue prematurely — before earning it (e.g., before work completion)
• Inflating value of existing sales — unrealistic pricing, ignoring discounts/allowances

(ii) Understatement of Expenses

• Capitalizing expenses — treating expenses as assets to reduce reported expenses
• Creating off-balance-sheet entities — entities not consolidated with financial statements
• Failing to accrue for expenses — not recording known expenses until paid later

(iii) Improper Asset Valuation

• Using unrealistic valuations — for inventory, PP&E, etc. to inflate asset values
• Intentionally not depreciating assets — overstates asset values on balance sheet

(iv) Concealed Liabilities

• Creating off-balance-sheet liabilities — not disclosed to investors/creditors
• Failing to disclose contingent liabilities — potential lawsuits, environmental costs, warranties

(v) Improper Disclosures

• Failing to disclose important info in financial statement footnotes
• Using misleading language — overly optimistic descriptions
• Failing to disclose related-party transactions — between company and its
affiliates/subsidiaries/officers

⭐ EXAM TIP: Chapter Overview diagram shows exactly these 5 types with sub-methods. This is
a favourite MCQ area!

2.3 Reasons for Financial Statement Fraud (6 Reasons)

1. (i) To meet or exceed earnings expectations — publicly traded companies fear stock price fall &
firing. Example: HealthSouth inflated earnings by $2.7B.
2. (ii) To maintain appearance of financial health — to attract investors/lenders. Example: Lehman
Brothers used off-balance-sheet accounting to hide billions in debt.
3. (iii) To hide losses or mismanagement — conceal true financial position. Example: Parmalat
(Italian dairy company) inflated assets by $14B.
4. (iv) To inflate personal compensation or bonuses — executives compensated based on
performance. Example: Bear Stearns inflated asset values to boost bonuses.
5. (v) Lack of oversight — board/management not actively monitoring financial reporting.
6. (vi) Culture of ethical apathy — environment that tolerates unethical behaviour.
SECTION 3: TYPES OF FINANCIAL STATEMENT FRAUDS

3.1 Main Methods of Committing Financial Statement Fraud

• Overstating revenues — recording unmade sales or inflating existing sales
• Understating expenses — failing to record or undervaluing expenses
• Misstating assets or liabilities — overstating assets or not recording liabilities
• Improper disclosures — misleading or false disclosures about financial position

3.2 22 Types of Financial Statement Fraud (Complete Table)

# Type Description

1 Cookie Jar Accounting Overstates earnings in one period; reverses fraudulent entries in
a later period
2 Channel Stuffing Ships excessive inventory to distributors/retailers to inflate sales
figures
3 Revenue Recognition Fraud Recognizes revenue before it has actually been earned
4 Expense Deferral Fraud Defers expenses to a later period to inflate current earnings
5 Asset Misappropriation Assets of a company are stolen/misappropriated by an employee
6 Accounts Receivable Fraud Inflates AR by creating fake customers or overstating existing
receivables
7 Bill-and-Pay Fraud Company pays for goods/services never received
8 Payroll Fraud Company pays employees for work they did not perform
9 Round Tripping Buys and sells own stock through sham transactions to inflate
stock price
10 Fictitious Revenue Creates fake sales/revenue to appear more profitable
11 Inventory Manipulation Overstates/understates inventory to appear financially healthier
or hide losses
12 Improper Use of Estimates Uses estimates in misleading or inaccurate ways
13 Disclosure Violations Fails to disclose important financial position/performance
information
14 Management Override Management overrides internal controls/accounting procedures to
commit fraud
15 Conflicts of Interest Employees/executives engage in self-benefiting transactions at
company's expense
16 Asset Diversion Transferring company assets to unauthorized parties or for
personal use
17 Ghost Payrolling Creating fake employees or inflating employee count to siphon
payroll funds
18 Fake Vendor Fraud Creating fictitious vendors or overstating invoices to steal money
19 Phantom Stock Fraud Issuing fake stock or unauthorized stock options to siphon
company funds
20 Fictitious Expense Creating fake/inflated expense reimbursements for personal
Reimbursements expenses
21 Improper Capitalization of Capitalizing expenses instead of expensing to inflate assets and
Expenses earnings
22 Unearned Discounts Taking discounts/rebates not applicable to inflate profits

⭐ EXAM TIP: Frequently tested: Cookie Jar Accounting, Channel Stuffing, Revenue Recognition
Fraud, Ghost Payrolling, Fictitious Revenue. Know ALL 22 with definitions.
SECTION 4: IMPORTANT CASE STUDIES

CASE STUDY: HealthSouth Corporation (2003)

Fraud Amount
$2.7 billion earnings inflation via fake accounting entries
Methods Used
• Capitalizing expenses (treating them as assets)
• Improper accrual methods
• Improper accounting estimates
Incentives/Pressures
• CEO Richard Scrushy set unrealistic earnings targets
• Culture of fear and intimidation
• Pressure to avoid stock price decline
Opportunities
• Complex corporate structure
• Weak internal controls
• Culture of secrecy and non-disclosure
Attitudes/Rationalizations
• Justified as necessary to achieve ambitious growth targets
• Claimed to be in best interests of company and investors
Consequences
• Fraud came to light in 2003
• Scrushy convicted for fraud
• Company filed for bankruptcy
• Investors lost billions; employees lost jobs and pensions
Key Lessons
• Ethical leadership is essential
• Effective whistleblowing mechanisms needed
• Auditor independence crucial
• Strong corporate governance required

CASE STUDY: Enron Corporation (2001)

Fraud Amount
$60 billion+ earnings inflation; one of the largest US bankruptcies in history
Methods Used
• Off-balance-sheet entities to hide debt and losses
• Mark-to-market accounting to inflate earnings using unrealistic market prices
Incentives/Pressures
• Intense Wall Street pressure to meet earnings expectations
• Aggressive growth strategy (new markets, acquisitions)
• Heavy executive compensation tied to stock price
Opportunities
• Complex corporate structure
• Weak internal controls
• Multiple off-balance-sheet entities
Attitudes/Rationalizations
• Claimed actions necessary for ambitious growth targets
• Believed it was in best interests of company and investors
Consequences
• Fraud exposed in 2001; company declared bankruptcy
• Thousands of employees lost jobs
• Many investors lost life savings
• Led to major reforms in corporate governance and accounting
Key Lessons
• Ethical leadership essential
• Need effective internal controls (segregation of duties, regular audits)
• Promote open communication / safe whistleblowing
• Enhance board oversight

CASE STUDY: Satyam Computer Services Ltd (India, 2009)

Fraud Amount
$1.47 billion earnings inflation; India's biggest corporate fraud at the time
Methods Used
• False invoices and bank statements
• Off-balance-sheet entities
• Mark-to-market accounting
Incentives/Pressures
• Pressure to meet investor/analyst earnings expectations
• Personal financial gain (compensation tied to stock price)
• Desire to maintain company's reputation and image
Opportunities
• Complex corporate structure
• Weak internal controls
• Off-balance-sheet entities
Attitudes/Rationalizations
• Justified as necessary for ambitious growth
• Claimed to be in company's and investors' best interests
Consequences
• Raju confessed in 2009; company collapsed
• Thousands lost jobs; investors lost life savings
• Eroded trust in Indian corporations
• Led to corporate governance reforms in India
Key Lessons
• Ethical leadership essential
• Effective internal controls needed
• Open communication and whistleblower protection required
• Active board oversight necessary

CASE STUDY: WorldCom (USA, 2002)

Fraud Amount
$11 billion earnings inflation; CEO Bernard Ebbers confessed
Methods Used
• Capitalizing operating expenses as capital expenditure
• Manipulating accounting records
Incentives/Pressures
• Maintaining illusion of financial health during dot-com boom
• Meeting Wall Street expectations
• Executive compensation tied to financial performance
Opportunities
• Excessive focus on short-term earnings
• Weak internal controls — lack of segregation of duties
• Lack of whistleblower protection
• Overly optimistic financial projections
• Lax regulatory oversight in telecom industry
Attitudes/Rationalizations
• Justified as necessary to maintain competitive edge
• Claimed to protect stock price in company's and investors' interests
Consequences
• Fraud unraveled in 2002; Ebbers convicted; company filed bankruptcy
• Thousands of employees lost jobs
• Investors lost billions
• WorldCom's reputation irreparably damaged
Key Lessons
• Ethical leadership
• Effective internal controls with segregation of duties
• Open communication culture
• Active board oversight

All 4 case studies share the SAME 4 key lessons: (1) Ethical Leadership, (2) Effective Internal
Controls, (3) Open Communication / Whistleblowing, (4) Board Oversight.

⭐ EXAM TIP: Case study MCQs often ask: Which company used 'capitalizing expenses'?
(HealthSouth & WorldCom). Which used 'off-balance-sheet entities'? (Enron, Satyam). Which is
Indian? (Satyam). Fraud amounts: HealthSouth=$2.7B, Enron=$60B, Satyam=$1.47B,
WorldCom=$11B.
 SECTION 5: LEGAL & REGULATORY PROVISIONS

5.1 Key Elements of Legal & Regulatory Framework

(i) Accounting Standards: Set by ICAI and promulgated by NFRA. Indian Accounting Standards
(IndAS) are convergent with IFRS — the most widely used global standards.
(ii) Corporate Governance: Clear separation of duties (board, management, auditors); effective
internal controls; culture of ethical behaviour.
(iii) Disclosure Requirements: Companies must disclose related-party transactions, off-balance
sheet arrangements, and use of accounting estimates.
(iv) Enforcement Mechanisms: Regulatory bodies and law enforcement agencies investigate and
prosecute fraud. Criminal penalties + civil lawsuits possible.
(v) Whistleblower Protection: Laws encourage employees to report fraud without fear of
retaliation. Whistleblowers may receive financial rewards and legal protections.

5.2 Companies Act, 2013 — Key Provisions

5 Major Provisions:
7. (i) Enhanced disclosure requirements — related-party transactions, off-balance-sheet
arrangements, accounting estimates
8. (ii) Strengthened internal controls — financial reporting, risk management, auditor oversight
9. (iii) Auditor independence — restrictions on non-audit services, mandatory auditor rotation
10. (iv) Establishment of SFIO (Serious Fraud Investigation Office) — power to search, seize
documents, arrest suspects
11. (v) Increased penalties — imprisonment up to 10 years, fines up to 3x the fraud amount

Specific Sections of Companies Act, 2013:

Section Provision

Section 30 Initiation of insolvency proceedings by a creditor/stakeholder

Section 43 Empowers insolvency resolution professional to investigate fraud
Section 44 Defines fraud as act committed by officer/employee with intent to deceive or gain
undue advantage
Section 66 Punishment for directors — imprisonment up to 7 years and/or fine up to ₹1 crore
Section 143(1)(c) Auditor must opine whether FS give 'true and fair view' per accounting standards
Section 147(1) Prohibits directors from knowingly making false/misleading material statements in
FS
Section 149 Auditor must report to Central Government any fraud/irregularity observed during
audit
Section 195 Appointment of special auditor to investigate fraud
 Section 210 Central Government empowered to investigate serious corporate fraud cases
Section 447 Punishment for fraud — imprisonment up to 10 years, fines up to 3x fraud amount

⭐ EXAM TIP: Section 447 (10 years, 3x fine) and Section 66 (7 years, ₹1 crore for directors) are
the most tested. Do NOT confuse them!

5.3 Insolvency and Bankruptcy Code (IBC), 2016

Definition of Fraudulent Transactions (Section 66):

• Preferential transactions (Section 43) — advantage to one creditor over others
• Undervalued transactions (Section 45) — selling assets below market prices
• Extortionate Credit transactions (Section 50) — unfavourable terms due to threats/pressure

Key Powers Under IBC:

Power to Avoid Fraudulent Transactions: RP/liquidator can avoid fraudulent transactions
entered within 2 years of insolvency commencement.
Investigation of Fraudulent Transactions: RP/liquidator can conduct interviews, review
documents, get expert opinions.
Prosecution: Imprisonment up to 10 years, fines up to 3x fraud amount.
Recovery of Assets: Adjudicating authority can order asset recovery from parties involved or third-
party beneficiaries.

Specific IBC Sections:

Section Title Provision

Section 66 Wrongful Trading RP can initiate application against corporate debtor for
wrongful trading by directors
Section 79 Avoidance Transactions RP can avoid pre-insolvency transactions prejudicial to
creditors
Section 86 Power to Investigate RP can investigate financial records/transactions for fraud
evidence
Section 195 Offenses & Penalties Imprisonment up to 5 years or fines (individuals); up to 2
years or fines (companies)
Section 207 Enforcement by Orders individuals to return assets, pay penalties, or face
Adjudicating Authority imprisonment
Section 302 Power to Investigate & Adjudicating authority can investigate & prohibit trading in
Prohibit Trading securities
Section 354 Power to Arrest Adjudicating authority can order arrest of those obstructing
insolvency process
 ⭐ EXAM TIP: IBC Penalties: Individuals — up to 5 years. Companies — up to 2 years. Compare
with Companies Act: up to 10 years (Section 447).

Impact of IBC on Financial Statement Frauds:

The IBC has significantly reduced financial statement frauds by making it harder to conceal fraudulent
activities and increasing penalties. The number of financial statement frauds has decreased since IBC
implementation.
SECTION 6: RBI & SEBI PROVISIONS

6.1 RBI Provisions Related to Financial Statement Frauds

12. (i) Classification and Reporting of Frauds — Master Circular mandates banks to classify/report
frauds by nature and severity
13. (ii) Prompt Reporting — Banks must report frauds to RBI promptly within a specified timeframe
based on amount
14. (iii) Establishment of Fraud Monitoring Cells — dedicated cells staffed with fraud detection
experts
15. (iv) Implementation of Robust Internal Controls — financial reporting, risk management, auditor
oversight
16. (v) Auditor Independence — restrictions on non-audit services, joint audits, mandatory auditor
rotation every 3 years
17. (vi) Increased Penalties — fines and imprisonment for bank officials in fraudulent activities

⭐ EXAM TIP: RBI requires auditor rotation every 3 YEARS (for banks). Remember this specific
number!

6.2 SEBI Provisions Related to Financial Statement Frauds

18. (i) Listing and Disclosure Requirements (LODR) — mandates disclosure of material financial
info, related-party transactions, off-balance sheet arrangements
19. (ii) Auditor Independence — restrictions on non-audit services, requirements for auditor rotation
20. (iii) Establishment of Audit Committees — composed of independent directors; oversee internal
audit and internal controls
21. (iv) Investigation of Financial Statement Frauds — can review documents, conduct interviews,
appoint forensic auditors; can impose penalties, disgorgement of profits, debarment from
securities market
22. (v) Protection of Whistleblowers — confidentiality, anonymity, and financial rewards

SEBI LODR Regulation 33 — Material Information Requirements:

Sub-Regulation Requirement

Reg. 33(1) Disclose any material information likely to affect investor decisions
Reg. 33(2) Disclose material information in a timely manner (as soon as practicable)
Reg. 33(3) Disclose material information in a clear, concise, and accurate manner
Reg. 33(4) Disclose material information in a readily accessible way to investors
Reg. 33(5) Consistent with company's other disclosures
Reg. 33(6) Fair and without misleading or deceptive statements
Reg. 33(7) Up-to-date information
Reg. 33(8) Consistent with company's financial statements
Reg. 33(9) Consistent with company's internal controls
Reg. 33(10) Consistent with company's corporate governance practices

⭐ EXAM TIP: SEBI audit committees are composed of INDEPENDENT DIRECTORS. Purpose =
strengthen corporate governance and reduce fraudulent activities.

SECTION 7: OTHER ACTS ADDRESSING FS FRAUD

Act Section Key Provision

PIDWA 2013 (Public Interest Section 4 Defines 'whistleblower' as person reporting

Disclosure and Protection of suspected fraud/corruption in public sector
Whistleblowers Act)
PIDWA 2013 Section 5 Provides protection to whistleblowers from
retaliation
PIDWA 2013 Section 6 Establishes procedure for reporting suspected
fraud/corruption
PIDWA 2013 Section 7 Empowers CVC (Central Vigilance Commission)
to investigate reports
PIDWA 2013 Section 8 Empowers CVC to recommend disciplinary
action against public officials found guilty
IPC (Indian Penal Code) Section 420 Defines cheating — dishonestly inducing
delivery of property or valuable security
IPC Section 467 Defines forgery — making a document with
intent to falsely appear genuine
IPC Section 471 Defines using a forged document as genuine
Income Tax Act 1961 Section 271E Concealment of income or wilful neglect to
furnish information is an offense
Income Tax Act 1961 Section 276C False statement in any verification relating to
income tax is an offense
Income Tax Act 1961 Section 276D False statement in verification in connection with
IT proceedings is an offense
CAG (Comptroller and Auditor - Independent body auditing Government of India
General) and public sector entities. Power to investigate
and report suspected FS frauds.

SECTION 8: FAIS 130 — FORENSIC ACCOUNTING &

INVESTIGATION STANDARDS
FAIS 130 is issued by ICAI and outlines the professional's responsibilities to comply with applicable
laws and regulations when conducting a Forensic Accounting and Investigation (FAI) engagement.

Why FAIS 130 is Essential (4 Reasons):

(i) Legal Compliance: Safeguards against legal implications; ensures professionals are not held
liable for non-compliance
(ii) Ethical Conduct: Upholds ethical standards — commitment to integrity and professionalism
(iii) Credibility and Reliability: Enhances credibility and reliability of FAI findings; fosters trust
(iv) Effective Investigations: Ensures all legal and regulatory considerations are taken into
account for accurate, defensible outcomes

FAIS 130 — Scope of Legal and Regulatory Considerations:

• Confidentiality and Data Privacy — comply with laws on handling sensitive information
• Reporting Requirements — report suspected fraud/financial irregularities to appropriate
authorities
• Cross-Border Engagements — consider applicable laws of each jurisdiction involved
• Industry-Specific Regulations — financial institutions, healthcare, etc.

FAIS 130 applies to ALL FAI engagements, regardless of scope, complexity, or jurisdiction.
SECTION 9: FRAUD RISK FACTORS

9.1 Three Primary Conditions for Fraud (Fraud Triangle)

Condition Description

(i) Incentives/Pressures Factors that motivate individuals/companies to engage in fraud —

financial difficulties, unrealistic earnings targets, changes in key
personnel/ownership
(ii) Opportunities Conditions that make fraud possible — weaknesses in internal
controls, lack of oversight, complex transactions making it difficult to
detect irregularities
(iii) Beliefs/justifications used to excuse fraudulent behaviour — sense of
Attitudes/Rationalizations entitlement, belief fraud is justified, lack of understanding of
consequences

⭐ EXAM TIP: This is the FRAUD TRIANGLE: Incentives/Pressures + Opportunities +

Attitudes/Rationalizations. ALL THREE must be present for fraud to occur.

9.2 Fraud Risk Indicators — Incentives/Pressures (11 Examples)

23. 1. Excessive emphasis on meeting/exceeding analysts' earnings forecasts

24. 2. Aggressive compensation plans — bonuses tied to short-term performance
25. 3. Rapid growth or expansion — management focused on growth, not internal controls
26. 4. Significant debt burden — pressure to appear creditworthy
27. 5. Declining profitability — pressure to appear more profitable
28. 6. Excessive focus on short-term results — quarterly targets over long-term sustainability
29. 7. Unrealistic performance targets — creates pressure to manipulate financial statements
30. 8. Individual or group financial gain — bonuses, commissions, promotions
31. 9. Maintaining a positive public image — to attract investors, customers, or partners
32. 10. Mergers and acquisitions (M&As) — differing accounting practices, pressure to close deals
quickly
33. 11. Declining stock prices or market capitalization — pressure to boost investor confidence

9.3 Fraud Risk Indicators — Opportunities (13 Examples)

34. 1. Lack of segregation of duties — single individual controls multiple financial reporting aspects
35. 2. Inadequate internal controls over financial reporting
36. 3. Lack of independent oversight — board not independent of management
37. 4. Lack of transparency in financial reporting
38. 5. Complex business operations — multiple subsidiaries, varied business lines
39. 6. Lack of surprise audits or investigations — predictable audit schedule
40. 7. Management override of internal controls
41. 8. Use of third-party vendors/service providers — inadequate oversight
42. 9. Lack of clarity or consistency in accounting standards
43. 10. Lack of transparency in related-party transactions
44. 11. Lack of whistleblower policy or protection
45. 12. Inadequate documentation or recordkeeping practices
46. 13. Lack of independent reconciliations or reviews — e.g., not reconciling bank statements
monthly
SECTION 10: OFFICIAL MCQ ANSWERS (ICAI)

Q# Question (Summary) Answer

1 One of the motivations for financial statement fraud? (c) To meet or exceed earnings
expectations
2 Which method did HealthSouth Corporation use to inflate (d) Capitalizing expenses
earnings?
3 Punishment for directors under Companies Act, 2013? (b) Imprisonment up to 7 years
and/or fine up to ₹1 crore
4 Purpose of audit committees under SEBI LODR? (c) To strengthen corporate
governance and reduce the risk
of fraudulent activities
5 Possible consequence of financial statement fraud? (b) Devastating impact on
companies, investors, and the
overall economy

SECTION 11: QUICK REVISION CHEAT SHEET

KEY NUMBERS TO REMEMBER

Item Number / Amount

Fraud types listed in the chapter 22 types

Fraud Triangle conditions 3 (Incentives, Opportunities,
Attitudes)
Companies Act — Max imprisonment (Section 447) 10 years
Companies Act — Max fine (Section 447) 3 times the fraud amount
Companies Act — Director punishment (Section 66) 7 years + ₹1 crore fine
IBC — Individual imprisonment (Section 195) Up to 5 years
IBC — Company imprisonment (Section 195) Up to 2 years
IBC — Avoid fraudulent transactions within 2 years of insolvency
commencement
RBI — Mandatory auditor rotation Every 3 years
SEBI LODR Regulation 33 sub-regulations 10 sub-regulations (33(1) to
33(10))
HealthSouth fraud amount $2.7 billion
Enron fraud amount $60 billion+
Satyam fraud amount $1.47 billion
WorldCom fraud amount $11 billion
Satyam — Revenues inflated by (from text 4.5) $1.4 billion (concealment example)
Parmalat assets inflated by $14 billion
HealthSouth earnings inflated by (from reasons section) $2.7 billion

COMPANY → KEY FRAUD TECHNIQUE MAPPING

Company Primary Fraud Technique Amount

Enron Off-balance-sheet entities + Mark-to-market $60B+

accounting
Satyam False invoices + Fake bank statements $1.47B
HealthSouth Capitalizing expenses + Improper accruals + $2.7B
Improper estimates
WorldCom Capitalizing operating expenses as capital $11B
expenditure
Bear Stearns Inflating asset values to boost executive bonuses -
Lehman Brothers Off-balance-sheet accounting to hide debt -
Parmalat Creating false accounting entries to inflate assets $14B
Nanjing Jinling Pharma Fake invoices + Repackaging generic drugs + $1.2B
Bribing distributors
China Huishan Water Fake bank statements + Fake contracts to inflate $2B+
PP&E

REGULATORY BODY → KEY FUNCTION

Regulatory Body Key Role Related to FS Fraud

ICAI Sets accounting standards (IndAS); issues FAIS 130

NFRA Promulgates accounting standards (IndAS)
SFIO Investigates serious corporate fraud under Companies Act, 2013
SEBI Regulates securities market; LODR disclosures; audit committees;
whistleblower protection
RBI Oversees financial sector; classifies/reports frauds; fraud monitoring
cells
CVC Investigates fraud reports under PIDWA, 2013
CAG Audits Government of India and public sector entities

FAIS 130 = Issued by ICAI. Applies to ALL FAI engagements regardless of scope, complexity, or
jurisdiction. Purpose: Legal compliance, Ethical conduct, Credibility, Effective investigations.
END OF CHAPTER 4 NOTES — GOOD LUCK ON YOUR EXAM!