The spotlight remains firmly on corporate governance issues two weeks after the founder of Satyam Computer Services Ltd, B. Ramalinga Raju, confessed to doctoring the company's books to the tune of Rs7,136 crore in India's biggest accounting scandal. While investigating agencies try to unravel the fraud, Crisil Research, an arm of credit rating agency Crisil Ltd, the Indian associate of Standard and Poor's, found there are at least a dozen ways a company can creatively cook the books. Also See Accounting Issues (Graphic)
Crisil Research came across these loopholes by studying the notes to account and footnotes in the annual reports of companies. While most of them would probably not amount to a violation of the law in letter, at least some are breaches of the law in spirit. "To call them malpractices would be harsh. The companies are just exploiting the loopholes that exist in the law," said a partner at a Mumbai-based firm of chartered accountants, who didn't want to be identified. Listed below are the ways companies exploit these loopholes, collated after discussions with Crisil Research and at least two company secretaries of Mumbai-based firms: *Write-off expenses from reserves*: Expenses towards research and development or money paid to employees or provision for taxes as part of a voluntary retirement scheme must reflect in the profit and loss (P&L) statement. Companies can show it as a one-time expense or amortize it over several quarters. In practice, many Indian firms take the easy way out by writing these off or deducting this amount from the reserves. This means expenses are understated in the P&L account and consequently, current profits look rosier than they are. *Show previous year's expenses as this year's income*: By writing off a one-time expense against reserves, a firm can inflate its profits. If for some reason, the company doesn't have to incur the expense (in case of tax provisions), it writes this expense back into the books. But instead of adding it to the reserves from where this amount was originally deducted, the company can show it as income in the P&L account, thus increasing profit. In good time, firms can suppress profits by setting aside money for unforseeable expenses such as doubtful debts and possible liabilities on pending legal claims (court orders expected against the company) all of which have a high probability of happening. Hence, the amount is shifted from the P&L account to the balance sheet. When the company faces turbulent times, the same provision is written back by reversing the entry and is recognized as income. Essentially, this amounts to transferring income from one year to another. This could also result in tax planning by deferring taxes as the rate of tax in subsequent years could be lower. *Revalue assets to write off losses/expenses*: This works if a company has enough reserves in its balance sheet. If it doesn't, it can "create" some reserves either through brand valuations (using professional valuers) or by "revaluing" their existing assets to inflate the reserves. So now, the company not only has an inflated profit and loss, it also has an inflated balance sheet without spending any money. *Read the complete article here : ** http://stoxdesk.com/smf/index.php?topic=57.0*<http://stoxdesk.com/smf/index.php?topic=57.0> --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en -~----------~----~----~----~------~----~------~--~---
