Tuesday, 9 August 2011

Complexities Breeds White-Collar Fraud Menace at Corporate

(Author Vinod Khurana, President, Institute of Forensic Accounting & Investigative Audit)

The management of corporate in the present social and working environments is scaring. The White-Collar Crime Menace is so widespread that I candidly see no company small or big which is not hit by this menace. It is a different matter that they do not come to limelight as often they do not get reported.  They not only have serious implications for corporate reputation and profitability but also convert large number of man-hours to unproductive exercise, which finally as you move forward becomes difficult to handle.

We often see that these white-collar crimes are the germination of the working complexities.  Working complexity is so strong that in which all directions the pipelines to drawn out the cash flow or choke the inward cash flow are laid could be mindboggling. The senior management may even come to know of the wrong, after the huge damage is done, if at all, the frauds being done do surface. Not only that, the senior management often is not successful in laying the early trap to sniff out the wrong happenings, not that they are not intelligent enough; unfortunately the systems are so complicated and they run short of time to understand and focus on these areas for many-many reasons.  Candidly, may be they are not even capable enough to sniff out the wrongs as they do not have sniffers mindset and are not trained how to look for wrongs. 

The complexity becomes further complex when the working environments are not simple and transparent. Simplicity and transparency brings in   inherited strength to catch the wrongs, and by itself is strong preventive measure. Whereas the complexity and camouflaging makes it that complex and sniffing out becomes difficult and the difficulty aggravates with more complexity.  The complexity that we often observe is either by design or by default. The complexity by design is created when the perpetrator does not want any other person to understand as to what wrongs he has done and how he has been doing these wrongs and camouflaging. This complexity is brought in not only at complex scenario but even at the simplest scenario. The modus operandi of such creation would be based on the position of the person trying to create complexity or to exploit the complexity to the best that perpetrator understands the systems, so that the system does not reveal the wrongs and with the passage of time the wrong becomes integrated in the system and gets dissolved. These days these complexities are even easy to create in the present existing computerised environments, which are rarely well understood at the top.

Whereas, the complexity by default is based on various reasons and lack of appreciation and understanding of the complexity, which grow with the time factor and the person living under those conditions gets so intoxicated with the situation that the foul smell becomes sentient and complexities are often not rectified till they start bleeding. These complexities when not rectified on time breed and generate more complexities, vertically as well as horizontally. To understand the consequences of these complexities better, I wish to share one simple rather a simplest live example that we revealed as to how the complexities that are created by default over a period of time are exploited and can be turned into perpetual pipe lines.

A well established and managed company in multidivisional domain used to apply for various tenders in the Govt, Public and Private sector for supply of material and execution of projects on turnkey basis. The task of applying for various tenders was undertaken by the concerned operation team and there were good number of operation team for each vertical. These teams whenever had to apply for tender used to make request to Account department to provide them a draft for applying the tender as earnest money/ security deposits. The practice went on for long but the earnest money so deposited with various Companies, Public Sectors and Govt. Departments, were not reconciled as to how many tenders were filed, how many allotted and earnest money adjusted and  how much earnest money has been refunded and how many are outstanding and for how long and who has the receipt of deposit for safe custody, a huge vacuum was created on this account as to reconciliation, so much so that whenever the issue was brought up by auditors , there used be deliberations as to who is responsible for reconciliation; the accounts or the operational division, who is answerable for the funds so deposited. With the passage of time and keeping in mind the financial impact being not very large the matter subdued and reconciliation became defunct by default.    

During one of our system evaluation/examination, one of our team members was examining salary accounts reconciliation, and while he was evaluating loan grant procedure and recovery thereof, he found that one of the loans, taken by staff member few months earlier, was refunded in lump sum and the refund was made by submission of Draft and the indication was made on the records.  This clearance by Draft raised alarms in his mind for one reason that the bank accounts of the Individual are held in the same bank in which the company holds his bank account, as the salary payment is being made through transfer of funds for all the employees, if that being so , why should a person get the draft made to clear the loan, when the same can be cleared through cheque, as getting the draft made is definitely time consuming  and at the same time additional amount for getting the draft made would need to be incurred. Therefore even if the charges for getting the draft making are not very high, but why one would do so, when he can easily clear the loan through cheque.   The curiosity to understand , our colleague went  into details of the concerned person and he found another anomaly; the person was in habit of raising loans as frequently as possible but also refunds the loans immediately after clearing two odd instalment through his salary deduction and thereafter  he often deposits the draft for clearance of his loan. This anomaly was not tenable and immediately drove our team member to the bank, which happened to be in the same building.   On request, when the draft so deposited by the company with the bank was taken out to find out its real origin, what was revealed with the help of the bankers that the Draft so deposited by the company, which was received from the staff member was prepared by the bank which was located miles away and this particular branch was catering to one large Public sector, which was revealed through the code number of the branch, by virtue of its geographical position. The matter became suspicious as to how and why the staff person would get the draft made from a bank so remote from the area.  The concerned person was called to enquire as to how he has managed the draft and what was revealed during investigation was alarming and astonishing and the followings were revealed:

(i)         The concerned staff member was working as lowest positioned clerk in the corporate secretariat, whose responsibility was to open the mail received from various sources, to record them in the register for posterity and place them in appropriate folders for review at appropriate level. 

(ii)              This person was working earlier as a peon in the Accounts department and was influential. He was aware that the earnest/ security deposit for contract purpose was not being reconciled as he had heard the deliberation and had understood this problem from the concerned dealing staff. 

(iii)           While working in the Corporate Secretariat registry during his process of opening the mail, he used to receive refund of earnest money, and smartly he would remove this refunds , destroy the covering notes , make no entry in the records and use these drafts for refund of his loan, as he would take these drafts to Accounts department and would make request to refund of loan stating that he has managed the finances from his family members, for which he would hand over the draft and accounts staff taking the draft would not really understand the nitty-gritty . He would even synchronize his loan and outstanding amount with the draft value that he has in his hand, and the variations in the amount of outstanding loan and the draft value would be transacted through his monthly salary.  

(iv)              As there were limitation on taking his loans, and the flow of earnest money/ security refunds/ other receipts which were unaccounted and could easily be played with were large, and his scheme   of operation had successfully capitalised, he wanted to expend the scheme in the same gambit.  

(v)         He approached his friends in the company, who had sought loans from the company and were paying interest on loan, he would offer on the pretext to those colleagues that his friend has money and is willing to grant loan at lower rate of interest, and convinced them to repay the loan and he would initiate the process for repayment and repayment for all those refund would flow in from all those drafts which were refund of security/ earnest money which always remained un- reconciled and after the refund he would recover the amount from his friends in due course of time. 

The reference made above is certainly small with respect to the total financial impact that it would have on the large corporate and one may even say at the corporate that this is part of the business, however I would put it differently saying , what a lesson to be learnt,  a person gets idea knowing the vulnerability, irrespective of the position he works and believe you me, if there is a weak link in the system and not exploited till today, does not mean the weak link would not be exploited tomorrow, be rest assured one day it would be exploited, unless we put our house in order and brings transparency and remove complexities .

The Instance that I have mentioned above crept up due to complexity of reconciliation created by default, though the reconciliation of earnest money per se may not be perceived as big issue and most of the companies may be in the same state,  but I am sure we can appreciate and understand the gravity of complexity created by design. When one creates complexity by design the exploitation would be much faster and consequences would be based on who has created the complexity and what is his total understanding of the system in which the complexity is created. If the understanding in the system is complete then sniffing out the wrong gone through with the complexity is going to be extremely difficult, but if the understanding of the person creating complexity by design is limited to some aspects in which the complexity is created, the sniffing out the wrong could be easier but would be based on the expertise available in the system who can understand the manoeuvring done and can see the red-flag to sniff out the wrongs. I wish to share an event, but not much in details intentionally, wherein one of our colleague while undertaking forensic Audit in well established corporate with well structured and operated ERP environments, revealed the followings:          

(i)            The Salary staff person in accounts department, looking after the corporate salary, used to regularly update the salary transaction file and would assure the complete updations, before he closes the monthly salary scroll, prints out the salary, and gets the funds transferred to each account through cumulative transfer to bank. Unfortunately he  had wrong access to the salary masters, which otherwise was the responsibility of Computer Cell and the concerned person had assigned him to take access to update the master with respect to salary increase to avoid bringing out lapses and getting highlighted the inaction on his part. But the person passing the password never could visualise as to what all wrongs can go through.

(ii)                The Concerned Accounts staff member was a member of modules development team when ERP was being developed through outsource agency, and when the ERP was developed and established this person was deployed in accounts to look after the salary module.  As he knew the system well and was able to secure the access to master file , played a smart move wherein; the   de-activated salary master of the person who had left the organisation  was activated and to reconcile the total number of master, being one of the major control, the active master of the person who was out on to the client base for more than 6 months and was not being paid the salary during their stay with the client,  was deactivated, and the salary went through to the person who had left the organisation. The concerned salary staff person had access to the bank account of the person whose master was activated, as while leaving the organization being in hurry he handed over his cheque book to the concerned accounts staff to get the accounts balance transferred to his given account and to close the accounts thereafter. The funds were transferred to the given account but the account was not closed hence he had access to his bank account.      

(iii)         How was it revealed and sniffed out is little longer statement, but in short, when our colleague found during review of monthly transaction file, the person gone abroad on the client side are not being paid and their ledgers are active but flagged, he wanted to know as to how many such employees are with clients whose ledgers are flagged and why the summery of their movements is not being prepared regularly and reconciled as being done for other employees, so as to know how many of the staff members are with the clients who are not been paid on monthly basis. Sooner our colleague asked this question he found the changing behaviour in the concerned staff person and our colleague instantly opened up, the transaction file of the previous month and tried to compare the flagged ledger the previous month and the current month. During this analysis he found the flagged ledger of one employee in the previous month did not exist in the current month and was not part of the scroll, this was alarming, and as he moved on comparing he found a Pandora box wherein this activation of deactivated ledger was a routine exercise.

I am really concerned, as at large the knowledge at various levels on ERP working operation and the capacity to monitor the audit trail and the logs is very limited. If the masters are played with it may be really difficult to reveal, though one may claim that he has the best ERP and the controls, may that be so, who has the capacity and understanding to monitor the complexities created by design. The factual position is the password of the person who left the organization years back are still alive and being used fearlessly.  I do not wish to go much in detail on this aspect at this stage as the same may not be desirable, but I do suggest that appreciate and understand as to what has gone wrong with others may go wrong with you tomorrow and the design of manoeuvring may even be flawless. Most of the frauds that we reveal or are being reported otherwise are so stupidly done, that I often wonder, why one has to do such stupid frauds. Do smart frauds ever surface? 

I strongly suggest, that the systems at corporate must be simple and transparent, complex  structure should be so divided and partitioned that understanding of each part becomes simple, which can easily and regularly be reconciled. We must not forget that our preventive controls would only function if the instructions are well understood at the levels who are supposed to monitor and the understanding would be much easier if the instructions are simple.  Do not bring complexity in the system be it by design or by default, keep them at bay and if we can simplify our systems their managing them would be simple and transparent and that is the need of the day.    

Wednesday, 20 July 2011

Frauds & White Collar Crimes with focus on Prevention, Detection & Investigation of Frauds & White-Collar Crimes

Institute of Forensic Accounting and Investigative Audit

Presents 85'th

One-Day Symposium


New Growing Trend At Corporate on Fraud & White Collar Crime
With Focus On:
Prevention, Detection & Investigation of Frauds & White Collar Crime

13'th Sep'11
Hyatt Regency (Salt Lake)
14'th Sep'11
Hotel Radisson (GRT)
15'th Sep'11
Hotel Hilton (Andheri East)
New Delhi
16'th Sep'11
The Claridges
For details log on to www.ifaia.org

Tuesday, 12 July 2011

Intellectual Property Audit

Copyright of this article rests with the writer Mr. Vinod Khurana, President IFAIA

(The article aims to explain the importance of Intellectual Property Audit in changing IPR scenario.)


Intellectual property audit is not statutory and hence is self-driven. In the growing corporate warfare the management of intellectual property has become absolutely mandatory. As the subject is critical and not so well understood in general, an organization in order to sustain in the changing business scenario has to understand their rights in explicit term and has to setup a system strong enough not only to protect those rights but also to commercially exploit them. In order to set up strong proactive system, audit of IPR by an expert team of professionals in this field becomes inevitable, who would help in setting up the system and lay down the mandatory build in checks for a system to function. The issues that the business organization needs to understand and are dwelled upon with due diligence by the IPR audit team are:


    Business must know what properties they own and intellectual properties can be no different. To monitor that Intellectual Properties are properly protected there is a need to take stock of such Properties. The rights could be in the form of Patents, Trademarks, Copyrights Industrial Designs, Trade secrets, Integrated circuits, and Geographical indications involving various modes, criteria and specifications. At the same time business may also have various intangible assets such as, customers list, distribution network, marketing method, manufacturing practices, R & D capabilities, which are equally valuable and at the same time vulnerable to exploitation. If one knows not what his rights are how can he protect them.

    Indian intellectual property laws have undergone sweeping changes. The new laws have come in force or they are in process of being put in force. The changes in the recent time have come through legislation such as, the Trademark Bill 1999 and copyrights amendments Bill 1999, the Design Bill 1999 the protection of Plant Varieties and Farmer's Right bill 1999. Geographical Indication of goods (Registration and Protection) Bill 1999 and the Patent Bill. These new legislations have brought changes in the basic existing policies and structures having larger ramifications, at the same time one intellectual property can be protected by more than one statute. All Organizations need to understand the modes of protections as both the civil and criminal mode are available as options.

    In order to protect intellectual property the organization should establish a proper procedure to determine what rights should be registered and what rights cannot be registered, should they be registered only in India or should they also be registered abroad. If they are to be registered abroad what factors should be considered and what route should be followed. Has the cost-benefit analysis being done before claiming rights abroad. If not registered should they be maintained as trade secret or should they be made public to protect their interest. Organizations also have to be cautions to understand if any third party is permitted to infringe, the proprietor's monopoly is eroded.

    Organization may have registered rights, which are no longer required, and it may make commercial sense in dispensing few of those rights. Maintaining a right without utilizing it is like a white elephant. As it costs money to maintain a right besides being a sunk investment, if not used it would be prudent to segregate them for commercial disposal. Many patents and trademarks may be laying and cluttering portfolio, there may be some patents, which make no commercial sense for the organization that does not mean that they have no commercial value. How those rights are to be traced out and valued can be of great significances.

    The organization may have large number of intangible assets like distribution network, customer list, manufacturing practices, research capabilities, licenses, and supply source. There are various other trade secrets which are highly valuable, how they need to be protected, how can they be misused by the employees, what precautions should be taken to protect. These precautions become more important in the fast changing moral values, where the frequency of employees turn over is increasing considerably and the loyalty to the organization appears to be fading fast.

    Organization needs to follow suitable procedure to record its right more so the unregistered rights. If the corporate logo is protected as Trademark then the jingle may also be protected as copyrights. Similarly the patent will not be granted in India to computer programme as per existing legislation but the same may be protected in different form. It needs to be understood as to how far you can make your correspondence as secret/confidential, what consequences will it have if the organization starts making every communication as confidential/secret, it may even loose the very credentials of being confidential/secrete. The organization must distinguish the various means and adopt the most economical and beneficial to monitor and protect the rights.

    Some of the contracts need to be formed under special statutory provision, some of the contracts may be formed under the law of contracts, what is more important is the organization to critically monitor the contract terms. How the agreement should be formulated, what are the key areas which need special emphasis, how the communication gap can be injurious and advantageous how should they be protected, when and how should they be disclosed. What are the obligations on the employees in a fiduciary capacity, how can they be put in force. The organization needs to understand these issues.

    Organizations needs to be wary not only on protection of their own intellectual property, the infringement of third-party right inadvertently or otherwise, can even prove to be devastating. Infringement of Polaroid instant photograph by Kodak, who was literally forced to destroy many millions dollar worth of its instant Cameras is not the case in isolation. To obviate and minimize the risk organization must prepare the guidelines and modus operandi that needs to be followed before starting any new product to avoid such situation.

    There is a great awareness in the industry as regards to the necessity of R & D establishment. The cost-benefit analysis would remain to be the basic bone of contention of the R & D units. Therefore the industry needs to understand as to what factors needs to be looked into and verified before the research is launched, how these factors can be verified, what would be the source of information and of counter check, how authentic would be the information, how should the research be executed, would it be more economical to outsource the research, if so as to whom and on what terms should it be allocated, what precaution should be taken in doing so. If the research is to be undertaken in house, how the records should be maintained, what precautions should be taken with the employees, what happens if the employee leave before the search is complete and such other issues needs to be closely understood and evaluated to make R & D unit economical and beneficial.

    As the intellectual property is comprehensive and the range of assets covered by those rights are diverse and extensive, to apprehend their commercial importance and the scope of exploitation becomes difficult. It would therefore be desirable for organization to put itself to audit of IPR undertaken by a team of experts in order to build up the IP monitoring system and to formulate the correct procedure and guidelines to protect and enhance the commercial value of intellectual property.

  • Brand Valuation

    The Copyright of this article rests with the writer Mr. Vinod Khurana, President IFAIA

    In the recent past valuation of intangible assets related to intellectual property particularly a brand has gained a considerable importance. Valuation of individual intangible assets is a recent concept in India, though the generic intangible assets better known, as Goodwill has been valued for a very long time. The Goodwill was valued when ever a business as a whole was transferred from one entity to another or when new partners were brought in or old partners left the business to give them there dues as part of their contribution to the business. The recent concept of valuation of Intangible assets related to Intellectual property like Patents, Copy rights, Design, Trademarks, Brands etc, is getting greater importance as these intellectual properties of the business is now often sold and purchased in the market by itself, like any other tangible asset.
    Coming to brand valuation, we would say that creating a power brand involves blending of resources in a unique way. The resources spent on brand building are not consumed and have a lagging effect, which ultimately turns out in formidable asset formation, over a period of time. Building of brands takes years; most of the famous brands are even 100 years old. What we need to understand is that the value of the brands needs to be maintained continuously and is not some thing that is consistent or permanent, they do change with the changing environments. What matters in business is to maximize the economic wealth, therefore if the establishment cannot maintain brand or the importance of the brand has higher commercial value in the hands of other organization, one may just like to exchange hands or shake hands as it benefits both the parties and makes economic sense .In order to optimize the gains it becomes necessary to know the intrinsic value of brand from time to time .I illustrate this with a simple example, say a reputed Indian brand motorcycle is selling for Rs.40000/ which has a basic cost of Rs.30000 + 30% taxes i.e.Rs.9000 + Rs.1000 profit, is facing a competition from import and imported compatible motorcycle in all respect is also selling for Rs.40000/, which has a basic cost of Rs.25000 + tariff and other taxes 60% i.e.Rs.15000 and with nil profit. Presently Indian manufacturer is not facing any serious threat due to its brand equity, though the market price is same. As we know that by the year 2004 the scenario is going to change considerably and the taxes on the import would be compatible with the taxes on the indigenous related product. So say in this case the revised cost of sale of imported motorcycle will be Rs. 32500/ i.e. Basic cost as it is of Rs.25000/ and revised taxes 30% i.e.RS.7500/ against the indigenous motorcycle cost of sale of Rs.39000/. In these circumstances what does the indigenous manufacturer do? Will he be able to compete with the imported motorcycle? And if he is not able to compete then what happens to his brand? Which he has built over many years and which presently can be sold for substantial economic consideration. The Indian corporate with substantial brand value of there product may face such situations in time to come, there fore he needs to address himself and formulate a strategy and to do that the knowledge of brand value is of great importance.Many legal issues arise while doing commerce on Internet which needs to be understood e.g. how far the web contents is protected by copyright law, how effective are the copyright in the present scenario when they become accessible globally, how the privacy and security can be maintained, what Constitutes defamation on the Internet, as the electronic commerce has no geographical boundary. We must be clear as to the repercussion and possibility of defending a lawsuit, in any country where end user resides.

    The Brand can be one of the four forms, they are:

  • Brands which are Associated with the product and no association with the manufacturers name. 

  • Brands where the Manufacturers name is attributed to a product. 

  • Brands where the company and product name is blended. 

  •  Brands that are personalized.  The modus operandi of the valuation would vary in each case. To valuate a brand & other intellectual properties the valuator requires careful analysis, keen judgment, through professional knowledge and a team of think tank who have expertise in finance, marketing, technical know-how, and in legal fields. There are forty odd variables, which in generic term are called Environments that affect the value. The environments broadly are internal & external environment and the major variables are internal strength, marketing scenario, technical know-how and its changing speed, growth prospective, competition scenario, government policy, impact of globalization etc. In present scenario impact of WTO treaty need critical evaluation to under stand its implication on the brand by the year 2004. This variable has given a new dimension to the valuation process and its importance needs to be urgently understood and addressed for formulation of business strategy .The impact of all these variables would vary from sector to sector and on type of brand and hence would need different weightage for evaluating .One of the valuation technique is 'Discounted Cash Flow Technique' .The focus of analysis of all these variables is to correctly predict the future cash flow exclusively attributable to the brand . This is comparatively a simple exercise if the future is continuity of the past but when there is divergence of one or more variables, then their impact in totality on the future cash flow with certainty becomes complicated and this deepens depending upon changes in number of variables and their individual and combined impact. Once we are able to formulate the expected future cash flow, we need to work out the discount rate. This is important as well as critical area of valuation. As said earlier not all the resulting cash flow can be attributed to the brand it self, large amount of it necessarily reflects the value of other assets employed in business, such as fixed assets, distribution system etc, hence we need to make appropriate adjustment for the discount rate to work out the brand valuation .The risk that is attached to the brand earning is given due weightage. Same analogy is also applied under different parameters to valuate other intellectual properties. In other words the valuation of these assets is the worth now of the benefits of the future ownership. 

  • Valuation has various intangible and tangible benefits

  • Tangible benefits are:

  • Merger & Acquisition: It is of critical importance for an acquirer, as well as for the vender to understand and evaluate their real worth for negotiating the correct price. 

  • Disposal: The current focus on brands has led many companies to recognize that they cannot support properly all their brands or certain brands could be worth more to a third party than to their current owner. Brand evaluation technique can be used to judge which brand to dispose of and their possible economic worth to a third party.

  • Fund Raising: Brand valuation are playing an increasing prominent role in the area of fund raising, particularly from the public as brand represent robust asset against which to seek funds is much easier  

  • Discount Rate: Robust strength also assists in arranging the large funds at lower cost.

  •  Intangible benefits are:

  •  Enhances Confidence: Brand credibility shows the faith & confidence of public at large in the product; Valuation if reflected in the books of accounts further enhances the public loyalty to the product and hence becomes a force multiplier. 

  •  Indicator of effective utilization: The investment in the brand building creates value in the reverse direction when compared to the capital expenditure. When you invest in capital expenditure you utilize the proportionate cost every year, which we write off in the form of depreciation or amortization, where as the expenditure in brand building is incurred to day and this expenditure is converted into valuable asset over a period of time. The expenditure is considered as revenue expense due to accounting & taxation provision which really is not so, hence valuation gives you the real affective worth, which you have created over the years through brand building. 

  •  Credibility to the real worth: If you valuate your brand only at the time of disposal it has a much lesser influence and will always leave a doubt of its real worth, in the mind of both the buyer as well as the seller where as if the brand is continuously valued has a different impact and gives much more creditability to the real worth. 

  •  Strategy development: Companies are applying brand evaluation techniques in order to under stand and manage their brands better. Brand evaluation involves a detailed examination of a brand from marketing point, a financial and legal prospective. It also examines the brand performance, prospective, market opportunity, and competition. It thus provides an excellent tool for strategy development.

  • If the organization does not know its value how can the organization monitor its growth and other parties correctly valuate it. In view of its advantages, it therefore, becomes imperative for any business organization to know the value of its intangible assets from time to time to formulate a business strategy.

  • Issues Concerning E-Commerce

    The Copyright of this Article rests with the writer Mr. Vinod Khurana, President IFAIA

    Information technology is no longer intersecting with business, but has become an integral part of our economy. However, as it stands electronic commerce per se is not part of WTO agreements. The United Nations Commission on International Trade Law adopted the model Law on electronic commerce in 1996, keeping that in mind the Indian Parliament has put in force Information Technology Act 2000.The salient features of this Act are the use and acceptance of electronic records and digital signature in Government offices and its agencies, thus bringing consequential changes in the Indian Penal Code, The Indian Evidence Act 1872, and to give legal sanctity for books of accounts maintained in the electronic form.

  • Cyber Law

  •  Intellectual Property issues in cyberspace

  • Commercial issues in cyberspace

  • Global issues in cyberspace
    Cyber Law:
    Many legal issues arise while doing commerce on Internet which needs to be understood e.g. how far the web contents is protected by copyright law, how effective are the copyright in the present scenario when they become accessible globally, how the privacy and security can be maintained, what Constitutes defamation on the Internet, as the electronic commerce has no geographical boundary. We must be clear as to the repercussion and possibility of defending a lawsuit, in any country where end user resides.

    Intellectual Property:
    Trademarks, Copyrights and Patents are the most common intellectual property issues affecting the cyberspace. A trademark as defined under trademark act 1999 means a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of others and may include shape of goods, their packaging and Combination of colours; - trademark can be broadly classified as generic, descriptive, suggestive, arbitrary, fanciful, and the protection would depend on the category in which it falls. It is important that on line company register its trademark besides a distinctive domain name and must be clear with difference of trademark/service mark and a particular dot.com domain name.
    Registering a trademark/service mark, trade dress as distinctive, it's infringement and delusion, it's international protection and the jurisdiction are the important issues that the domain name and the companies on line have to be aware of.
    Copyright is another issue that affects e-commerce. Are you aware what kind of legal recourse do you have if another e- business is using your on line material or could you be liable for infringement, if your website is linked to an e-business that displays copyrighted material without the owner's consent. Never before it has been so easy to violate a copyright owner's exclusive right, as it is now, therefore it is essential to understand as to how e-business can legally protect copyright ownership, what are the requirements for registration in copyright office, what are his exclusive rights, what are remedies and liabilities for copyright infringement what are the Patent able subject matter related to software in view of new patent act and what are it's advantages.

    Commercial Issues in Cyberspace:
    E-commerce involves various issues such as, on line contracting, payment procedure, and taxation, among others. A contract is an agreement to exchange property or service that is legally enforceable in the court of law, we also know that a contract law is a matter of both common law and statutory law enacted by each country and may vary in various requirements, which are essential. To enter into valid and enforceable contract such as Mutual Assent, Consideration, Capacity, Legality and Forms, validity of such requirement for business or internet or e-commerce may involve various legal issue e.g. a person under intoxication is incompetent and lacks contractual capacity, what happens if a person under intoxicated condition formalizes a contract on e-commerce, therefore the companies need to understand such delicate issue to equip themselves for such eventualities as a precautionary measure. As regards taxation some intricate issues may arise such as sales tax charge. Sales tax is a state subject and paid by the consumer at the point of purchase, how would that be implemented in e-commerce scenario, sales tax is charged on sale of tangible assets software on disk in a state may subject the vendor for collecting the sales tax, what happens when a company sells software on line through credit card without knowing the physical presence. The problems are more complex when you have international transaction and needs to be understood by the companies doing e- business.
    The Internet was developed with free and open communication rather than security in mind, as the business is migrated to the internet to address the above questions are out of necessity more so when the users are generally novices, the urgency needs to be understood from the very fact that the expected turnover on e- commerce for the year 2003 is three trillion dollars.
    The purpose of this letter is only to create awareness among the e- traders that much needs to be done and understood to protect one's business, which otherwise can be in jeopardy. If you have any question please do not hesitate to refer them to us at ifaia@ifaia.org.com

  • Internal Audit Outsourcing

     The Copyright of this Article rests with the writer Mr. Vinod Khurana

    The business world over is quietly undergoing through the fundamental changes, which have very serious long-term consequences. The impact of privatization, speed of communication, globalization, border less trade, impact of e-commerce, influence of intellectual property and relentless drive to do more with less have converged to place Internal Audit to fore front in the business management. The importance of internal audit has also been intensified, as the pace of fundamental change is strongly influenced by the change in information technology compliance, in the functioning process, and aligning the ever changing information technology plans with existing business process needs effective monitoring to prevent any adverse consequences in time to come.

    These changes have broken the traditional well-defined role of internal audit revolving around control and compliance. As a result generally internal audit group of corporate needs alignment to deliver value. In view of wide spread changes there is an urgent need to make internal audit beyond the traditional role and have to be assigned new value based agenda covering wide spectrum. To meet this challenge, the Internal Auditor has to have complete business knowledge and clear perception as to how the entire business operates in the changing business methods and environments. There fore the internal auditor has moved from being just accountant to 'also an accountant 'and hence is coming under intense scrutiny.
    By virtue of its position and role, internal auditor is more effective than external auditor in all respects, particularly in protecting the business assets and detecting fraud. In order to serve the organization and to stay in control he must make a valuable contribution or he will become irrelevant. Being internal control expert, the internal auditor has to play crucial and visible role, to play such role, besides his much wider understanding of the business as whole, he must have in-depth knowledge of accounting and its vulnerability to exploitation. As accounting is a language, it speaks for itself, but like any other languages it takes time for any auditor to acquire command, extensive auditing experience adds to the knowledge to really understand the accounting language and only there after you can put your fingers where the things have gone wrong and for some it becomes passion. At the same time understanding of accounting principle is not limited to management and accounting of liquid and tangible assets, when in the modern economy the intangible assets primarily consisting of intellectual property, have emerged as a new source of wealth and urgently needs proper accounting and management system for its protection and commercial exploitation, hence the internal auditor has to have in-depth knowledge of intellectual property, its commercial value and its fast changing legislation.

    The new business methods and technology dependency, which are making business dynamic, are also making them vulnerable to financial fraud. To cope with the complications and to understand the implications of new business methods and technology, the internal auditor can no more limit himself revolving around control and compliance and confine himself with in the perimeters of accounting records, in fact he only begins there. He has to have much wider business perception and ability to link data, knowledge, and insight together to prevent potential wrongdoings. The role of internal auditor covers the new emerging areas such as; vulnerability to changing software system and new information technology methods, consequences of e-commerce transactions, protection and commercial exploitation of intellectual property, analysis of implication of WTO agreement, evaluation and implementation of cost saving methods, compliance of new developing legislation, among other issues, besides the traditional role.

    Independence is an important characteristic of an audit. The changing role and position of Internal Auditor has led to power struggle with in corporate finance department. Internal auditor must have direct link to audit committee, which has resulted to loss of power of CFO and needs to be understood in the overall interest of the corporate. However in some companies internal audit is still seen as a necessary evil and in some the corporate employees are not even equipped to take on the new role, at the same time some business organizations spend large sums of money but have no system to measure the real worth of contribution made by the internal auditors. Therefore there is urgent need to understand the importance of internal audit and to place the system in the hands of those who understand the nitty-gritty and can contribute to the organization

    Under these circumstances outsourcing the internal audit to reputed establishments, who have expertise in the field has many inherent advantages for any business organization. Institutions, which are primarily focusing on internal audit, have vast experience and expertise in new developing areas such as e-commerce, intellectual property, and globalization through WTO and can well appraise their consequence on the existing business. They are also widely aware of issues such as; general weak areas in accounting which promote frauds, different modus operandi of white-collar crime, inadequacies in computerization and accounting software witch helps in financial frauds, how the employees and ex employees play around with intellectual property, lacunae in finalization of contracts and their legal consequences, among other issues.
    Therefore outsourcing of internal audit besides being cost effective can provide the real insight and business organizations can gain rich dividends by rectifying the anomalies existing in the system. If the internal audit is integral part of the establishment the results are less likely to prove effective as the results would be restricted by inherent limitations of internal audit team and at the same time would be influenced by some vested interest, compromising with its independence. That is the primary reason as to why the statutory audit has been barred to also perform internal audit. Therefore internal audit services from those that provide specialized services will strengthen confidence at all levels and bring about internal discipline and deterrence besides being cost effective

    The Growing Menace - Frauds & White-Collar Crime

    The Copyright of this article rests with the writer Mr. Vinod Khurana

    (This paper is an effort to explain that sniffing out frauds is an art and needs a mind-set, which comes through Experience and mere knowledge of accounting principles and standards may not help)

    The fertility of man's invention in devising new scheme of fraud is never ending, the new business methods and the speed, which are making business dynamic, are also making them vulnerable to financial fraud. At the same time technology dependency through ERP application generates unrealistic expectations, where as there is thick fog behind the screen, leaving much to be desired, thus creating ideal environments for the wrongdoers to exploit the weaknesses for their personal gains. Therefore Frauds and White-collar crimes in the corporate sector have been increasing at an alarming pace, which of late was the primary concern at Government Establishments
    Fraud is a generic term; No definite, explicit or formal statement can be laid in defining fraud. Fraud, theft, and embezzlement are terms that are often used interchangeably. Although they have some common elements, they are not identical in the criminal law sense. Theft is referred to as larceny- the taking and carrying away of the property of another with the intention of permanently depriving the owner of its possession. In larceny the perpetrator comes into possession of the stolen item illegally. In embezzlement, the perpetrator comes into initial possession lawfully, but then converts it to his or her own use. Embezzlers have a fiduciary duty to care for and to protect the property. In converting it to their own use, they breach that fiduciary duty. Therefore theft and embezzlement have different legal consequences.
    Fraud is intentional deception, commonly described as lying, cheating and stealing. There is no end to the types of frauds that is why, The Indian Penal Code, 1860 has not strictly defined a fraudulent act, even the courts have not explicitly elaborated and have kept it to them selves to interpret. In nutshell, fraud in books of account comes in two major categories, transaction and statement frauds. Statement frauds involve intentional misstatement of certain financial values to enhance the appearance of profitability and deceive shareholders and creditors, which will also benefit the perpetrator indirectly in one way or the other. World Com and Enron are the outstanding examples of this category. Transaction frauds are intended to facilitate the theft or conversion of organizational assets to one's personal use and the perpetrator is the direct beneficiary. The recent case of Parmalt, an Italian company, which is also the largest dairy product group in Europe, where the management allegedly produced fake bank documents to claim that it possesses Four Billion Euro in cash that was non-existent and the Bank of America denied the authenticity of a document is an example of transaction fraud.
    There are varieties of ways the individual might fraudulently steal or embezzle the company's assets. The size, complexity and ownership characteristics of the entity have a significant influence on fraud risk factor. In large entity focus on effectiveness of those charged with the governance, internal audit function, and formal code of conduct, are important issues, in small entity may be these factors are not applicable. There fore in general, procedure and methods of White-Collar Crime are based on inherent risk prevalent in the system.
    We must understand that fraud is no simple conduct. Most of the white-collar crimes are committed for economic reasons. Loose or lax controls and a work environment that does not value honesty, provides the opportunity. Motivations and opportunities are interactive, the greater the economic need, the less weakness in internal controls is needed to accomplish the fraud. The greater the weakness in control, the less motivation is needed. So when one has the motivation and opportunity, it's the right recipe for the fraud because; it pays to do it, it is easy to do it, it is unlikely that you will get caught. The opportunities to commit fraud are rampant in the presence of loose or lax management or administrative and internal accounting controls at any corporate. These controls become vulnerable by half hearted and inadequate compliance of computerization and ERP applications. The recent years have seen the frauds growing both in size and complexity, at the same time, well-planned fraud is too complicated to be unearthed by any plain investigating agency.
    Fraud may surface through an allegation, complaint or discovery, which may be incidental or looked for. The visible part of a fraud transaction may involve a small amount of money, but the invisible portion can be substantial, so don't let it go if you have suspicion though small. Surfacing fraud by design involves a proactive approach and methodology to discern fraud that looks for evidence of fraud. Financial auditing generally is not intended to search for fraud but to attest that financial statements are presented fairly. Though in the present time, the pressure is mounting on the statutory auditor to look for frauds, but how far they would succeed would depend on individual's capability, as detecting frauds is a knack and not mere knowledge of accounting standards and practices.
    To understand and appreciate the early warning you got to look for missing link in the chain of evidence that brings the insight to the front. A general belief in the auditing profession is "Most frauds are discovered by accident, not by audits or accounting system design." This has been repeated so many times by so many accountants and auditors that the general public accepts it as a gospel truth. I do not contribute to this belief, but yes there is no commonly accepted fraud detection methodology. It is a mind-set. The mind-set that I am addressing is not of paranoid, who trusts no one and sees evil everywhere. The mind-set that I talk of, can be described as seeing the wholesome and the hole at once, this knack of seeing the wholesome and the hole all at once comes with experience and the right-aptitude, which requires innovative and creative thinking as well as logic of science, which is able to see the wholesome and the hole together to establish the missing links, that brings the insight to the front and provides pragmatic approach to locate the vulnerable area, read the culprit's mind and then sniff out frauds.
    There are large numbers of frauds, which never hit the radar screen and have stealth in built; and at the same time fraud travel to grow geometrically over the period as a learning curve, if not detected on time. Therefore the prevention through right-controls and early detection by professionals with right mind-set could save fortunes.