In financial frauds, CFOs failing as first gatekeepers: Sebi's S K Mohanty

In major cases of financial frauds, there has been a lack of due-diligence or irresponsibility shown by the chief financial officer (CFO) of the firm and that they have faulted in their duties as gatekeepers, SK Mohanty, whole-time member of the Securities and Exchange Board of India (Sebi), said on Friday.

Speaking at the Federation of Indian Chambers of Commerce and Industry (FICCI) CFO Summit, Mohanty highlighted cases of fund siphoning by promoters through subsidiary companies and that if the internal controls were at right place, the CFO would have gained knowledge of such schemes being operated and alerted the regulator.

“Our markets have witnessed a number of frauds in the past. There are big companies involved in frauds. On the basis of analysis we have done, much of these frauds could have been prevented if the CFOs had acted as the first level of check to these activities of the management,” said Mohanty.

The Sebi official pointed out that one of the major areas of concern is that the regulator has seen the rise in related-party transactions.

“On the enforcement side, Sebi earlier had only one department for investigations in market-related frauds, insider trading, pump and dump schemes, etc. After witnessing a host of corporate frauds, we had to create an exclusive investigation department which mostly has chartered accountants to grapple with so many frauds that are happening,” added Mohanty.  

The Corporation Finance Investigation Department (CFID), responsible for carrying out investigations on fraud, diversion, siphoning or misappropriation of funds and other non-compliances, took up 13 cases pertaining to financial statements fraud category in 2021-22 while 10 such cases were completed in the year itself.

Under the proceedings under Section 11 of the Sebi Act, CFID initiated regulatory action against 74 entities in FY22 (2021-22 financial year) against 4 such cases in FY21 while adjudicating proceedings in the same period were issued against 35 entities in comparison to 7 in FY21. The department had also issued 8 administrative warnings in FY22 against 3 in the previous fiscal.

Mohanty also asserted the need for adopting technology and analytical tools for regulatory compliance (Regtech) by the corporates.

“CFOs have to rely on technology to provide them with the facility of Regtech tools to monitor internal controls,” said Mohanty.