Bharat’s Red Flags Compendium Practical Case Studies in Forensic Accounting & Corporate Fraud Investigation by CA Kamal Garg

Chapter 1       Red Flags in Forensic Accounting and Investigation – An Introduction     

Chapter 2       Material Business Changes                                                    

Chapter 3       Scale of Operations of a Company                                        

Chapter 4       Complex Transaction Structures                                            

Chapter 5       Predominance of Cash Transactions                                      

Chapter 6       Registered Office of the Company                                       

Chapter 7       Foreign Entity Connections and Potential Non-Compliance with FEMA    

Chapter 8       Team Competency and Presence for Financial as well as Operations related matters          

Chapter 9       Director Disqualification under Section 164(2) of the Companies Act, 2013          

Chapter 10     Director Disqualification Due to Non-Filing of Financial Statements by Connected Entities                                                                                               

Chapter 11     Frequent Changes in Directors and Key Managerial Personnel        

Chapter 12     Name Sake Directors                                                             

Chapter 13     Frequent Changes in Auditors and Auditor Independence  

Chapter 14     Large Number of Related or Connected Entities                  

Chapter 15     Materially Adverse Information Identified through Public Domain Searches          

Chapter 16     Promoters and Connected Entities Marked as Wilful Defaulters by Banks and Financial Institutions                                                                             

Chapter 17     Corporate and Bank Guarantees Issued to Related Parties and Third Parties          

Chapter 18     Unconfirmed Balances of Debtors, Creditors, Loans, and Advances          

Chapter 19     High-Value Receipts and Payments during the Look-Back Period  

Chapter 20     Legal and Professional Fees as a Potential Red Flag Indicator         

Chapter 21     Kickbacks in Procurement Contracts                                     

Chapter 22     Discrepancies Between Claims and Asset Values of the Corporate Debtor 

Chapter 23     Non-Maintenance and Loss of Books and Records              

Chapter 24     Weak Accounting Systems and Internal Controls                 

Chapter 25     Non-Registration and Non-Filing of GST/IT Returns           

Chapter 26     Material Arbitration Proceedings                                           

Chapter 27     Clean Audit Reports and the Need for an Avoidance Review         

Chapter 28     Assets Featuring in the Balance Sheet without Proper Title 

Chapter 29     Frequent Changes in Accounting Policies                             

Chapter 30     Incomplete Board Reports not in Line with the Companies Act, 2013        

Chapter 31     Assets in Transit or Not Cleared from Port for a Significant Period of Time           

Chapter 32     Assets Used by Other Entities on a Free of Cost or Lower-than-Market Charge Basis       

Chapter 33     Significant Aging of Capital Work in Progress                     

Chapter 34     Significant Revaluation Reserves in the Balance Sheet        

Chapter 35     Sale and Leaseback Transactions of Assets Pledged in Favor of Lenders    

Chapter 36     Unauthorized Creation of Security Interests                         

Chapter 37     Assets Used for Personal Purposes of Promoters with Costs Borne by the Company         

Chapter 38     Large Undervalued Asset Sales without Valuation Reports or Competitive Sale Process   

Chapter 39     Incorporation of Special Purpose Vehicles (SPVs) and Transfer of Funds without Underlying Business Purpose                                                                   

Chapter 40     Significant Investments in Partnership Firms and Other Unincorporated Entities   

Chapter 41     Indian Special Purpose Vehicle (SPV) Subject to Strike Off and Loss of Trail of Funds    

Chapter 42     Foreign Special Purpose Vehicle (SPV) Closed without Notice to Lenders and Loss of Fund Traceability                                                                            

Chapter 43     Creation of Assets Abroad and in Related Entities              

Chapter 44     Sale or Transfer of Key Revenue-Earning Business Divisions          

Chapter 45     Shares of Investee Entities Purchased as Investments at Exorbitant or Unjustified Premiums  

Chapter 46     No Returns on Investments in Terms of Dividends or Refund of Capital Even after Long Periods                                                                                   

Chapter 47     Large Value Investments Extinguished or Written off and Recorded as Losses without Proper Rationale, Leading to Erosion of Net Worth                        

Chapter 48     Shareholding Dilution by Fraudulent and Collusive Rights Issue Process and Relinquishments in Investee Companies                                                           

Chapter 49     Variances Between Stock Reporting to Lenders and Books of Accounts    

Chapter 50     Sale of Inventory Other than in the Normal Course of Business      

Chapter 51     Large Sales Returns to Certain Operational Creditors to Enable Preferential Payments for Current Transactions in the Ordinary Course of Business     

Chapter 52     Inflated Stock and Book Debts Reporting without Underlying Inventory  

Chapter 53     Customer Master Data is Not Maintained Properly and is Incomplete         

Chapter 54     Fraudulent Accounting and Reporting of Sales and Inflation of Receivables          

Chapter 55     High Value Discounts Offered to Some Customers and Not to Others       

Chapter 56     Collections Routed Through Non-Authorized Bank Accounts or Received in Cash           

Chapter 57     Customer Payments are Made Directly to Vendors/ Promoters and Receivable Balances are Not Reconciled                                                                      

Chapter 58     Significant Aging of Receivables Balances                           

Chapter 59     Assignment of Receivables to Third Parties/Related Parties 

Chapter 60     Large Receivables Extinguished/Written off and Recorded as Losses without Proper Rationale/Legal Efforts and Eroding the Net Worth            

Chapter 61     Fictitious Bank Receipts (In Bank Book but Not in Bank Statements)        

Chapter 62     Sudden Increase in Unbilled Revenue                                  

Chapter 63     Receivables Written off on the Basis of Arbitral Awards     

Chapter 64     Audit Qualifications on Revenue Recognition, Inability to Obtain Balance Confirmations

Chapter 65     Inflated Book Debts Reporting to Bankers Not Reconciled to Books of Accounts

Chapter 66     Presence of a High Number of Bank Accounts and Inter-Se Movement of Funds  

Chapter 67     Diversion of Funds to Parties Other than Normal Business Payees  

Chapter 68     Round Tripping of Funds Between Various Cash Credit Accounts Held with Different Bankers to Enhance Debit and Credit Summations of Bank Accounts        

Chapter 69     Fund Movements Not through Designated Consortium Accounts   

Chapter 70     Loans and Advances given without any Agreements and Legal Recourse  

Chapter 71     Loans to Directors/Entities for No Business Purpose and Includes Related/Connected Entities  

Chapter 72     Significant Aging of Loan Balances                                      

Chapter 73     Loans and Advances on an Interest-Free Basis Although Interest is Paid by the Company

Chapter 74     Large Value Loans and Advances Written off without any Legal Recourse/Attempts to Collect and Eroding the Net Worth                                      

Chapter 75     Loans and Advances Outstanding in Entities which are under “Strike-off” as per MCA Records and No Proceedings are Stated as Possible             

Chapter 76     Share Capital Not Received by Bank Funds Process but by Adjustment Entries    

Chapter 77     Return of Allotment Not Filed or Filed with Wrong Facts and Figures       

Chapter 78     Exorbitant Share Premium from Investor Companies Not through Bank Sources and/or Diverted Back later                                                                

Chapter 79     Shareholding in the CD is Fictitious — the Investor-Shareholders have themselves Extinguished the Investments in their Balance Sheets          

Chapter 80     Company Funds have been used to Purchase Shares of the Company by Directors

Chapter 81     Loans Recorded by Mere Book Entries without Corresponding Bank Inflows — Preference/ Fraudulent                                                                              

Chapter 82     Round Tripping Loans Received, diverted to Other Group/Connected Entities without any Business Purpose — Diversion of Funds                              

Chapter 83     Loans taken without No Objection from Existing Lenders and Security Interest Created thereon                                                                                   

Chapter 84     Unsecured Loan becomes a Secured Loan without New Value       

Chapter 85     Loans Stated as Received in Cash                                         

Chapter 86     Certain Loans Settled in Priority over some Other Loans     

Chapter 87     Loans Received at Exorbitant Rates of Interest or Security Created and Purchases on Credit at Exorbitant Prices                                                                

Chapter 88     Loan Agreement Stated as Secured Loan by Unregistered Memorandum of Deposit of Title Deed (MoDTD) and Ante-Dated Transactions                     

Chapter 89     Where Loans have been Recognized due to Invocation of Bank Guarantees (BGs), where such BGs did Not Reflect Genuine Business Transactions   

Chapter 90     Security Interests and Claims Recognized on Basis of Award by Court or Tribunal           

Chapter 91     Conversion of Unsecured Loan to Secured Loans in Order to Defraud other Secured Creditors Impacting the Waterfall Mechanism under Section 53 of the Insolvency and Bankruptcy Code                                                                   

Chapter 92     Fictitious Purchases of Goods and Services and Consequent Liabilities and Losses           

Chapter 93     Transactions Especially with Related Parties Not on an Arms-Length Basis           

Chapter 94     Significant Aging of Payables Balances                                

Chapter 95     High Value Sole Selling or Purchase Agents and/or Related Parties

Chapter 96     Creditors Settled Directly by Customers but still Showing as Outstanding both for Receivables and Payables                                                      

Chapter 97     LCs Issued for Local Trade Related Party Transactions without Underlying Trade Transactions                                                                           

Chapter 98     Significant Reduction in the Stake of Promoter/ Director or Increase in the Encumbered Shares of Promoter/Director                                                  

Chapter 99     Resignation of the Key Personnel and Frequent Changes in the Management         

Chapter 100   Increase in Borrowings, Despite Huge Cash and Cash Equivalents in the Borrower's Balance Sheet                                                                                      

Chapter 101   Claims Not Acknowledged as Debt High                             

Chapter 102   Large Number of Transactions with Inter-Connected Companies and large Outstanding from such Companies                                                                     

Chapter 103   Fictitious Bank Receipts in Bank Books                               

Chapter 104   Exorbitant Share Premium from Investor Companies           

Chapter 105   Share Capital Contributions Not through Bank Channels     

Chapter 106   Inflated Stock and Book Debts Reporting                            

Chapter 107   Hidden Dangers in Corporate Financial Statements — A Comprehensive Analysis of Red Flags