Citizens' Issues
Wipro and the failure of internal controls

The outcome of a recent probe into the shocking embezzlement at the IT firm, is proof that despite regular affirmations, India Inc has neglected elementary monitoring practices

Last week, The Hindu BusinessLine front-paged a report "Embezzlement at Wipro; Probe blames lack of internal controls" (17 November 2010). The matter involved an employee who had been working in the controllership division of the company's finance department for about three years till the theft was discovered in December last year. The employee is believed to have embezzled about $4 million by stealing a password and transferring money from one of Wipro's bank accounts.

The BusinessLine reported that an independent legal counsel appointed by the IT major to look into the matter had found that lack of internal controls in the company had led to the embezzlement committed between November 2006 and December 2009. The external counsel was engaged on the advice of the US Securities and Exchange Commission (US SEC).

Based on the finding of the legal counsel, Wipro suggested that if corrections were to be carried out to the published annual financial results, in view of the "mis-statements identified during the probe" together with other "uncorrected audit adjustments", profit-after-tax for 2009-10 would have been higher by 2.1% or approximately Rs92 crores.

Wipro is reported to have informed the US SEC that its audit panel has concluded that mistakes were committed in accounting entries and that they were also not supported by any documents. Weaknesses identified related to sharing of online banking access passwords and Wipro's internal accounting system passwords by certain employees within the finance and accounting departments, including those responsible for external financial reporting,

The company admitted there was lack of effective controls over recording of journal entries, including inadequate documentation which resulted in ineffective controls over bank reconciliation statements, exchange rate fluctuation accounts, outstanding liabilities accounts, and lack of timely and adequate reconciliation and review of period and end reinstatement of foreign currency inter-company and unit balances including the recording of appropriate adjustments. There was also insufficient segregation of duties with respect to recording and initiating banking payments.

Wipro conceded in its disclosure to the US SEC, "We and our independent registered public accounting firm also identified the lack of internal controls that gave rise to the embezzlement and the financial statement mis-statements as material weaknesses in internal control over financial reporting."

The amount of Rs92 crores may not be considered "material" in routine audit parlance in a multi-crore company such as Wipro, to warrant reporting "extra-ordinary transactions" in the annual accounts, either by way of a note on the accounts, or qualifications from auditors, or a mention in corporate governance. But a reference in small print about an inquiry would not serve the same purpose.

This is a clear-cut case of a very carefully thought out, long-drawn fraud that certainly is not the handiwork of a solitary employee-player, but the result of active connivance of more than a number of employees working in collusion at every level in the organization, who breached the company's internal control system by taking advantage of the lacunae or the lack of monitoring. The embezzlement did not happen in a single financial year, but was spread out over a period of three years, and should not have escaped the attention of auditors if it was committed by an individual.

It is not surprising that the theft was carried out by tampering with known and common fraud-prone areas of reconciliation of bank accounts as well as relatively less operated/scrutinized accounts like outstanding liabilities, exchange rate fluctuations, inter-unit and company balances. Note that the company mentions "lack of timely and adequate reconciliation and review of period and end reinstatement of foreign currency, inter-company and unit balances including recording of appropriate adjustments." It also says that "segregation of duties with respect to recording and initiating banking payments was found insufficient". How does one account for the absence of built-in checks and controls that are an essential requirement for any enterprise, large or small? If at all well-documented procedures and practices were in place, where did these fail?

The disclosure of "material weaknesses in the internal controls" is a frank admission of the absence or disregard for monitoring through an elementary internal control system with appropriate accounting care and standard operating procedures, such as duly laid down authorisation levels, insistence of appropriate supports for accounting entries (like the journal entries that are recorded by debiting one account and crediting another), and mandatory periodic segregation as well as rotation of duties. This happened despite the solemn affirmations to the contrary contained in the certification of the CFO/CEOs and Corporate Governance Report, as also in internal and statutory audit reports that have, year-after-year declared the existence of internal control systems. This instance may be just the tip of the iceberg, with more than a few such frauds likely to be discovered, that's if they have not been suppressed already by company managements, to protect their lily-white images even after the whistle is blown!

Take the declaration by Ratan Tata recently that he did not want to go to bed thinking he had to pay a bribe, while Rahul Bajaj states that every industrialist pays bribes. Which begs the question, where are these payments accounted, or how do they remain unaccounted? Though the amounts may not compare with the unimaginable figures being estimated in the 2G spectrum allocation scam, it is an endemic malaise. Is there any regulator who will look into this? Will it be the Institute of Chartered Accountants of India that will look into the internal and statutory audits, or the ministry for corporate affairs and/or the Securities and Exchange Board of India for violations of corporate governance, or will they remain mere listing requirement checklists to be ticked before sign-off?

(The writer is a chartered accountant and is based in Mumbai.)
 

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COMMENTS

Adi Daruwalla

6 years ago

I agree there is a total lack of physical governance, e-governance, and whatever is put in place can easily be broken or cracked by unscrupulous employees and bosses. Also I read another article in DNA Money of November 24, 2010, where Mr. Senapathy the CFO of Wipro has stated that this is all a "small amount." Does he mean there are bigger amounts also, and such a statement shows the callous attitude of one of the senior most members of the Wipro clan and it is because of this attitude that has been going on for years and years the nation is today facing a barrage of scams that have rocked it. Wipro should be barred from all contracts abroad especially financial ones as the current scenario shows the apathy with which actions are taken. Also Mr. Premji should step down from all councils where he has a right to vote and elect people giving them honours. Narayanmurthy should not join Premji's initiative in the Education prgram.

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He has a charge-sheet against him. But he heads our corruption watchdog

PJ Thomas has been made chief vigilance commissioner despite the apex court questioning his appointment. He is accused in a graft case. But our Attorney General has gone on record saying that “impeccable integrity” is not an eligibility criterion for appointment of the CVC. Go figure

The current CVC of India, PJ Thomas, has been appointed to this post-when allegations of corruption against him have not yet been cleared.
The process of his appointment was itself controversial.

Moneylife has in its possession documents detailing the coronation of Mr Thomas, made available to us by activist Subhash Chandra Agrawal, who obtained them through the RTI (Right To Information) Act. The documents reveal the bureaucratic approvals leading up to the appointment of Mr Thomas.

On 3rd September, prime minister Manmohan Singh, home minster P Chidambaram and Sushma Swaraj of the BJP (in her capacity as leader of Opposition, Lok Sabha) met to finalise the CVC's appointment. Ms Swaraj disagreed to the appointment of Mr Thomas as CVC, but the detailed proceedings of the same have not been provided to Mr Agrawal, apart from the note recording the Opposition leader's dissent.

On 9th November, the Supreme Court asked the already-beleaguered Centre whether the criterion of being an "outstanding civil servant" was met when Mr Thomas was appointed as CVC.

Now why is Mr Thomas in the eye of a storm? He was secretary, department of telecommunications, during A Raja's now-infamous tenure. 
 
In addition, the Comptroller and Auditor General had exposed a case of palmolein imports into Kerala from Malaysia during the early 1990s; Mr Thomas is an accused in this scandal. It involves the alleged import of this commodity at an exorbitant rate, causing a loss of Rs2 crore to the state exchequer.

On 17th December, the court of the enquiry commissioner and Special Judge (Vigilance) at Thiruvananthapuram will conduct proceedings into the case.
With due respect to the various statutory bodies involved in the appointment of the current CVC, does Mr Thomas fit the bill?

On top of this, the Centre (on 23rd November) defended the selection of the CVC before the Supreme Court (SC) by stating that "impeccable integrity" was not an eligibility criterion for appointment of the CVC.

These words were from Attorney General (AG) GE Vahanvati before an SC bench comprising Chief Justice SH Kapadia and Justices KS Radhakrishnan and Swatanter Kumar.

The AG made this statement after being constantly grilled by the apex bench on how an accused could get the top post of a CVC.

We needn't add anything more. "Impeccable integrity" is not needed if you want to head the topmost corruption watchdog.

The only saving grace is: If we are already plumbing such abysmal moral depths, we just can't sink any deeper.

  For the record, according to the official Indian government website (http://cvc.nic.in/CVC_power.htm), following are just a few 'powers and functions' of a CVC.

A CVC has the power:

1)      To undertake an inquiry or cause an inquiry or investigation to be made into any transaction in which a public servant working in any organisation, to which the executive control of the Government of India extends, is suspected or alleged to have acted for an improper purpose or in a corrupt manner;

2)      To tender independent and impartial advice to the disciplinary and other authorities in disciplinary cases, involving vigilance angle at different stages i.e. investigation, inquiry, appeal, review etc.;

3)      To exercise a general check and supervision over vigilance and anti-corruption work in Ministries or Departments of the Govt of India and other organisations to which the executive power of the Union extends.

To cut a long job description short, the CVC has got to ensure that corruption is weeded out of the country.

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COMMENTS

mahavir jain

6 years ago

Mercifully for the Congress led UPA Government and Mr PJ Thomas, the common people in the country are not aware of all the intricacies involved in the appoint of the CVC and his statutory status. They Govt is not bothered about the remarks made by the Apex court or the clamor made by part of the media.

kumar

6 years ago

SUCH POSTS SHOULD BE INDEPENDENTLY APPOINTED WITHOUT ANY POLITICAL PARTY / GOVT. INDULGING IN IT.

IN THE LARGEST FARCE-O-CRACY OF THE WORLD, NICKNAMED DEMOCRACY IN INDIA, ALL NONSENSE HAPPENS THROUGH, OF & BY THE GOVT. WHICH HAS NO BUSINESS EXCEPT MISGOVERN INDIA AS PROVED IN 60+ YEARS. THANKS TO POLITICAL BIGWIGS & MINIONS TO BABUS TO CLERKS & PEONS!

Babubhai Vaghela

6 years ago

On seeing your comment, I just emailed Goa Shipyard Director Finance financial irregularity case for information & to stop victimisation of the Internal Auditor. Email to CVO Defence, CVC, CBI, PM, President, HCs at Bombay & Delhi as also Supreme Court. Hopefully, action would be taken soon.

B V KRISHNAN

6 years ago

The pity is that in India, the ruling party or parties can get away with such arrogant behaviour. I heard somewhere that there is a rule which makes it obligatory for the govt to get the opposition leader's consent before appointing the CVC. Does this not make MrThomas's apppointment illegal? Can somebody clarify?

REPLY

Babubhai Vaghela vaghelabdATyahooDOTcom

In Reply to B V KRISHNAN 6 years ago

Dr Manmohan Singh ABUSED power in appointing Mr PJ Thomas as CVC discarding Smt Sushma Swaraj view. While Dr Manmohan Singh jointly ABUSED power with Mr L K Advani in appointing Mr Wajahat Habibllah and then Mr A N Tiwari as CIC.

K Narayanan

In Reply to Babubhai Vaghela vaghelabdATyahooDOTcom 6 years ago

Every party is corrupt and every party's spokeperson strongly defends its misdeeds.Govt consists of elected rogues.Thomas might have thought " When ministers are looting crores and crores and getting why I not be smart and get a small share".We will get a solution only when the system becomes so bad for everyone -like the plague that happened in Surat and later it became a clean city.

Suresh Pilankar

6 years ago

this is common in India. In Goa shipyard a defence compnay. the director finance mr Anantha sayanam is reported to have involved in financial irregularities. the internal Auditors of the comoany reported the matter to the Chairman & managing director of the company.the explainations given by the director were rejected by the CMD, yet the internal auditor is transffered as EA to the DIRECTOR finance.the chief vigilalnce commission has also confirmed the irreularities. the defence ministry has also obtained records to confirm the financial irregularities. yet the internal auditor is tortured for the past more than five years. As per my knowledge the internal auditor who is present EA to DIRECTOR finance has approached the Prime minister, president, defence minister, the cvo, sonia gandhi,yet.the sufferrer is an honest internal auditors. at the end let us say jai ho

philip george

6 years ago

Set a thief to catch a thief?

Babubhai Vaghela

6 years ago

PJ Thomas should gracefully resign before he is compelled to.

REPLY

K Narayanan

In Reply to Babubhai Vaghela 6 years ago

Why should he resign?Govt has appointed him.If Govt is feeling okay why shd he resign?
Did Chawla (CEC)resign when allegations were there agaist him.Did our so called honest and cleanest PM MM Singh resign?Are our industrialist are not looting the country tho so many overt and covert means.The country is open to anybody to loot provided you are clever enought not to get caught.

M P Pinto

6 years ago

I do not know Mr Thomas and have nothing to say about his suitability for the post of CVC. But doesn't the fact that a case against him for something done in 1991 is still pending ring alarm bells? Isn' this the easiest way of blocking the appiontment of any person: simply file a case against him and say that even if it takes more than 20 years to decide he is not eligible for anything until that case is decided? Is this what we want?

kumar

6 years ago

Manmohan singh is the corruption king.
Karunanidhi can even corrupt god. What chance does does manmohan have against Karun + sonia? What pains most indians is the idiotic congress spokesmen comming out so strongly in defence of these criminals.

REPLY

K Narayanan

In Reply to kumar 6 years ago

At least they are people like yor who realise the damage MM Singh is causing to the country.MMsMM Singh is the worst criminal tho not in the legal sense.He wears a facade of innocence and honesty.He is shameless person forget about Thomas,Raja,Kalmadi.
We cannot expect politicans who come to power on vote bank can ever be honest.They need pliable people to fulfil the agenda.Is Sonia Gandhi the grand daughter of Sri Mahatma Gandhi?Pawar and Sangma shamelessly joined her after making so much about her foreign origin.Advani and Sushma are honesty personfied because they back Yuddy and Sibu at any cost.All ministers take an oath.To loot the country-not to abide by constitution.Oath taking ceremony is a big joke conducted by Gov or Pres at a great cost.

K B Patil

6 years ago

With all this muck hitting us daily, how can anyone say that the PM is a man of integrity. He has spent long years in the bureaucracy. He knows how the system works and yet, has anyone seen him take a single concrete step to clean the system. The system has won. It has him firmly in its cluctches.

ramchandran

6 years ago

Its a sad state of affairs. Certain Positions must have a minimum criteria to be met.

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