Wipro and the failure of internal controls

Nagesh Kini
23 November 2010 1
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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
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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
1 decade 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.
REPLY

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Public Interest

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

Moneylife Digital Team
23 November 2010 15
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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
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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.

https://www.moneylife.in/article/he-has-a-charge-sheet-against-him-but-he-heads-our-
corruption-watchdog/11472.html