Swisss Govt to dump secrecy

Under pressure from the US and other troubled economies, the Swiss government announced on Friday that it would cooperate in international tax investigations, breaking with its long-standing tradition of protecting wealthy foreigners accused of hiding billions of dollars. Austria and Luxembourg also said they would help.

Against the background of the financial crisis, international cooperation has grown stronger, especially against tax crimes, Swiss president Hans-Rudolf Merz said.

The decision was a hard one for the Swiss, whose renowned discretion has long attracted the wealth of famous foreigners as well as refugees fleeing political or religious persecution.

Swiss banks hold an estimated $2 trillion of foreign money , and financial services account for about 12% of the country’s GDP. According to the Boston Consulting Group, those holdings amount to onefourth of the world’s foreignowned assets.

The famed numbered accounts that do not bear the owner’s name will still be available for clients willing to pay for added anonymity. But the government will now be able to demand account holders ’ identities in cases of suspected wrongdoing, and to share that information with foreign authorities.

Switzerland’s move comes ahead of a meeting next month in which world powers will discuss stepping up their fight against tax cheats. The greatest pressure has been on Switzerland, which has been embroiled in a dispute with the US over Americans who have stashed their money in its biggest bank, UBS AG.

Seeking to avoid being blacklisted as uncooperative tax havens, other countries have also announced plans to open their books to foreign tax inspectors. Austria and Luxembourg said on Friday that they would offer more help on tax investigations. Over the past month, leaders have made similar promises in Singapore, Liechtenstein, Bermuda, the British islands of Jersey and Guernsey, and tiny Andorra on the border between France and Spain.

via ET

India Manipulation

India Manipulation

Teledata - Scam ?

After maintaining a silence and refusing to respond to a series of e-mailed questionnaires sent by Financial Chronicle over the past fortnight, Teledata Informatics woke up on Tuesday, a day after FC reported about the issues involving eSys, the alleged inflated earnings and doubts raised by auditors over the return on investment in the two of the company's subsidiaries in the 2007-08 annual report.

In a communication to the Bombay Stock Exchange, it denied the contents of the FC article.
"We will not be able to respond to this query," said a BSE spokesman, when asked if the exchange was taking any regulatory action on the Chennai-based Teledata Informatics based on its auditor's report that about 80 per cent of the company's Rs 6,636 crore revenue is reported to have come from its subsidiaries in Singapore, the balance sheets of which have not been audited for the past two years.

An official of the ministry of corporate affairs (MCA) said that the ministry has not received any formal complaint against the company. "If there is a formal complaint against Teledata, we will look into it", the official said.

Securities and Exchange of Board of India (Sebi) officials were reluctant to talk on the subject. An e-mailed query sent to Sebi chairman C B Bhave's office remained unanswered till the time of going to press.A spokesperson of the National Stock Exchange said, "We will get back to you if in case we have anything to say in this regard."

At last, Teledata also responded to FC on Tuesday but instead offering answers to any of the questions, it went on a flat denial mode. Through a fax message to FC, company secretary N Ramanathan said the company "at the outset denies the contents of the article".

Terming the contents of the article as "misleading, demeaning and highly defamatory", the letter stated that the "operations and affairs of the company are managed in the normal course".
The company failed to reply to any of FC's questions e-mailed to concerned executives of the company on January 16 (on the supposed sale of eSys stakes), January 23 (on the revenue from PC manufacturing and total business outsourcing), January 28 (a reminder to the earlier emails), February 2 (on relisting of Teledata Marine Solutions and Teledata Technologies) and February 3 (on the loan taken from SBI).

However, later on Tuesday, when contacted on phone, Ramanathan sought to explain away the absence of any response from the company to FC's series of emails attributing it to "want of time".
"We needed time to ascertain all facts, before responding to the queries and could not do so at short notice," he told FC, conveniently forgetting that the first set of mails were sent to the company on January 16, 2009 and FC waited for over 15 days, before it published the article.
There was no response from the Company or from Ramanathan to FC's request for information regarding a set of fresh queries sent on Tuesday about the status of the $ 80-million loan that the company had raised from SBI.The loan amount was based on the valuation of $105 million for 51 per cent of eSys Technologies, Singapore.

However, according to eSys' ex-chairman and managing director Vikas Goel's affidavit filed in the Singapore High Court on October 3, 2008, the deal was worth only $60 million.

Teledata has raised a loan for $80 million, sanctioned by SBI, Chennai. SBI holds as collateral the 51 per cent stakes of Rainforest Trading Ltd (special purpose vehicle holding 100 per cent of eSys Technologies Pte Ltd).

When contacted, deputy general manager (merchant banking) of the international banking group of SBI JN Kerkar said the "loan is standard and is in order." He refused to make further comments.
Teledata's former auditors Chaturvedi and Shah have stated in the company's 2007-08 annual report: "We are of the opinion that the company has defaulted in repayment of dues to banks arising out from the invocation of bank guarantee which as on the date of the balance sheet stood at Rs 48.43 crore."

The auditors on Tuesday refused to comment on anything connected to Teledata because they do not handle the account anymore. Teledata's bankers are State Bank of India, Canara Bank, HSBC, Vijaya Bank and all of them are based in Chennai. The break-up of the default in loan repayment taken from the four banks could not be crosschecked with the company.

Corporate rating agency ICRA assigned LBB- rating to the Rs 650-million term loans of Teledata, in its November 2008 report."The rating indicates inadequate credit quality and high credit risk in the long term. The minus sign appended indicates that the relative safety is marginally lower than in LBB rating. ICRA has also assigned A4 rating to the Rs 1,200-million fund based limits and Rs 3,660-million non-fund based limits of TDIL, indicating risk-prone-credit-quality rating in the short term," the report said.

"Where is the explanation to the points raised? All good companies call press conference and answer the questions raised. What this clarification (by the company) means without addressing the questions raised in the article," Prabha, who said she was an investor, wrote on FC's website.
"How can Teledata seek explanation to facts which are there in public domain? It is the turn of Teledata to reveal the facts and accept the reality. This cannot go on for long now", she added, urging investors to get together and present the case to Sebi and SFIO (Serious Fraud Investigation Office).

Ways companies manipulate

The spotlight remains firmly on corporate governance issues two weeks after the founder of Satyam Computer Services Ltd, B. Ramalinga Raju, confessed to doctoring the company’s books to the tune of Rs7,136 crore in India’s biggest accounting scandal.

While investigating agencies try to unravel the fraud, Crisil Research, an arm of credit rating agency Crisil Ltd, the Indian associate of Standard and Poor’s, found there are at least a dozen ways a company can creatively cook the books.

Crisil Research came across these loopholes by studying the notes to account and footnotes in the annual reports of companies. While most of them would probably not amount to a violation of the law in letter, at least some are breaches of the law in spirit.

“To call them malpractices would be harsh. The companies are just exploiting the loopholes that exist in the law,” said a partner at a Mumbai-based firm of chartered accountants, who didn’t want to be identified.

Listed below are the ways companies exploit these loopholes, collated after discussions with Crisil Research and at least two company secretaries of Mumbai-based firms:

• Write-off expenses from reserves: Expenses towards research and development or money paid to employees or provision for taxes as part of a voluntary retirement scheme must reflect in the profit and loss (P&L) statement. Companies can show it as a one-time expense or amortize it over several quarters. In practice, many Indian firms take the easy way out by writing these off or deducting this amount from the reserves. This means expenses are understated in the P&L account and consequently, current profits look rosier than they are.
• Show previous year’s expenses as this year’s income: By writing off a one-time expense against reserves, a firm can inflate its profits. If for some reason, the company doesn’t have to incur the expense (in case of tax provisions), it writes this expense back into the books. But instead of adding it to the reserves from where this amount was originally deducted, the company can show it as income in the P&L account, thus increasing profit.
• In good time, firms can suppress profits by setting aside money for unforseeable expenses such as doubtful debts and possible liabilities on pending legal claims (court orders expected against the company) all of which have a high probability of happening.

Hence, the amount is shifted from the P&L account to the balance sheet. When the company faces turbulent times, the same provision is written back by reversing the entry and is recognized as income.

Essentially, this amounts to transferring income from one year to another. This could also result in tax planning by deferring taxes as the rate of tax in subsequent years could be lower.

• Revalue assets to write off losses/expenses: This works if a company has enough reserves in its balance sheet. If it doesn’t, it can “create” some reserves either through brand valuations (using professional valuers) or by “revaluing” their existing assets to inflate the reserves. So now, the company not only has an inflated profit and loss, it also has an inflated balance sheet without spending any money.

Revalue assets to write off transfer value: Imagine a company called Veritas, which has an associate or subsidiary called Satirev. Now, Veritas has three machines (assets) and wants to transfer one to Satirev without accepting any payment. In other words, it wants to gift away an asset.

How does it do it? After transferring one machine, Veritas will revalue the remaining two machines (increasing their value by 50% each) so that the balance sheet remains balanced. Alternatively, Veritas will revalue its holding in Satirev to make up for the value of the asset it transferred.

• Show loan waiver as income: One should look for this, especially in the books of companies that have accumulated losses and have got their outstanding debt restructured.

Very often, as part of this restructuring, debtors waive a part of the outstanding loans to help the company turn around sooner. Instead of showing this as part of the balance sheet, some companies book it as income for the year.

• Transfer loans to associates: Sometimes, companies transfer outstanding loans to associate companies. This helps them lower the debt-equity ratio—a measure of how leveraged a firm is.

A lower debt equity ratio helps firms borrow more. Still, since they have to repay the original loan, it is shown as a “contingent liability”, which is defined as an obligation that must be met, but where the probability of payment is minimal.

• Transfer fixed assets to current assets: Yet another way of revaluing assets. A corporate balance sheet typically has fixed assets (such as land, machinery) and current assets (cash, bank balances, receivables). Under the pretext of selling a piece of machinery, a company might transfer a por tion of its fixed assets to current assets. Now, fixed assets are often valued at book value or the price at which they were bought. When they are transferred to current assets, they can be done at market price. If market prices are more than the book value, the difference could be shown as income, which again boosts profit.
• Continue with dead projects: When a company starts a new project such as building a factory, it is allowed to capitalize expenses, which means whatever it spends on the project is shown as investment in the balance sheet.

During times of slowdown, the project may become unviable, yet the company might continue to show it “under implementation” so as not to add to the expenses in its P&L account.

• Inventory valuation: Often, the closing stock of goods for a manufacturing firm is valued at higher than the selling price.

This is against the law, both in letter and spirit. Firms desperate to show profits resort to such a practice, say experts.

• Inflate sales: Higher sales growth results in higher profits. This also eases working capital financing from banks.

At the end of each accounting period, the inflated sales are reversed as sales returned and rebooked with a lapse in time as sales to a different client and at revised prices, thereby further inflating the value of sales in subsequent years.

• Sale/lease back of assets: Firms sell utility assets such as diesel generator sets, boilers and office buildings to leasing and finance companies and get cash up front. The same asset is then leased back to the company which pays a monthly lease rental. The company benefits as such rental is a deductable expense for tax calculations.
• Change depreciation policies: This is done to postpone or advance taxes/profits as depreciation is an expense which is non-cash in nature and does not impact cash balance available for business operations but saves tax outflow.

The objectives behind all accounting adjustments range from boosting profits after tax to raising valuations, suppressing revenues for tax purposes and even getting higher bank financing.