Must-Know Corporate Frauds & Reporting Structures in India and the USA

Col Sunil Sharma | Expert's Blog, Blog | March 24, 2025

Table of Contents

Corporate fraud is a worldwide scenario that affects all countries and all sectors of the economy. Corporate fraud includes a wide range of illegal acts and illegitimate practices involving misrepresentation and intentional deception.

The first initiative that the US government has taken was the passing of the Foreign Corrupt Practices Act in the year 1977 for ensuring sound corporate governance practices. It mainly dealt with the systems of internal control. As high-profile failures were emerging, the Treadway Commission was incorporated in the year 1985, highlighting the necessary requirement for constituting independent boards and committees.

In the year 2002, after the Enron collapse, the US legislature enacted the SOX Act to protect investors from the possibility of fraudulent accounting activities by corporations. SOX mainly dealt with auditor independence and financial disclosures.

When corporate governance practices were emerging around the world, India was lagging behind. In India, corporate governance gained prominence in the wake of liberalisation during the 1990s. The reform of SEBI was the most significant initiative of 1992. At that time the main role of SEBI was to control and supervise the stock trading activities; with this, SEBI also formed many corporate governance rules and regulations. After that, it was also introduced as a voluntary measure by the Confederation of Indian Industry (CII) in 1996; at that time, it created the set of laws that have rules and guidelines for Indian corporations to initiate the act towards corporate governance.

On May 7, 1999, two committees, Narayan Murthy and Kumar Mangalam Birla, were formed under the Securities and Exchange Board of India in order to deal with insider trading and insider information and also draft a code for best corporate governance practices. Based on the suggestions provided by these committees, Clause 49 was introduced so that the standards of corporate governance can be raised and promoted. Timely, it was reformed to incorporate and overcome the problems and contained all the regulations and requirements.

Regulatory Legislation

India has witnessed several corporate frauds; major ones can be seen in this article—Major Corporate Frauds in the USA & India. Indian research evidence shows that a growing number of corporate frauds and misleading activities have undermined the integrity of financial data. As a result, it contributed to substantial economic losses, and investors also became eroded. The US has also witnessed several such corporate frauds, where fraudulent financial reporting and corrupt business practices have existed since the era of the footprints of the public corporation.

A prior study of historical literature reveals that the state of non-compliance has typically been investigated using governance and financial variables (e.g., Kinney, 2004; Srinivasan, 2005; Abbot, 2004; Aggarwal and Chadha, 2005; Beasley, 1996; Caruso, 2002; Erickson, 2006; Farber, 2005). However, it is generally accepted that the SOX Act of the US and the Indian Clause 49 with equivalent Indian regulations have improved corporate governance compliance and decreased the incidence of misleading activities and fraud.

US and India’s Corporate Governance Norms: A comparative analysis of SOS and Clause 49 with equivalent Indian regulations

A comparative analysis has been made between the US and India to gain insights into the corporate governance system in both countries. The comparison will thus provide us with various factors on which the corporate governance of these can be distinguished and the factors on which they are similar.

Different Regulatory Legislation of India and USA

S.No	India	USA
1	Indian Contract Act 1872, Clause 49 of the Listing Agreement	Sarbanes-Oxley Act
2	Indian Penal Code	Foreign Corrupt Practices Act
3	Prevention of Corruption Act	Patriot Act
4	Prevention of Money Laundering Act	OECD Guidelines
5	The Companies Act 2003	IIA Guidance

Corporate Governance Regime in the USA and India

Factors	Sarbanes-Oxley Act	Clause 49 & Equivalent Indian Regulations
Corporate governance structure	Rules-based	Rules-based
Control	In Section 404, details regarding control are specified	Only specified, but no elaborative details are given
Responsibility	The Board is responsible and accountable for any frauds	The CEO and CFO are responsible and accountable for any frauds
Audit committee composition	Minimum of 3 independent directors	2/3rd independent directors
Review of internal control mechanism by	Public company accounting oversight board (PCAOB)	Audit Committee
Penalties and Punishments.	Penalties having range between losses of stock from listing on the exchange to fines upwards of millions of dollars. Provision for imprisonment can be range from 1 year to 25 years.	Penalties having range between losses of stock from listing on the exchange to fines upwards of millions of dollars. Provision for imprisonment can be range from 1 month to 10 years
Whistle blower protection	Strong protection laws in place.	No strong protection laws in place.

Although the intention of both regulations is the same, the structure and provisions are much different.

Section 404 (b) of the SOX Act requires that an independent auditor attest to management’s assessment of those internal controls. Financial information and accuracy, which applied throughout the entire corporation, should be taken into consideration as per all the controls specified in the act. While on the other side, Clause 49 focuses on the guidelines related to the corporate governance of the entire corporation. It means Clase 49 covers all the aspects related to the processes and not just the financial process of the corporation.
As per SOX, the boards are responsible for the internal control. They are a certifying authority, which is the principal financial official for the similar function. While Clause 49 has no guidelines for boards, as it mentions the same for the CEO and CFO of the business organisation. The CEO and CFO have to certify that the internal controls are in place. The CEO and CFO are responsible if any fraud takes place in the organisation.
As per SOX, observes the financial reporting and accounting processes. If no committee is there, then all directors who are on the board would be considered as members of the audit committee. Each member should be a director and also must be independent.

As per the Sarbanes-Oxley Act, the frequency related to the audit committee meeting and the number of directors for constituting the audit committee are not specified. But in Clause 49, specification features are elucidated under:

There shall be a minimum of 3 directors as members in the audit committee.
Independent directors shall be two-thirds of the members of the audit committee.
All the members of the committee should be financially literate, and at least one member shall have accounting and financial management experience.
The requirement for the independent director to be a member of the audit committee is the same for both the SOX and Clause 49, but the information regarding the same is different in both regulations.

SOX states regarding the independent person that any person who may not accept any consulting fee or compensation from the firm or is affiliated with any subsidiary firm is known as independent. Whereas in clause 49, an independent director is any person who:

Takes only the director’s remuneration and does not have any monetary benefits other than his remuneration.
Does not have any relation with any other person who is holding the management position in the firm and also does not have any relationship with the promoters of the firm.
Has not been the executive in the immediate past 3 years and has also not been a partner in any legal and consulting firm of the organisation or in any audit firm of the organisation.
Is not a service provider to the firm or supplier to the firm?
Does not have more than two percent of the voting shares. As from above, we can see a clear meaning of the definition of the independent directors. In Clause 49, the scope of exclusion of independent directors is much wider than the Sarbanes-Oxley Act.

Section 301 of SOX tells about the responsibility of the audit committee, which includes retention and redressal of the complaints and establishing the procedures for receipt. The complaints can be related to the auditing, accounting, and internal controls of the firm. While on the other hand, under Clause 49, there is a disclosure section that said the Investors Grievance Committee shall be formed, which includes non-receipt of declared dividends or balance sheets and the transfer of shares. Therefore, it can be observed that the SOX considers accounting-related concerns very especially, unlike clause 49.
As per SOX, companies should reveal the accepted code of conduct, and if there is no accepted code of conduct, then a reason should be given. However, in Clause 49 it is mentioned that it is necessary to publish the code of conduct on the company’s website, and it should be followed strictly by all the senior management staff and board members of the corporation. In the Indian framework, a code of conduct is mandatory for each firm. Also, the code of conduct is applicable to all the stakeholders; however, as per SOX, the code of conduct is applicable to the main financial officers only.

Limitation in Corporate Governance Structure:

From the above study, it seems that in both countries there is a proper structure of rules and regulations for corporate governance. But it is felt that a rule-based approach alone may not serve the purpose of improving corporate governance. As both countries said in their regulation to join a board as a nonexecutive director, describing some directors as independent will create greater accountability upon them. It seems that they are independent and selected because of their skills and experience and not in conflict. But there are some issues related to independent directors that matter to cooperatives.

The interests seem to be artificial:

Tend to be more conservative
Spending other people’s money
Moderator of independence for time service.

Good corporate governance cannot be assured by independent directors but independence judgement can be a key considerable quality.

If there is any strict law or mandatory system, then again compliance is not certain, as fear of penalties to be paid for non-compliance may not be influencing the firms. Many firms may simply ignore the rules and regulations and follow the non-compliance. If there is a well-performing firm with satisfied investors, then corporate governance standards will be of secondary importance to them. In India, penalties are somewhat flexible since no criminal offence is implied by regulators, as companies in the US are under SOX, which is more severe for non-compliance. As per Figs. 3 and 4, it can be seen that the provisions for penalties and punishments are different.

Recommendation

As in India, the regulations are timely revised and amended, but still, SEBI and the Indian government are lacking to overcome the issue, which is resulting in the form of noncompliance with corporate governance rules. Presently, Clause 49 and the Indian Companies Act 2013 are incorporating all the aspects of corporate governance.

But as India has the largest number of listed companies in the world, it is also needed to design and implement a dynamic mechanism of corporate governance legal structure, which protects the interests of investors and other stakeholders. The main auditions that are required in the new legal structure are as follows:

Currently, in Indian corporate governance, there is no Public Company Accounting Oversight Board (PCAOB) or similar kind of body that can deal with the audit process of the publicly listed companies. The Clause 49, which also comes under the purview and jurisdiction of SEBI, does not have any proper rules and guidelines related to auditing. In the year 2013 when the Indian Companies act, 2013 came into existing which also supersedes the Clause 49 having some better rules and guidelines which can overcome the noncompliance of corporate governance.
But still, there is a need for a single entity like PCAOB in the Indian context. This is also required because we are having a comprehensive rulemaking body. With the single entity rulemaking body for auditing, it should also be ensured that every auditor must follow the rules and guidelines completely.

The following responsibility must be entrusted to the rulemaking body:

All the firms dealing with accounting must be registered.
Public company audits must be performed with standards established for the purpose. Establishment of standards related to audits of public companies.
Required regulations and discipline must be enforced.
Conduct inspections and disciplinary proceedings on a regular basis for accounting firms.

As above, it was already mentioned that clause 49 and the Indian Companies Act 2013 did not mention any details related to internal controls. Therefore, an amendment becomes necessary, which should be made to create a benchmark with an internal control framework. The Committee of Sponsoring Organisations (COSO) is also an internal control framework adopted by US SOX-compliant companies. Such kind of adoption is necessary for removing any ambiguity related to internal controls.

In the whole picture, India is not having such regulation, which puts strict control over white-collar crimes. With laws like the Indian Companies Act, 2013; the Cybercrime Act; the Securities Contract Regulation Act, 1956; the Indian Penal Code; etc., India is trying to address the white-collar crimes in current times, which are not sufficient enough. Corruption and non-compliance can only be tackled and minimised with comprehensive legal bindings and punitive charges made along with them.

The comprehensive legal structure must have featured in the lines of SOX, which is as follows:

Imprisonment (which may vary between 1 to 25 years, as the case may be).
The term of imprisonment must not be less than three years if litigation or fraud is involved in the public interest.
The monetary amount of the fine must extend to three or four times the amount of fraud committed in certain cases.

In the US, the Statement on Auditing Standards (SAS) No. 70 is a standard that allows the auditors to assess the internal control. There are mainly two types of reports in the SAS 70, namely Type I and Type II. All the internal control framework design and domain of business entity are concerned with Type I, while the report and testing and evaluation of the effectiveness of controls implemented are concerned with the Type II report. In the Indian context, a mandatory requirement of such a type of auditing structure is necessarily required.

This is also required because at present there is no standard or regulation that provides any information for the assessment of internal controls. However, in Clause 49, somehow it is mentioned that internal controls should be in place. But it should be implemented, for there is no structured method.

Therefore, as the US is having the COSO for the Internal Control framework, in India there is also a need for the same, which will become mandatory to effectively check these internal controls. Such a kind of organisation will surely help the directors and CEO/CFO so that they can certify the validity and operational effectiveness of the internal controls.

Conclusion

Acts like SOX, 2002, and Clause 49 of India, which have more similar provisions to SOX, have come forward in order to protect investors and other stakeholders of companies with some strong provisions. To keep a close vigil on the corporate activities of companies, such acts have been passed and amended from time to time. Although the Indian stringent features are compared to the US SOX Act, some provisions like PCAOB are still missing in India. Clause 49.

Oversight Boards under the SOX have expressed tremendous power in auditing, inspecting, investing, and regulating the activities performed by auditors and auditing firms in the U.S. Such powers are also to be handed to Indian agencies of auditing, though the Institute of Chartered Accountants of India (ICAI) has been vested with the task of auditing and inspecting the works of auditors and auditing agencies in India, but still ICAI has not been empowered to make rules for an ethical code of conduct for auditing works.

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