The he Institute Institute of Chartered of Chartered Accountants - - PowerPoint PPT Presentation

The he Institute Institute of Chartered

• f Chartered Accountants

Accountants of India

• f India

Nati National nal Co Conf nferenc nce

3 Augu August 2 st 2018, Ahm Ahmedaba abad To Topic pics: s:

• 1. Fo

Forensic ic Ac Accountin ting, g, Tools Tools & Evide dences

• 2. Fr

Fraud ud De Detecti tion as a Prof

• fessio

ssion.

Agenda

• What is Fraud?
• Key Fraud Survey findings
• Forensic Accounting
• Tools
• Evidence
• Fraud detection as a profession
• Questions and Answers

What is fraud?

Wha hat i is fra raud ud?

The la language of f fraud

De Defin finition ition of fr

• f frau

aud d

“Fraud” in relation to affairs of a company or corporate body, includes any act, omission, concealment

• f any fact or abuse of position committed by any person or any other person with the connivance in

any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;

Com

• mpanie

ies s Ac Act 2013 defin fines s fr fraud a as…. s….

• Act – Omission – Concealment – abuse of position
• By person or any other person with the connivance
• Intent to deceive
• To gain undue advantage – to injure the interests of the company or

shareholders/creditors

• Whether or not there is any wrongful gain/loss

Categ egori ries es o

• f Fra

raud and nd Misco cond nduc uct (Sa (Sample) e)

• Fraudulent financial reporting (e.g., improper revenue

recognition, overstatement of assets, understatement of liabilities)

• Misappropriation of assets (e.g., theft of cash, physical

assets or intellectual property)

• Revenue or assets gained by fraudulent or illegal acts (e.g.,

deceptive sales practices, market rigging, over-billing customers)

• Expenses or liabilities avoided by fraudulent or illegal acts

(e.g., improper avoidance of tax liabilities, wage and hour abuses, falsifying information provided to regulators)

• Expenses or liabilities incurred for fraudulent or illegal acts

(e.g., commercial kickbacks, bribery of domestic or foreign

• fficials)
• Other misconduct (e.g., other violations of legal, regulatory
• r ethical standards)

The “W The “Why hy” ” Fa Fact ctor -Ind nducem ucements

Oppo Opportunity Inc Incentiv ntive / e / Pr Pressur ure Ratio tiona naliza lizatio ion

Don

• nald

ld R R Cresse ssey’s s Fra raud T Triangle

Debts Revenge Coercion or blackmail Family pressures “I need the money” Addiction – drink, drugs, gambling Illness “Results results results!”

The The fra raud ud t tri riangle e –pres ressure ure

Credit crunch

Poor controls Lack of effective

• versight

Exploiting errors Abuse of authority Lack of segregation

• f duties

Fraud can be hidden in complex transactions

The The fra raud ud t tri riangle e -opport rtun unity

Poor governance

“They do not pay me enough!” “It’s a victimless crime” “Everyone else does it” “Who cares?” “I’m in charge!” “They can afford it” “It’s a cost of doing business” “Rules are made to be broken” “I’ll never get caught!” “Its only small amount”

The The fra raud ud t tri riangle e -ration ationalisation lisation

Com Commo mon n My Myths & ths & Missing Missing Checks Checks (Ex (Example: Procurem le: Procurement Function ent Function)

Myth

Missing Checks

Our staff cannot / would not commit fraud Fraud does not happen to organizations like us We would know if fraud occurred Fraud can be discovered / detected quickly and loss will not be significant Our internal controls will take care of fraud related issues

Occu ccupational f fra raud t tree ree

Key Fraud Survey findings

Evolu Evolution tion of fr

• f frau

aud d in in In India dia

Sect Sectors p perce erceived ed a as mo most vul ulner nerable t e to fra raud

Pro roce cesses es p perce erceived ed to b be mo e most vul ulnera nerable e to f fra raud ud

In Increase sed r d relian liance on

• n wh

whistle istle-blowe blower hotlin

• tlines

s to det etect ect f fra raud ud

Stakeholders more confident of using whistle- blower hotlines to report fraud… …followed by internal audit and data analytics

Global lobal pr profile

• files

s of

• f th

the fr frau audste dster ke key fin y findin dings gs (2016) 2016)

Tech echnology en y enabl bles, , while e wea eak co k contr trols f fuel el f frauds ds Som

• me key observation
• ns

68% of the global fraudsters were in the 35-55 age group. Indian fraudsters are young

• unger in age with 32% of the

perpetrators in the 26-35 age group 38% of the global fraudsters were in service for more than 6 years as compared to Indian fraudsters who sta

tart rt ea earl rly

with 27 % were in service anywhere between one and four years Technology is increasingly being used to enable frauds, and this proportion was hig

highe her in India (33 %) compared to

trends observed globally (24 %) Globally 62% of the frauds were committed in collusion

• n , which was similar to what was observed in India

Globally 61% of the frauds were committed due to wea

eak k intern ternal co contr trols which was similar to what was

• bserved in India

Globally 35% of the frauds were detected as a result of a tip, complaint or a formal whistle b

blowing g hotline,

compared to 59% in India Globally 52% of the fraudsters were in the man

anagers & & st staff aff category, compared to 63% in India

How Fra Frauds were d ere det etect ected ed

Source: Global profiles of the fraudster, KPMG International, 2016

Management review Formal whistle-blowing report/hotline/ Anonymous informal tip-off Accidental Internal audit Suspicious superior Other not listed above Other internal control External audit Supplier complaint Self-reported / Admitted Proactive fraud-focused data analytics

Global India

Customer complaint

Forensic Accounting

Wha hat is forens rensic a c aud udit?

• Forensic audit is an examination and

evaluation of a firm’s or individual’s financial information for use as evidence in court

• A forensic audit can be conducted in
• rder to prosecute a party for fraud,

embezzlement or other financial claims

Fo Fore rensic a c aud udit v vs Fina nanc ncial aud udit

FORENSIC AUDIT

• 1. A forensic audit is a process of reviewing

a person’s or company’s financial statements to determine if they are accurate and lawful.

• 2. Emphasis on conclusive evidence
• 3. Conducted for investigative purpose, in a

manner suitable to a court.

• 4. Example:
• Financial and accounting review
• Digital forensic analysis
• Field investigations
• Data mining at an advanced level
• Application of interviewing skills
• Specimen signatures

FINANCIAL AUDIT

• 1. Financial audit is examination and

evaluation of financial statements of an

• rganisation, to form an opinion based
• n the conclusions derived, in an audit

report.

• 2. Relies on persuasive documentary

evidence

• 3. Conducted for audit purpose, for users
• f financial statements
• 4. Example:
• Physical examination and count
• Confirmation
• Inquiry
• Observation
• Inspection
• Year end scrutiny
• Bank reconciliation

Who ho ca can be e a f foren rensic c aud uditor?

i. No standard qualifications stated

• ii. Any person with requisite knowledge

and skills can be a forensic auditor

• iii. CFE is majorly recognized qualification
• iv. In India, any CA can be a forensic auditor

based on knowledge and experience in financials and legal field

• v. FAFP (ICAI) is an additional certificate for

enhancing the knowledge

1. Sequential invoice numbers for same vendor 2. Vendor addresses

• Do not match with the vendor application and no intimation of change of address provided
• Multiple addresses for same vendor
• Vendor address matches with employees’ address

3. Payments to vendors increased for no apparent reason 4. Vendor invoices received by departments other than accounts payable 5. Excessive adjustment entries in the vendor ledger 6. Applicable taxes not charged on vendor invoices 7. Applicable income tax not deducted on vendor payments 8. Lack of segregation of duties between:

• Updation of vendor master and raising invoice
• Preparation of cheques/ authority to make wire transfers and posting to vendor account
• Preparation of cheques/ authority to make wire transfers and mailing cheques

Acco ccounts P Payable

9. Non - reconciling general ledger and sub ledger

• 10. The payee as per the general ledger and bank statement

differs

• 11. Unrestricted access to blank cheques
• 12. No audit trail for addition/ deletion/ modification to vendor

ledger/ vendor master

• 13. Goods returned accounted in general ledger but no

evidence of physical return of goods into the warehouse etc

Acco ccounts Payable (co e (contd.)

1. Competitive bids seeming to be received from various parties

• Have same fonts/ similar formats
• Same/ similar address
• Signed by the same person
• Same spelling mistakes

2. The bid selected is always the last bid placed (which is by the same vendor) recurringly 3. Purchases made without placing purchase order 4. Purchases made even though re – order level is not reached 5. Inter state purchases made though goods are available locally at lesser prices without compromise on quality 6. Rise in cost of purchases beyond inflation rate 7. Unusual purchases made – not consistent with prior history of purchases

Pu Purchasin sing

1. Documents such as employee interview details/ appointment letters not maintained/ not available 2. Unjustifiable increase in head count of employees 3. Amount of statutory deductions (like PF , ESI, PT , Income Tax) do not commensurate with the salaries paid 4. Huge cash payments of salaries made without adequate acknowledgements from employees for receipt of salary 5. Payroll processed for employee with nil or no attendance records 6. Falsified time sheets 7. Inadequate segregation of duties between

• Updation of employee master and processing attendance/ salaries
• Processing attendance/ salaries and disbursement of salaries
• Disbursement of salaries and accounting of payroll costs
• Accounting of payroll costs and making statutory remittances

Payr Payroll

• ll

1. No segregation of duties between:

• Receiving cash and posting in general ledger
• Issuing receipts and deposit preparation

2. Significant recurring negative cash balances shown in the books of accounts 3. Entries for sale of scrap, news papers, old stock etc not accounted though there is corroborative evidence of such transaction 4. Infrequent bank deposits and holding huge balances of cash on hand 5. Recurring fluctuations of bank account balances 6. Missing copies of pre numbered receipts 7. Cash payments made without supporting documentation and with inadequate explanation

Cash rece h receipts

1. No segregation of duties between:

• Processing accounts receivable and posting to ledger
• Posting to ledger accounts and cash receipts

2. Recurring adjustments, write offs etc. 3. Unjustified slow collection cycle 4. Unjustified increase in doubtful accounts 5. Unjustified increase in provision for doubtful debts in view of positive economic events 6. Unrestricted access to general ledgers and sub ledgers 7. Lack of accountability for invoice numbers raised 8. Lack of policies and procedures for write offs 9. Frequent adjustment entries passed between 2 or more customer accounts etc

Acco ccounts rec recei eivable

1. Credit balances in inventory accounts 2. Consistent fluctuations in inventory accounts between months 3. Excessive inventory write offs without documentation or approvals 4. Large number of fixed assets classified as inventory and written off 5. Unrestricted access to inventory storage areas by non-responsible employees and/or vendors 6. No policy regarding inventory levels to be maintained 7. Inventory turnover rate does not correlate with operating cycle 8. Improper labeling of inventory and raw materials 9. Significant weaknesses in inventory cut off procedures

• 10. Consistent production runs and backlog orders
• 11. Abnormal expenditure for external maintenance services
• 12. No segregation of duties between
• Receipt of inventory and issue of materials
• Recording of inventory and ordering materials
• Identification of obsolete materials and sale of the same etc

In Inve ventor tory

1. Significant adjustments to accrued liabilities, accounts receivable, contingencies, and other accounts prior to acquisition of new financing 2. Dramatic change in key leverage, operating, and profitability ratios prior to obtaining financing 3. Adopting a change in accounting principle or revising an accounting estimate prior to obtaining financing 4. Increase in short-term cash and a decrease in receivables while sales are increasing prior to seeking new financing 5. A change in external activities, legal counsel, or treasury department head prior to obtaining new financing 6. A delay in issuance of monthly, quarterly, or annual financial reports prior to seeking new financing 7. Reported profits but negative cash flows etc.

Fi Fina nanc nce

Rea ead t the s he signs ns

without a high workload

complaints

• f

missing statements, unrecognised transactions

without audit checks

Red ed Flags -Lim Limitation itations

Red flags” are not always

• bvious or easily
• bserved

They are only indicators not evidence They may indicate other risks and not exclusively fraud They can be ambiguous There is no linear relationship between risk factors and fraud risk

1 2 3 4 5

Tools

Mob Mobile forensics ile forensics –UFED UFED an and d Oxyge Oxygen

• 1. Data extraction from a mobile device.
• 3. Bookmarking the data.

Hardware and software based data extraction from mobile devices.

• 2. Forensic analysis of the extracted data.
• 4. Generating the report.

EnCa nCase se –Forensic suit

• rensic suite

e for ima for imaging ing, , recovery recovery and nd ana naly lysis sis

Ana naly lysis sis and nd E ESI SI review review using using NU NUIX IX

Illustrative Keyword Searches on indexing platform

vendor 1 vendor 2 PAN No. PAN No.

Different vendors with same PAN number Different vendors with same bank account number Different vendors with same phone number

Data a ano nomalies es

Ag Agen enda

09.30 –09.45 Welcome and Introduction 09.45 – 11.00 What is Evidence & Types of Evidence 11.00 – 13.00 Key Principles-Evidence Act 13.00 – 13.45 Lunch Break 13.45 – 15.45 Key Principles-Evidence Act 15.45 – 16.00 Wake-up break 16.00– 16.30 Evidentiary Value of FIR 16.30 – 18.00 Case Studies

Ind India ian n Evid vidence ence Act ct, 1872 , 1872

Evidence is… 1. All statements which the Court permits or requires to be made before it by witnesses, in relation to matters of fact under inquiry, such statements are called oral evidence, 2. All documents including electronic records produced for the inspection of the Court, Such documents are called documentary evidence.

Types es of E

• f Evid

vidence ence

Oral Documentary Indirect: Circumstantial

Oral Evidences are those evidences which are personally seen or heard by the witness giving them and not heard or told by some one else.

Indirect: Hearsay

Hearsay evidences are the ones which the witness has neither personally seen nor heard, nor has he perceived through his senses, but are those which have come to his knowledge through some other person. These are the most weak category of evidences. All those documents which are presented in the court for inspection regarding a case, such documents are known as documentary evidences. The definition of 'documentary evidence' has been amended to include all documents, including electronic records produced for inspection by the court.

Evidence

Circumstantial Evidence is the evidence that does not point directly to the fact. A reasoning must be made or an inference, that links circumstantial evidence to the desired fact the party is trying to prove.

Scena Scenario 1 1 –Use e of a d disappea eari ring ng ink nk t to cl claim m ex exces cess mi milea eage

Use of the disappearing ink by the vendor Use of the disappearing ink by the vendor established by an independent expert

Scena Scenario 2 2 –Pro rocu curemen ent f fra raud uds –Emp mployee v ee vend endor r con

• nflic

flict

Unsigned quotations of the vendor found in the e-mail forwarded to the Head of the Commercial Team

Scena Scenario 2 2 –Pro rocu curemen ent f fra raud uds –Emp mployee v ee vend endor r co conf nflict ct (co (contd)

Vendor with lowest rates selected

L2 - INR 26,500 per month

L1 - INR 25,500 per month

L2 - INR 26,500 per month

Scena Scenario 2 2 –Pro rocu curemen ent f fra raud uds –Emp mployee v ee vend endor r co conf nflict ct (co (contd)

Residential address of the suspected employee in his resume is appearing same as contact address of the vendor selected

Scena Scenario 3 3 –Doub uble p e paymen ment of wages es in n the s he same me mon

• nth

th of

• f Jan

anuary 2011 2011

45

Sandeep AD Sanju S Nair Jayasankar M Sandeep AD Sanju S Nair Jayasankar M

Scena Scenario 3 3 –Doub uble p e paymen ment of wages es in n the s he same me mon

• nth

th of

• f Febr

bruary ry 2011 2011

Guddu Prasad Guddu Prasad

Scena Scenario 4 4 –IM cha chat co commun unication reg regarding ng ca cash g h gifts

Scena Scenario 5 5 –A l lea eading ng Tel Teleco ecommunica cation n co comp mpany

A bogus quotation submitted by a vendor clearly revealed by the mark and confirmed through site visits ABC

Scena Scenario 5 5 –A l lea eading ng Tel Teleco ecommunica cation n co comp mpany (co (contd.)

Another bogus quotation submitted by a vendor. Note the mismatch between the letterhead saying ‘Specialists in…’ and the service offered in the quotation ‘providing air conditioners on rental’

Entry of garbage bags inserted in the security register by Employees

A B C D E

Scena Scenario 6 6 –A lea eading ng Ins nsura urance co comp mpany (C (Cont ntd)

Comparative quotes of 3 vendors looked similar. In all the 3 quotes, same incorrect address of the company was mentioned

Scena Scenario 6 6 –A lea eading ng Ins nsura urance co comp mpany (co (contd)

Scena Scenario 7 7 -Dispatch ch of ca carton s scra crap ( ( ra rate: I INR 8/kg) ) along ng with h garb rbage (ra e (rate: I INR 3/kg) ) (1 (1/2)

Actual photos of scrap sale consignment dispatched on 28 October 2015 showingg dispatch of cartons along with garbage Invoice showing garbage scrap was sold to B S Surte Waste Paper on 28 October 2015

Scena Scenario 7 7 -Dispatch ch of ca carton s scra crap ( ( ra rate: I INR 8/kg) ) along ng with h garb rbage (ra e (rate: I INR 3/kg) ) (2 (2/2)

Actual photos of scrap sale consignment dispatched on 28 October 2015 showingg dispatch of cartons along with garbage

Scena Scenario 8 8 –Inco ncons nsistenci encies es no noted ed i in n seri erial numb number and nd dates es ment mentioned on v n vehi ehicl cle e dut uty s slips (1 (1/2)

Scena Scenario 8 8 –Inco ncons nsistenci encies es no noted ed i in n seri erial numb number and nd dates es ment mentioned on v n vehi ehicl cle e dut uty s slips (2 (2/2)

Sce cena nari rio 9

• 9 –Mism

ismatch tch in qua in quantity ntity mentio entioned o ned on n different different do docume cuments indica nts indicate tes po s pote tentia ntial sho l short receipt rt receipt (1/2) (1/2)

Snapshot of inward register maintained at security gate Quantity in Invoice – 200,00,000 units Quantity in inward register – 100,00,000 units Vendor invoice showing quantity as 160 boxes

Sce cena nari rio 9

• 9 –Mism

ismatch tch in qua in quantity ntity mentio entioned o ned on n different different do docume cuments indica nts indicate tes po s pote tentia ntial sho l short receipt rt receipt (1/2) (1/2)

LR attached to the invoice showing consignment quantity as 120 box whereas quantity as per invoice is 160 box

Back ckground Scre Screen ening ng –Educa ucation n

Fake letter by University

Rev evenue F enue Fra raud

Photograph on application form does not match with Voters ID and Driving License

Loan application supported with documents where the photographs of the applicant is different from the identity proofs

Excel spreadsheet maintained with a detailed account of money due against each vendor invoice

Evide Evidence of kic

• f kickbac

kbacks

Fraud detection as a profession

Opportunities for Chartered Accountants

Key ey Mana nagement C Concer ncerns

• Robust Fraud risk framework – Prevention, Detection and Response
• Syndicate crimes on the increase with organisations becoming

targets

• Limited Forensic skill pool
• Evolving product mix and profitable growth a key requirement
• Collusion risk – how to handle it?
• Effective early warning alert mechanism
• Regular training and skill updation
• Independence and objectivity at the process level to identify fraud

risk

• Effective mechanism to investigate reported cases
• Integrity of agencies/third parties in customer handling
• Regulatory compliance framework to manage regulatory requirements

Strategic Operational

• Ongoing learning to be incorporated in the processes
• Interplay of departments and accountability and responsibility

matrix for fraud

• Effective strategy in handling third parties and related processes on

customer acquisition and collections

• Regulation of outsourced vendors for customer service and

collection Reputational Functional

Opport rtunities es for C r Cha hart rtered Acco Accountants

Frauds Detection Investigation Data Analytics Prevention Fraud Risk Management

Fra Fraud I Inv nves estigation Serv n Services ces

Collecting Evidence Identifying Issues

Reporting findings and suggesting way forward including interface with law enforcement

What happened? How can we prevent it in future? Who was involved? What was the magnitude? Preparing the investigation plan

In Inve vestigation stigations life s life cyc ycle le

• Review the

internal investigation reports

• Securing of

information

• Reporting
• Liaison with

management

• Liaison with

legal counsel

• Digital

data recovery

• Forensic

Data Analysis

• Interviews/

external verifications

• Review of

documents and records Forensic Procedures Phase 1 Phase 2 Phase 3

Preliminary assessment Detailed investigation Reporting and way forward

Fra Fraud Risk Mana nagement Fra Framework

Fraud Risk Management framework

Prevention Detection Response Internal Vigilance Unit and its reporting Structure Anti-Fraud Manual (including Fraud Risk Management Policy) Ongoing fraud risk assessment at business level Fraud Monitoring Tools Pre-employment background screening Communication and Training Investigation protocols Enforcement and accountability protocols Disclosure protocols Remedial action protocols Code of Conduct Third party due diligence Vigil mechanism (whistleblower) Transaction Monitoring Proactive data analysis System assessment and review

Role e of Int ntern ernal Aud Audit in n Fra Fraud Risk M Mana nagem ement

Internal audit’s role is believed to include:

• Provide an independent review based on an objective assessment of the framework of

governance, risk management and control.

• Exercise due professional care by considering the probability of significant errors, fraud or non-

compliance

• Evaluate the potential for the occurrence of fraud and how the organization manages fraud risk

It is not a primary role of internal audit to detect fraud and corruption

New audit challenges require Internal Audit to evolve..... Supporting fraud detection and investigation….is amongst the more important ones

Aud uditors Vs Vs Inv nves estigators rs

Auditors Investigators

• Express an opinion concerning the

truth and fairness of financial statements

• Concern limited to books of

account

• Concept of Materiality
• Rely primarily on examination of

documents

• State facts to help management make

informed decisions

• Invariably go beyond books of account
• Materiality is irrelevant
• Document examination
• Forensic technology
• Market Intelligence
• Interviews

Why hy int ntern ernal a aud uditors somet metimes mes f fail to det etect ect FRAUD? RAUD?

REASONS

Sample sizes too small The nature of concealment and misrepresentation associated with fraud Management’s emotional response to fraud Fraudster’s familiarity with the control environment and thus ability to conceal fraud Concealed in excessive loss figures Lack of effective Forensic integration

The auditor’s lack of familiarity and awareness of fraud (not attuned to fraud) Insufficient levels of professional skepticism

&

Questions uestions Answers Answers

Ques uestions ns a and nd Ans Answers ers

Than ank you k you

Kaushal Mehta Associate Director, Forensic services (KPMG in India) Phone: (+91) (22) 61349316 Mobile: (+91) 9833737797 kaushalm@kpmg.com