The he Institute Institute of Chartered of Chartered Accountants Accountants of India of India Nati National nal Co Conf nferenc nce 3 Augu August 2 st 2018, Ahm Ahmedaba abad Topic To pics: s: 1. Fo Forensic ic Ac Accountin ting, g, Tools Tools & Evide dences 2. Fr Fraud ud De Detecti tion as a Prof ofessio 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 3
De Defin finition ition of fr of frau aud d Com ompanie ies s Ac Act 2013 defin fines s fr fraud a as…. s…. “Fraud” in relation to affairs of a company or corporate body, includes any act, omission, concealment of 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; 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 4
Categ egori ries es o of 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 officials) Other misconduct (e.g., other violations of legal, regulatory or ethical standards) 5
The “W The “Why hy” ” Fa Fact ctor -Ind nducem ucements Don onald ld R R Cresse ssey’s s Inc Incentiv ntive / e / Pr Pressur ure Fra raud T Triangle Oppo Opportunity Ratio tiona naliza lizatio ion 6
The The fra raud ud t tri riangle e –pres ressure ure Revenge Addiction – drink, Credit crunch drugs, gambling “Results results Coercion or results!” blackmail Illness Debts Family pressures “I need the money” 7
The The fra raud ud t tri riangle e -opport rtun unity Poor governance Fraud can be hidden in complex transactions Poor controls Abuse of Exploiting authority errors Lack of Lack of effective segregation oversight of duties 8
The fra The raud ud t tri riangle e -ration ationalisation lisation “They do not pay me “Rules are made to be enough!” broken” “Who cares?” “Everyone else does it” “Its only small amount” “I’m in charge!” “It’s a victimless crime” “They can afford it” “I’ll never “It’s a cost of doing get caught!” business” 9
Com Commo mon n My Myths & ths & Missing Missing Checks Checks (Example: Procurem (Ex le: Procurement Function ent Function) Myth Our staff cannot / would not commit fraud Missing Checks 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 10
Occu ccupational f fra raud t tree ree 11
Key Fraud Survey findings
Evolu Evolution tion of fr of frau aud d in in In India dia Source: KPMG report on evolution of fraud in India 13
Sect Sectors p perce erceived ed a as mo most vul ulner nerable t e to fra raud Source : KPMG fraud survey 14
Pro roce cesses es p perce erceived ed to b be mo e most vul ulnera nerable e to f fra raud ud Source : KPMG fraud survey 15
In Increase sed r d relian liance on on wh whistle istle-blowe blower hotlin otlines 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 16
Global lobal pr profile ofiles s of of 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 ome key observation ons 68% of the global fraudsters were in the 35-55 age group. Indian fraudsters are young ounger 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 on , 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 observed 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 17
How Fra Frauds were d ere det etect ected ed Management review 22% 25% Formal whistle-blowing report/hotline/ 35% 59% Anonymous informal tip-off 14% Accidental 14% 16% 14% Internal audit Suspicious superior 10% 9% 7% Other internal control 7% India Global 6% External audit 5% 3% Proactive fraud-focused data analytics 9% Self-reported / Admitted 5% 3% 5% Customer complaint 5% 6% 5% 4% Supplier complaint 5% Source: Global profiles of the 9% Other not listed above 5% fraudster, KPMG International, 2016 18
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 order to prosecute a party for fraud, embezzlement or other financial claims 20
Fo Fore rensic a c aud udit v vs Fina nanc ncial aud udit FORENSIC AUDIT FINANCIAL AUDIT 1. A forensic audit is a process of reviewing 1. Financial audit is examination and a person’s or company’s financial evaluation of financial statements of an statements to determine if they are organisation, to form an opinion based accurate and lawful. on the conclusions derived, in an audit 2. Emphasis on conclusive evidence report. 3. Conducted for investigative purpose, in a 2. Relies on persuasive documentary manner suitable to a court. evidence 4. Example: 3. Conducted for audit purpose, for users Financial and accounting review of financial statements Digital forensic analysis 4. Example: Field investigations Physical examination and count Data mining at an advanced level Confirmation Application of interviewing skills Inquiry Specimen signatures Observation Inspection Year end scrutiny Bank reconciliation 21
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 22
Acco ccounts P Payable 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 23
Acco ccounts Payable (co e (contd.) 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 24
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