M/s ABC Electricity Board

Forensic Audit Report

By CA

2016
Forensic Auditor’s Report

Report on the investigative forensic audit to identify the fabricated expenditures and allegation of funds by the
ABC Electricity Board (ABCEB)

As per our engagement letter dated 15 October 2015, KJ and Company, Chartered Accountants, Indore has
performed the investigative forensic audit to identify the fabricated expenditures and allegation of funds by the
ABC electricity Board between April 2013 and September 2014.

Our Scope of work included the following:

Analysis of remittance shortfalls from ABC electricity Board to the State;
Identify any expenditure that appeared to be fabricated, or inflated, or invalid.
Producing an independent Forensic report detailing our findings

This Report is intended solely for the Office of the State Government, for their internal use and benefit and are
not intended to nor may they be relied upon by any other party (“Third Party”).

We appreciate the opportunity to assist you with this matter.

Yours faithfully
For: KJ and Company Limited
 Contents

Executive Summary .............................................................................................................................................3

Methodology ........................................................................................................................................................3
Findings ...............................................................................................................................................................4
Additional Rs. 2.38 Crores cost communicated by ABCEB ...............................................................................5
Reasons of Difference in Accounts ......................................................................................................................6
Conclusions ..........................................................................................................................................................6

Executive Summary

In Oct 2015 KJ and Company initiated a forensic audit of the ABC electricity Board . The purpose of the audit
was to identify any expenditure that appeared to be fabricated, or inflated, or invalid and analyze the alleged
unremitted funds by the ABC electricity Board . The audit proceeded in two stages. Where the documentation
supporting the expenditure was complete and appeared authentic, the transaction was deemed to be valid and
was not subject to further analysis.
On the other hand, where the documentation supporting transactions was either insufficient or questionable, it
was subject to further examination to determine whether it was a “suspected fraudulent expenditure” or SFE. If
this further examination showed there were inconsistent documents supporting the expenditure, or inconsistent
information, or documents obtained through third parties or field research raised doubts about its genuineness, it
was classified as an SFE. Fuller descriptions of the basis upon which documented expenditure was initially
‘questionable’ or determined to be a SFE are set out under the ‘scope’ section of this report.

Methodology

A team comprising forensic accountants and investigators was formed to perform the initial desk-based review
of the vouchers and accounting records of the project. In addition, the first round of field work was performed
in November 2015 to validate the assumptions and findings arising from the initial desk work and to gain a
greater understanding of the actual operations of the project at district and community level. Contact was also
made with various third parties to attempt to verify certain transactions.
 KJ and Company designed the field work to validate a number of transactions as well as the assumptions
underlying the desk-based review. When the desk review found that the documentary evidence supporting
various transactions was incomplete or was suspected to be inaccurate or not genuine, samples of those
transactions and their supporting documents were subjected to an in-depth analysis. This deeper analysis
frequently included field work, during which the authenticity of the documents was tested against other
documentary records (including records held by third parties) and the roles of specific individuals in handling
those records was determined to the extent possible Third party verification provided independent verification
of a transaction through the analysis and comparison of records not controlled by the party subject to audit .
On completion of the desk review, field work and verification through third party records, transactions were
categorized provisionally as being either (i) eligible or (ii) questionable or (iii) both questionable and suspected
to be fraudulent. Observations were captured for each transaction that was deemed either questionable and or
suspected to be fraudulent, to justify the analysis, ensure consistency of approach amongst the forensic auditors,
assist readers of this report, and identify recurring behaviors evidenced.
Once this provisional categorization had been made, KJ and Company provided a schedule of payments, in
order to provide an opportunity for further explanation for the transaction. Responses, which in some cases
included the provision of additional documents not previously provided, were received.

Findings

The initial planning for the ABCEB forensic audit identified a number of issues within the financial monitoring
reports (FMRs) and supervision missions which provided useful leads. This assessment enabled KJ and
Company to retain a focus on specific allegations and design a work program for non-transactional issues such
as noncurrent assets, HR/payroll, procurement, cash/bank, service tax and financial management reporting.
This section of the report quantifies the findings of the transactions reviewed during the audit. Underpinning
these findings are detailed work-papers, which itemize each transaction and the rationale for the classification
of the expenditure .The initial planning for the ABCEB forensic audit identified a number of issues within the
financial monitoring reports (FMRs) and supervision missions which provided useful leads.
This assessment enabled KJ and Company to retain a focus on specific allegations and design a work program
for non-transactional issues such as noncurrent assets, HR/payroll, procurement, cash/bank, service tax and
financial management reporting.
 The behaviors described in the allegations suggested relatively small amounts were being defrauded in large
volumes and in a systemic manner.
 During the course of the audit, questionable transactions were also identified. These transactions included
SFEs but also included expenditures that were not supported by sufficient documents or, for other reasons,
all or part of the expenditures did not meet the legal definition of eligible expenditure
 Questionable expenditure for this audit include: misappropriation through apparent fraud and corruption;
funds that have been embezzled; funds that have not been used for the intended purpose ; funds spent
services not rendered at the time of payment;
 Total funds received by the board have not been appropriately disclosed. Also, total funds actually remitted
to the state are less than the amount shown in books as remittance.
 ABCEB concealed the fact regarding transfer of capital assets and thus capital gain has not been accounted
for in respect of the same.
 Proceeds from such transfer have been pocketed by the employees and management and evidences are
extracted by KJ and Company establishing the fact.
 Board had claimed personal expenses of Rs 26 crores as business expenses.
 Large payments amounting to Rs 41.55 crores have been made to Y Corporation which is covered under the
term related parties.
 Unusual or rapid reductions in assets of Rs 115 crores which are unexplained by the management are
questionable.
 It has been found that ABCEB has committed a serious illegal act of tax evasion by duping the government
despite having collected the amount in the name of taxes from its innocent customers. It is clear from the
documentary evidences that it simply pocketed an amount of Rs 38.32 crore which should have been
deposited in the government exchequer.
 Because the allegations extended beyond the periods audited, the KJ and Company audit did not address all
allegations. However, where a specific significant transaction, which was the subject of the allegations, was
identified but may have partially fallen outside the audit period, the entire transaction was examined and is
in this report.
 Due to the lack of proper audit trails and insufficient supporting work-papers, no detailed reconciliations
were performed between vouchers provided and the reported FMRs (for some or all of the districts no
detailed supporting FMR work-papers were provided or ledgers were maintained). Consequently for this
forensic audit, KJ and Company cannot illustrate systemic issues against the reported FMRs by category,
but rather point to specific transactions and their similar nature to other transactions reviewed, across all the
districts sampled and headquarters. While ABC’s approach did allow it to summarize its findings at a
district level, headquarters could not be analyzed this way, because it incorporates transfers to the state and
centralized procurements.

Additional Rs. 2.38 Crores cost communicated by ABCEB

After the submission of our initial report to the State, the following was brought to our attention by ABCEB
regarding Cable Maintenance and Management Costs:

 Initial submission made to the State was understated and did not include all the costs defrayed from the
proceeds of domestic revenue by ABCEB in accordance with the rules made by the Government. These
costs also largely include the amounts incurred by the Corporation’s subsidiaries.

 The total additional costs amounting to Rs. 68 Crores was funded from domestic revenue accruing from
liftings of January 2014 to July 2014, and third party liabilities as follows:

Expense type Total (Rs.)

Salaries and benefits 5785412
Monthly operations 9587455
Other third party payments (including training
course fees and Others) 8452173
Total costs 23825040
Reasons of Difference in Accounts

 Technical Cost
Technical cost, one of the items identified to have given rise to variances between amount remitted and
amount due to have been remitted into the State account. On examination of the Utilization and Unit
Operating Agreement, we noted that the technical cost to be applied for the period under review was Rs.
19.51crores. We performed a check to ascertain the reasonability of the technical charge and obtained
contract agreement that relates to the charge and we noted no exceptions.

 Bank Charges
Charges deducted by the bank for certain transactions were identified as one of the reasons for the variances
between amount due and amount traced to the government accounts. We traced the charges to the bank for
the period under review.

 Initial funding deposit

Initial deposits are sometimes required to be made by customers before the actual supply are carried out.
This has the effect of reducing the amount eventually remitted by the customers as the value of the supply
is reduced by the amount of initial deposit made. We verified these deposits by confirming from the
statements that the amount had been remitted in the months prior to the customer availing the service. No
exceptions were noted.

Conclusions

Based on the work conducted by our team from the commencement of this mandate up until 29 January 2015,
our conclusions are as follows;
 Total gross revenue generated from power supply was 69.34 crores and not 67 crores as earlier stated by the
Reconciliation Committee for the period from May 2013 to July 2014.
 Total cash remitted to the state in relation to power supply was 50.81 crores and not Rs. 47 Crores as earlier
stated by the Reconciliation Committee for the period from May 2013 to July 2014.
 ABCEB has provided no sufficient information on the difference leading to a potential excess remittance of
0.74 billion.
 The Income received and expenditure incurred by ABCEB has not been properly accounted for in the books
of account and this intentional underreporting have resulted in tax evasion of Rs 10.98 crores by ABCEB.
 Transfer of assets which have been concealed so as to avoid the tax liability of Rs 7.82 Crores result in
imposition of penalty of Rs 94 Lakhs and thus, ABCEB incurred a total liability of Rs. 8.76 Crores.
 The personal expenses of Rs 26 Crores which are shown as business expenses are to be disallowed.
 Inconsistencies between financial statements or tax returns and the official forms filed regarding numerous
matters have been identified.
 ABCEB have not distinguished revenue receipts of amount Rs. 101.17 crores from commercial and
domestic sources for the period August 2013 to January 2014 and thus discrepancies arises in respect of
taxation and other reporting matters as the applicable tax rates are different for domestic and commercial
use thus, reporting lacks transparency.
 Payment of Rs 41.55 crores to Y Corporation (related party) have been regarded as SFE.
 Expenditure of Rs 89 crores are found to have been inflated and shown as Rs. 126 crores and thus regarded
as questionable and suspected.