FORENSIC AUDIT : FINDINGS REPORT

PRIME INSURANCE CORPORATION OF INDIA

Unauthorised disclosure prohibited

Forensic Audit and Investigation Services (FAIS)

542, New Spring Road, Hyderabad,

Telangana - 500072
Background

Prime Insurance Corporation of India (herein referred to as PIC/Insurer) has been the insurer of SV
Woven Fabric Industries PVT LTD (herein referred to as SVWF), for over a decade since 2009. The
business model of the claimant is to manufacture and sell woven fabric polypropylene bags used to carry
large amounts of material of any kind. Some common applications of polypropylene bags include:

 Moving massive amounts of food ingredients and packaging of food in large quantities.
 Useful in Geo engineering i.e., construction of irrigation works, roads, railways, mines, etc.,
 Often used as oversized sandbags for controlling flood waters in areas that require large
barriers.

On February 5, 2021, there was a significant fire mishap in the premises of SVWF. The company claimed
stock worth of 2.2 crores was destroyed by fire thereby resulting in the former applying for insurance
claim with PIC of India.

On February 18, 2021, PIC requested a proposal of work from Durga Abhiram P to perform a forensic
audit on the awardee in relation to the claim, the incident which took place resulting in such claim due to
concerns about the suspicious activity given the history of multiple claims arising significantly over the
last seven years. FAIS has proposed a forensic audit work plan on February 25, 2021, to fulfil the needed
services. The forensic audit began on April 1, 2021.

Due to the pandemic, FAIS strategically performed interviews of SVWF staff, Board members, and the
community, through password protected ZOOM meetings, and collected extensive records and data
information from SVWF and individuals through a secure file sharing website and by email. Additionally,
FAIS used information gathered from publicly available records, and secure permissioned-based sites for
court records and other needs to complete the forensic audit.

The totality of information gathered was assessed based on risk. Targeted forensic testing and analysis
was performed during the examination and an internal control assessment. Results are detailed in this
findings report that was issued June 2, 2021, after the conclusion of this forensic audit on May 28, 2021.
Executive Summary

The forensic audit began on April 1, 2021 and concluded on May 28, 2021. The forensic audit scope
period was from January 1, 2021, till February 18, 2021 1. The forensic audit was predicated by
concerns about suspicious activity, lack of transparency and inequitable practices by SVWF and the
Board of Directors (“Board”).

The purpose of this consulting engagement was to conduct a limited scope forensic examination of the
SVWF’s activity to determine the authenticity of the claim and to what extent, for the period considering
the events before and after the fire accident took place. The engagement was designed to assist PIC in
determining the fraud risk and value of the stock unaccounted for, the causes for such disaster.

In summary, as and when the incident took place, SVWF directly reached out to PIC for the settlement of
claim. Usually, PIC performs a thorough scrutiny of the insured themselves and settle the claims as and
when no anomalies are detected. However, PIC has reached out to FAIS in this matter given the multiple
claims of significant value, claimed by the insured over the past few years.

Below is the historical information on the claims made by SVWF and settled by PIC:

Financial Year Claim Value Involved Reasons for the claim

Theft of Polypropylene material in the
2012-2013 0.93 crores
factory premises.
Heavy tonne Vehicles involved in
2016-2017 0.67 crores
accidents.
Insurance of Key Management Person of
2018-2019 0.73 crores SVWF pertaining to health issue requiring
significant medical attention.

Considering the amount involved and the frequent claims made by a single entity, PIC has reached out to
FAIS for the purpose of probing into the genuineness of the claim to ensure there aren’t any signs which
indicate a potential swindling of the funds by SVWF.

After a thorough understanding of the business model of SVWF by performing walkthroughs, conducting
interviews, observation of the processes, we have identified certain deficiencies in the internal controls
which have led us to believe the fact that there are certain abnormalities surrounding the stock destroyed
and the claim made by the insured.

We have began obtained significant information through the entity’s personnel and with the help of data
analytics, came to a conclusion that, the propylene material used in manufacturing woven bags are
purchased by the company once in every two weeks (mostly on second Fridays) in order to meet the
supply i.e., the material reorder level is set at 2 for each month. This is to ensure that there is no
significant stockpile of the same.

1
To ensure we consider events occurred prior to and after the incident occurred and are in no manner responsible
for any activities which took place before or after the period concerning us.
We have also observed the sales trend for the period from February 2020 till March 2021 to be as follows:

Sa l e s t r e nd f o r l a s t f if t e e n mo nt hs
1250000

1200000

1150000

1100000

1050000

1000000

950000

900000
0 0 0 0 0 0 0 0 0 0 0 1 1 1 1
b-
2 -2 -2 -2 -2 l-
2 -2
p-
2 -2 -2 -2 -2 -2 -2 -2
ar pr ay
n
Ju ug ct ov ec n b ar pr
Fe M A M Ju A Se O N D Ja Fe M A

We observed the below reasons very peculiar in nature:

1. The monthly sales for the month of March 2021 and April 2021 were found to be following the
trend as it has over the last few months even in case of disruption of activities by fire.
2. There were no moment of cash outflow/orders placed in the month of March 2021, yet the
firm has managed to make a revenue amounting to Rs. 11,81,122. This was achieved without
procuring the key ingredient Polypropylene used in manufacturing of the woven bags.

This strange behaviour has been drilled down further which resulted in the following data:

1. Polypropylene is procured from multiple vendors for which a separate heavy tonne vehicle is
assigned.
2. As per the company norms, the vehicles are supposed to collect the raw material from the vendor
assigned to them and deliver the same at the factory premise. There is no written/ formal policy
in place to validate the same.
3. Whenever goods arrive at the Front gate, the security personnel who maintains a physical
register, note down the registration number of the vehicle, delivery in-time, weight of the cargo
received.
4. The people who operate the vehicles are paid on an hourly basis and also submit diesel bills and
get their amount reimbursed.

Based on the above facts, we have obtained the copies of log register and the bills submitted during the
period of February, March and April.

We observed that there was no record in the physical register for a truck (MH28R2626) on February 4,
2021 (the night before the fire accident) and on various dates following the incident i.e., on February 17,
2021, and March 10, 2021 and March 24, 2021.
The reason for identifying the selected dates was the fact that the operator of the truck bearing registration
number (MH28R2626) submitted the oil bills on the above-mentioned dates which were in terms of value
found to be inconsistent with the bills submitted before the event. The reason was attributed to the fact
that every vendor has been assigned with each heavy goods vehicle having a separate operator for each of
them which results in submission of oil bills with similar amounts with a probability of around 5-10 per
cent. The bills submitted during the months of November, December and January do corroborate the
same.

In case of the identified truck (MH28R2626), we have identified the operator’s name as Mr. Soujan who
has submitted the bills, summary of which is as follows:

Date Bill No. Value of the bill submitted

January 8, 2021 56 8500.00
January 29, 2021 293 8375.00
February 4, 2021 BV-446/21 14620.00
February 17, 2021 BV-897/21 14437.00
March 10, 2021 BW-437/21 14615.00
March 24, 2021 BW-887/21 14448.00

  Indicates bills submitted prior to the event

  Indicates bills submitted after the event

On verification of bills 56 and 293, it was clear

that the truck had its oil refilled at a place called Gajulramaram. On further investigation, it was known
that a vendor who deals in polypropylene material operates from such place and SVWF has been
contracting with him for a considerable period of time. However, on inspection of bills submitted post the
incident, the truck made few round trips to the outskirts of the city.

On observation of the given facts and circumstances, it was decided that the truck was not operating as it
was supposed to be i.e., making trips only from the allotted vendor.

We inquired Mr. Soujan who was operating the truck and then started a series of events spiralling which
resulted in Mr. S. Dubey (Managing Director of SVWF) making a confession stating the fact that the
stock was moved the night before the incident took place from the factory premises to Mr. S. Dubey’s
guesthouse located at the outskirts of the city and was cleared out on subsequent dates stated above.

Based on the above facts and circumstances, it was clear that the management of SVWF was involved in
certain unethical practices which led to the fire accident and consequently applied for the insurance claim.

This report summarizes our findings discovered during test work to accomplish the goals of the forensic
examination.
Procedures performed

We were hired to perform these procedures in accordance with policies of Prime Insurance Corporation of
India. PIC may employ consultants when appropriate to carry out tasks or projects that enhance the
effectiveness of the insured when PIC have some concerns relating to the claims raised or when such
assignments would be burdensome to PIC when added to their full ‐time assignments. The kinds of
assistance sought from consultants may include but will not necessarily be limited to (1) conducting fact‐
finding studies, surveys, and research; (2) providing counsel or services requiring special expertise; and
(3) assisting the Board in developing policy and program recommendations.

This section expands upon our testing and results of the consulting procedures listed above. FAIS has
performed the following procedures for the time period April 1, 2021 till May 28, 2021.

 We interviewed those who were involved in the process of raising purchase orders, warehouse
personnel, security personnel who let the goods enter the premises, in house engineers who obtain
samples from the goods received, operators of the heavy tonne vehicles also the Finance Director or
CFO, Managers, Administrative Assistants and treasurer. 2

 We reviewed the SV Woven Fabric’s policies and internal procedures and became familiar with the
same as we tested the records and reviewed what the PIC of India had already collected on this
matter.

 We reviewed SVWF activities, emails, Oil receipts and counterfoils submitted by the operators of
trucks to ensure we had a complete overview of activities that took place before and after the incident
took place.3

 We applied forensic auditing procedures to the transactions handled by SVWF’s Bookkeeper during
the period requested. In general, the information provided to us, the Bookkeeper’s records, were
accurate to the extent of accounts concerned with the stock. We also relied substantially on records
from the bank to complete our engagement.

 An analysis was made pertaining to inventory of the company and noted the following points:

o Major ingredient involved in production of Woven bags: POLYPROPYLENE

o SVWF has two operating machines and one standby machine which is utilised in case of
special contracts were more output was required.
o The cost of making a bag 4 is Rs.7.86 and the bag is sold between 11-16 per piece depending
upon the volume of contracts, relation with the customers and discounts given.

2
See also the evidence (1) collected – Organisation chart comprising of relevant positions.
3
Evidence (2) collected – Listing of bills submitted by the operators of heavy goods vehicle.
4
Including the fixed costs apportioned based on absorption method.
  Below are some of the abstracts of
Raw Material composition in WF Bags data analysis performed by FAIS:
Stools, needles
and others
3% Cash outflows for procuring Polypropylene - MOM analysis
BOPP film
310000.00
15%
300000.00

290000.00

280000.00

Polypropylene 270000.00
82%
260000.00

250000.00

240000.00
Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21

Production of units - MOM Comparision

98000

97000

96000

95000

94000

93000
Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21

From the above information, we noted that Polypropylene constitutes 82 per cent of the final product and
it can be said as the key component included in manufacturing woven fabric material. The cost of
polypropylene varies from time to time depending on the demand and supply movements happening in
the industry. The above data provides us with some abnormal facts about the events that occurred prior to
and after the fire incident.

Based on the data shown above, we can derive at the following key points:

 Monthly production of finished products ranges between 96000 – 98000 pieces.

 Polypropylene constitutes 82 per cent of the end product, the cost of which fluctuates from time to
time.
 There were no cash outflows during the month of March 2021 which is an odd factor as the
Material Reorder quantity is once in every two weeks.
 The sales were not at all affected by the incident and continued to follow the historical trend.

As we noted the discrepancies in the cash outflows and production of units, we have shifted our focus on
the fact on how the company was able to produce such number of units without obtaining the key raw
material.

We have noted that the company owns two heavy goods vehicles and employed two operators for each
vehicle. The operators are Mr. Soujan who operates vehicle (MH28R2626) and Mr. Anji who operates
vehicle (MH28V4377). Below are the additional details which contain the list of vendors from whom
polypropylene is procured and the respective operators allotted:

Vendors Operators assigned

AB Polysacks Anji
SVRS Polymers Soujan
Synthetic Polymers and Films Anji
Darwen granules Soujan
Marvin white Granules and films Anji

Once the Purchase order is raised by SVWF and the invoice is raised by the respective vendor post which
the vendor makes the goods available, it is the duty of the operators to proceed to the vendor’s location,
load the goods in the vehicle and unload the same at the factory premise of SVWF after signing in the
register at the front gate of the premise.

The operator after satisfying all the formalities as stated above, is eligible for submitting the oil bills and
get the expenses reimbursed.

Considering all the facts stated above, we deduced that the oil bills submitted by respective operators
shall be of consistent value as they operate at a similar distances frequently. This deduction was
evidenced by obtaining few bills submitted by both the operators.
We have selected the following bills submitted by the vendors and examined the same:

Date Bill No. Value of the bill submitted

January 8, 2021 56 8500.00
January 29, 2021 293 8375.00
February 4, 2021 BV-446/21 14620.00
February 17, 2021 BV-897/21 14437.00
March 10, 2021 BW-437/21 14615.00
March 24, 2021 BW-887/21 14448.00

  Indicates bills submitted prior to the event

  Indicates bills submitted after the event

These bills were obtained from the cashier

(Mr. Raju) who on conducting interview, stated that he issues a voucher as and when a bill is submitted
by an operator. The voucher includes the name of the operator, bill value, date and the signatures of both
cashier and the operator.

However, the fact that once the operators reach the front gate, the security personnel note down the
vehicle number, in time, name of the operator was not supporting the cashier’s point of view.

The register does not contain any details of the Truck number, name of the person etc., since the event
took place. Another fact we noted that all the bills after January 29, 2021 were submitted by Mr. Soujan
who was operating MH28R2626 vehicle.

We had an interview with Mr. Soujan who provided the following explanation:

Question : Why there is a huge difference or variation in the bills submitted in the month of January and
in the month of February considering the fact that you only operate from two locations with similar
distance?

Answer: I only do what my superiors tell me to do. On February 4 th Dubeyji told me to unload the goods
at a place located in the outskirts of the city. This was the reason the bills submitted were of huge value.

Question : Why there was no detail recorded in the log register along with your signature?

Answer: Dubeji told me as well as the security guard to delete the entries which concern transporting
goods from such place.

On having an interview with Mr. S. Dubey, he admitted to the fact that he moved the stock the night
before the incident took place, and later claimed about the loss of stock by fire and applied for the
insurance claim intentionally.
Deficiency in Internal Controls

The purpose of the engagement is to examine the validity and genuineness of the claim. Our examination
was limited to the areas and periods described and limited to the documents available and the interviews
of employees performed. Had we reviewed other periods or areas or documents, other matters may have
been identified warranting attention.

We have identified the following deficiencies in the existing internal control, which led to the
aforementioned events:

 Implementation of fire extinguishment controls – the organisation has installed 3 fire extinguishers
around the factory and two sand bucket stands. The delay after the cause of fire and utilising the
equipment may result in serious damage to the people and the environment. Although it is not our
duty to recommend, it is advisable to install Ionization and photoelectric smoke detectors and fire
sprinklers as well.
 Maintenance of physical registers – The organisation maintains a physical record containing the in
and out times of the trucks. It is advisable to implement ERP system where the confidentiality and
integrity of the data are maintained.
 Submission of bills for reimbursements – There are chances of operators submitting fictitious
invoices. It is advisable to set a budget based on the cost per litre of oil and the distance to be
covered.

Conclusion and Deliverables

Based on our Investigation procedures, we have concluded that certain malpractices have been committed
by the management of SV WOVEN FABRIC for the purpose of applying the insurance claim. Upon
further research and diving into the financial position of the entity, it was suffering a financial crunch and
the pressure from the creditors, the opportunity to commit such an act owing to the current scenario
(Lockdown restrictions amid pandemic) considering the fact that lesser staff was involved on the site and
the rationalization of the fact that it was an accident and occurs frequently in the type of industries as the
machines used in sewing are succumbed to excessive heating, all three factors which constitute fraud
triangle and has resulted in such an act.

PIC of India will get this report along with the ZOOM call recordings of interviews and evidence of bills
and log register snapshots collected.