The Institute of Chartered Accountants of India

National Conference
3 August 2018, Ahmedabad

Topics:
1. Forensic Accounting, Tools & Evidences
2. Fraud Detection as a Profession
.
Agenda
• What is Fraud?
• Key Fraud Survey findings
• Forensic Accounting
• Tools
• Evidence
• Fraud detection as a profession
• Questions and Answers
What is fraud?
What is fraud?

The language of fraud

3
Definition of fraud
Companies Act 2013 defines fraud as….

“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
Categories of Fraud and Misconduct (Sample)
 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 “Why” Factor - Inducements
Donald R Cressey’s
Fraud Triangle Incentive / Pressure

Opportunity Rationalization

6
The fraud triangle – pressure

Revenge

Credit crunch Addiction – drink,

drugs, gambling

“Results results Coercion or

results!” blackmail

Debts Illness

Family pressures “I need the money”

7
The fraud triangle - opportunity

Poor governance Fraud can be hidden in

complex transactions
Poor controls

Exploiting Abuse of
errors authority

Lack of Lack of effective

segregation oversight
of duties

8
The fraud triangle - rationalisation
“They do not pay me “Rules are made to be
enough!” broken”

“Everyone “Who cares?”

else does it”
“Its only small
“I’m in amount”
charge!”
“It’s a victimless
“They can crime”
afford it”

“I’ll never “It’s a cost of doing

get caught!” business”
9
Common Myths & Missing Checks
(Example: Procurement 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
Occupational fraud tree

11
Key Fraud Survey findings
Evolution of fraud in India

Source: KPMG report on evolution of fraud in

India

13
Sectors perceived as most vulnerable to fraud

Source : KPMG fraud survey

14
Processes perceived to be most vulnerable
to fraud

Source : KPMG fraud survey

15
Increased reliance on whistle-blower hotlines
to detect fraud

Stakeholders more confident of using whistle-

blower hotlines to report fraud…

…followed by internal audit and data analytics

16
Global profiles of the fraudster key findings (2016)
Technology enables, while weak controls fuel frauds
Some key observations

68% of the global fraudsters were in the 35-55 age group. Indian fraudsters are younger 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 start early
with 27 % were in service anywhere between one and four years
Technology is increasingly being used to enable frauds, and this proportion was higher in India (33 %) compared to
trends observed globally (24 %)

Globally 62% of the frauds were committed in collusion , which was similar to what was observed in India

Globally 61% of the frauds were committed due to weak internal controls 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 blowing hotline,
compared to 59% in India

Globally 52% of the fraudsters were in the managers & staff category, compared to 63% in India

17
How Frauds were detected
22% Management review 25%

35% Formal whistle-blowing report/hotline/ 59%

Anonymous informal tip-off

14% Accidental 14%

14% Internal audit 16%

10% Suspicious superior 9%

7% Other internal control 7%

Global India
6% External audit 5%

3% Proactive fraud-focused data analytics 9%

3% Self-reported / Admitted 5%
5%

6% Customer complaint 5%

4% Supplier complaint 5%
5%

9% Other not listed above 5% Source: Global profiles of the

fraudster, KPMG International, 2016

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Forensic Accounting
What is forensic audit?

• 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
Forensic audit vs Financial audit
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 can be a forensic auditor?
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

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 Accounts 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
 Accounts Payable (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
 Purchasing
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

25
 Payroll
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

26
 Cash receipts
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

27
 Accounts receivable
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

28
 Inventory
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

29
 Finance
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.

30
Read the signs
■ Marked personality changes - Staff under stress
without a high workload

■ Late working hours

■ Reluctance to take leave

■ Unexplained wealth or living beyond apparent means

■ Sudden change of lifestyle

■ Customer complaints of missing statements,

unrecognised transactions

■ “Relationships” with suppliers/contractors

■ Rising costs with no explanation

■ Key employees having too much control or authority

without audit checks

■ Employees with external business interests

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Red Flags - Limitations

1 2 3 4 5
Red flags” are They may There is no linear
They are only They can be
not always indicate other relationship
indicators not ambiguous
obvious or easily risks and not between risk
evidence
observed exclusively fraud factors and fraud
risk

32
Tools
Mobile forensics – UFED and Oxygen
1. Data extraction from a mobile device. 2. Forensic analysis of the extracted data.
3. Bookmarking the data. 4. Generating the report.

Hardware and software based data extraction from mobile devices.

34
EnCase – Forensic suite for imaging, recovery and
analysis

35
Analysis and ESI review using NUIX
Illustrative Keyword Searches on indexing platform

36
Data anomalies
Different vendors with same PAN number
vendor 1 PAN No. vendor 2 PAN No.

Different vendors with same bank account number

Different vendors with same phone number

37
 Agenda
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

Indian Evidence Act, 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.

39
Types of Evidence
Indirect: Hearsay
Oral
Hearsay evidences are the ones which the
Oral Evidences are those witness has neither personally seen nor
evidences which are personally heard, nor has he perceived through his
seen or heard by the witness senses, but are those which have come to his
giving them and not heard or knowledge through some other person. These
told by some one else. are the most weak category of evidences.

Evidence

Documentary
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.
Indirect: Circumstantial
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.
40
Scenario 1 – Use of a disappearing ink to claim
excess mileage
Use of the disappearing ink by the vendor
established by an independent expert

Use of the disappearing ink by the vendor

41
 Scenario 2 – Procurement frauds – Employee vendor
conflict
Unsigned quotations of the vendor found in the e-mail forwarded to the Head of the Commercial Team

42
Scenario 2 – Procurement frauds – Employee vendor
conflict (contd)
Vendor with lowest rates selected
L2 - INR 26,500 per L2 - INR 26,500 per
month month

L1 - INR 25,500 per

month

Unsigned
quotation

43
Scenario 2 – Procurement frauds – Employee vendor
conflict (contd)
Residential address of the suspected employee in his resume is appearing same as contact address of the
vendor selected

Khodiyar Colony, Jaamnagar

Khodiyar Colony, Jaamnagar

44
Scenario 3 – Double payment of wages in the same
month of January 2011

Sandeep AD

Sanju S Nair

Jayasankar M

Sandeep AD

Sanju S Nair

Jayasankar M

45
45
Scenario 3 – Double payment of wages in the same
month of February 2011

Guddu Prasad Guddu Prasad

46
Scenario 4 – IM chat communication regarding
cash gifts

47
Scenario 5 – A leading Telecommunication
company

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

48
Scenario 5 – A leading Telecommunication
company (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’

49
Scenario 6 – A leading Insurance company (Contd)

D
Entry of garbage bags inserted in the
security register by Employees
E

50
Scenario 6 – A leading Insurance company (contd)
Comparative quotes of 3 vendors looked similar. In all the 3 quotes, same incorrect address of the company
was mentioned

51
Scenario 7 - Dispatch of carton scrap ( rate: INR 8/kg)
along with garbage (rate: INR 3/kg) (1/2)
Actual photos of scrap sale consignment dispatched on 28
Invoice showing garbage scrap was sold to B S
October 2015 showingg dispatch of cartons along with garbage
Surte Waste Paper on 28 October 2015

52
Scenario 7 - Dispatch of carton scrap ( rate: INR 8/kg)
along with garbage (rate: INR 3/kg) (2/2)
Actual photos of scrap sale consignment dispatched on 28 October 2015 showingg dispatch of cartons along with garbage

53
Scenario 8 – Inconsistencies noted in serial number
and dates mentioned on vehicle duty slips (1/2)
Vehicle Duty Slip Date: - 10 Nov 2009 Vehicle Duty Slip Date: - 15 Nov 2009 Vehicle Duty Slip Date: - 22 Nov 2009
Duty Slip No: - 113 Duty Slip No: - 112 Duty Slip No: - 111

54
Scenario 8 – Inconsistencies noted in serial number
and dates mentioned on vehicle duty slips (2/2)
Vehicle Duty Slip Date: - 28 Nov 2009 Vehicle Duty Slip Date: -11 Dec 2009
Duty Slip No: - 110 Duty Slip No: - 109

55
Scenario 9 – Mismatch in quantity mentioned on different
documents indicates potential short receipt (1/2)
Vendor invoice showing quantity as 160 boxes Snapshot of inward register maintained at security gate

Quantity in Invoice –
200,00,000 units
Quantity in inward register –
100,00,000 units

56
Scenario 9 – Mismatch in quantity mentioned on different
documents indicates potential short receipt (1/2)
LR attached to the invoice showing consignment quantity as 120 box whereas quantity as per invoice is 160 box

57
Background Screening – Education
Fake letter by University

58
Revenue Fraud

Loan application
supported with
documents where the
photographs of the
applicant is different
from the identity
proofs
Photograph on application form does not match with
Voters ID and Driving License

59
Evidence of kickbacks
Excel spreadsheet maintained with a
detailed account of money due
against each vendor invoice

60
Fraud detection as a profession
Opportunities for Chartered
Accountants

62
Key Management Concerns
 Robust Fraud risk framework – Prevention, Detection and Response
 Syndicate crimes on the increase with organisations becoming
Strategic 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
Operational  Regular training and skill updation
 Independence and objectivity at the process level to identify fraud
risk

 Effective mechanism to investigate reported cases

Reputational  Integrity of agencies/third parties in customer handling
 Regulatory compliance framework to manage regulatory requirements

 Ongoing learning to be incorporated in the processes

 Interplay of departments and accountability and responsibility
matrix for fraud
Functional
 Effective strategy in handling third parties and related processes on
customer acquisition and collections
 Regulation of outsourced vendors for customer service and
collection
63
Opportunities for Chartered Accountants

Frauds

Detection Prevention

Data Fraud Risk

Investigation
Analytics Management

64
Fraud Investigation Services
What was the
Who was involved? magnitude?

How can we
What happened? prevent it in future?

Identifying Issues

Preparing the
investigation Collecting Evidence
plan

Reporting findings and suggesting way forward including interface with law
enforcement

65
Investigations life cycle
Phase 1 Phase 2 Phase 3

• Interviews/
external
verifications

• Review the
• Reporting
internal Forensic • Forensic
• Digital • Liaison with
investigation Procedures Data
data management
reports Analysis
recovery • Liaison with
• Securing of
legal counsel
information

• Review of
documents
and
records

Preliminary assessment Detailed investigation Reporting and way forward

66
Fraud Risk Management Framework
Fraud Risk Management framework
Prevention Detection Response

Internal Vigilance Unit and its reporting Structure

Anti-Fraud Manual (including Fraud Risk Management Policy)

Pre-employment background
Vigil mechanism (whistleblower) Investigation protocols
screening
Enforcement and accountability
Communication and Training Transaction Monitoring
protocols

Code of Conduct Proactive data analysis Disclosure protocols

Third party due diligence System assessment and review Remedial action protocols

Fraud Monitoring Tools

Ongoing fraud risk assessment at business level

67
Role of Internal Audit in Fraud Risk Management
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

68
Auditors Vs Investigators
Auditors
• 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
Investigators
• State facts to help management make
informed decisions
• Invariably go beyond books of account
• Materiality is irrelevant
• - Document examination
- Forensic technology
- Market Intelligence
- Interviews
69
Why internal auditors sometimes fail to detect
FRAUD?
Insufficient
levels of
professional
The nature of Fraudster’s skepticism
concealment and familiarity with
misrepresentation the control
associated with environment and
fraud thus ability to
conceal fraud
Sample sizes too
small
REASONS
Concealed in
excessive loss
Management’s
Lack of effective figures
emotional
Forensic
response to
integration
The auditor’s fraud
lack of
familiarity and
awareness of
fraud (not
attuned to
fraud)

70
Questions and Answers

Answers
&
Questions

71
 Thank you

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