Types of FRAUD

Focus on Bid Rigging &

Cash Lapping
CA. B. Arunkumar
CLASSIFICATION OF FRAUDS:

▪ Every Organisation is required to introduce necessary safeguards /

preventive measures by way of appropriate procedures ad internal
checks so as to prevent/minimise occurrence of frauds and resultant
financial loss to the organisations.
▪ The effective Fraud Prevention and Fraud Management Function
primarily based on proper classification of the Frauds based on its
penal provisions. In India mainly the frauds are classified on the basis
of provisions of India Penal Code and Competition Act 2002.
BID RIGGING:

Bid rigging one of the most popular subject matter in Forensic

Accounting and Fraud Detection. Every where are dealing with BID or
otherwise called as Auction / Tender.
“bid rigging” as “any agreement, between enterprises or persons referred
to in sub-section (3) engaged in identical or similar production or trading
of goods or provisions of services, which has the effect of eliminating or
reducing competition for bids or adversely affecting or manipulating the
process of bidding”.
Competition Act 2002
BID RIGGING:

Bid rigging takes place when bidders collude and keep the bid amount
at a pre-determined level.
Bid rigging contravenes the very purpose of inviting tenders and is
inherently anti-competitive.
Pre-determination is by way of intentional manipulation by the
members of the bidding group.
Bidders could be actual or potential ones, but they collude and act in
concert.
Common Ways & Means of BID RIGGING:

▪ agreements to submit identical bids

▪ agreements as to who shall submit the lowest bid, agreements for the submission of cover bids
(voluntarily inflated bids)
▪ agreements not to bid against each other
▪ agreements on common norms to calculated prices or terms of bids
▪ agreements to squeeze out outside bidders
▪ agreements designating bid winners in advance on a rotational basis, or on a geographical or
customer allocation basis
▪ agreement as to the bids which any of the parties may offer at an auction for the sale of goods or
nay agreement through which any party agrees to abstain from bidding for any auction for the
sale of goods, which eliminates or distorts competition.
▪ Inherent in some of these agreements, is a compensation system to the unsuccessful bidders by
dividing a certain percentage of profits of successful bidders.
Common Ways & Means of BID RIGGING:

 Bid Suppression
 Complementary Bidding
 Bid Rotation
Subcontracting
Subcontracting arrangements are often part of a bid rigging scheme.
Competitors, who agree not to bid or to submit a losing bid, frequently
receive subcontracts or supply contracts in exchange from the successful
bidder.
Classified Occupational Fraud:

Bid Rigging classifies as

Bribery grouped under
Corruption in the
Occupational Fraud Tree.
Each of such schemes
are per se violations as
per Competitions Act
2002 in India as well as
the Sherman Antitrust
Act in United States
Red Flags indications in BID RIGGING:

▪ Winning bids too low when benchmarked against the company

estimates, past experience and industry standards.
▪ Most of shortlisted bids had vey close price range, similar experience
tenure, consistent in terms, conditions and technical specifications.
▪ Most of participating firms are from same commercial complex
building with adjoining office numbers.
▪ Some of the qualified bidders who failed to make it to short list was
internally rated good performance, based on past experience and their
marked reputation.
Effects of BID RIGGING in Government Tenders:

▪ is likely to have severe adverse effects on its purchases and on public

spending.
▪ Price Inflation
▪ procuring entity is cheated out of its right to the benefits of free and
open competition
 Penalty for BID RIGGING:

 Competition Commission may inquire into any alleged contravention

under sub-section (3) of Section 3 of the Act.
 The Director General, for the purpose of carrying out investigation, is
also vested with powers of civil court besides powers to conduct
‘search and seizure’.

 The penalty can be up to 10% of the average turnover for the last
three preceding financial years upon each of such persons of
enterprises which are parties to bid rigging or collusive bidding.
Powers of the Commission against BID RIGGING:

After the inquiry the competition commission may pass inter – alia any or
all of the following orders under section 27 of the Act: 
 Direct the parties to discontinue and not to re-enter such agreement.
 Direct the enterprise concerned to modify the agreement.
 Direct the enterprises concerned to abide by such other orders as the
commission may pass and comply with the directions, including payment
of cost, if any and
 Pass such other orders or issue such directions as it may deem fit.
CASH LAPPING:

Cash Lapping is a scheme whereby payments from a customer are stolen

while other customers’ payments (or subsequent payments from the
customer) are used to hide the scheme by offsetting this customer’s
accounts receivable.
Lapping Schemes are classified as Skimming under Theft of Cash receipts
broadly classified under Asset Misappropriation (Cash) in the occupational
Fraud tree which is punishable as per the provisions of Indian Penal Code.
Lapping other wise called as Teeming and Lading is also achieved through
cash deposits or cheques collected from customers being overlapped with
the collections from subsequent customers and the amount collected is
diverted to personal account
CASH LAPPING:
Red Flag in CASH LAPPING:

▪ Excessive billing errors

▪ Slowing accounts receivable turnover
▪ Excessive write-offs of accounts receivable
▪ Delays in posting customer payments
▪ Accounts receivable details doesn’t agree with general ledger
▪ A trend of decreasing payments on accounts receivable
▪ Customer Complaints
Effects of CASH LAPPING Scheme:

 best way to detect lapping schemes is only the course of Time

 Damages on account of flaw in Internal control, will cost more than
the loss by lapping schemes.
 loss of credibility with some of its customers, likely costing the Victim
with many multiples the Amount Lapped.
 Co-workers at the Victim office has to suffer loss of morale.
 Caused because of flaws in two or more Internal Control measures,
mainly in small organisation where no Job separations and Job
rotations are not possible.
Prevention and Detection of CASH LAPPING Scheme:

 someone other than the cashier send statements to customers.

 Contact customers and ask if they have received monthly statements from the
company.
 Audit cash receipts transactions on a regular basis.
 Require all employees in the accounting area to take all of their vacation time,
without exception.
 Track the days of accounts receivable on a trend line.
 Tightly control the use of Credit Memos.
 Insist customers pay directly to a Lock Box so that cash cannot be intercepted
and stolen by employees.
 Conclusion:

 Organisations need to build awareness around the latest technological

and procedural vulnerabilities and fraud schemes.
 Hiring reliable management and building relationships with genuine
clients, suppliers and partners are of utmost importance.
 lack of correct background information can lead to both reputation and
business risks.
In addition to the above a well defined and comprehensive incident
management procedures to be placed to ensure that incidents of fraud are
managed without exposing the organisation to any legal or reputational
risks
Thank you