Forensic audit, fraud detection and Investigation techniques

1 Forensic audit, fraud detection and Investigation techniquesBy Bhagwan Lal Soni, IPSADGP cum Director,Rajasthan Police Academy, IS fraud misrepresentationoffactswithintentiontom isleadsomeonetobelievethesefactsastrue; partingwithsomevaluablethingormoneybelon gingtosomeoneaftergettinginducedbyrelyin guponsuchfacts, fraud -A WORLD WIDE PHENOMENON Enron, ,DaewooMotorsKorea, , ,HomeTradefraud,SatyamScam,failureofnon- bankingfinancialinstitutions,fraudsthrou ghvanishingcompanies& FRAUDS, QUITE COMMONIN CORPORATE SECTORSC ausing loss of enormous money to;Banks Financial institutionsGeneral publicAdverselyAffectingthetrustinmechan ismoftrade,finance,andinvestmentHavingde stabilizingeffectoncommercialinstitution sAffectingnationalprogressandputtingstra inonnationalresourcesFinancial frauds Primary Market Frauds Secondary Market Frauds Bank Frauds NPAs-55000 Cr Import / Export Frauds Public sector frauds Tax frauds Money laundering Intellectual Property Crime/Theft Insurance Frauds Non-Banking Finance Companies (NBFCs Frauds)

2 Fake Currency Fake stamps scam Computer & internet frauds6 HOW COMPANIES ARE USED FOR COMMITTING FRAUDF raudstersusecompaniesasvehicleforcommitt ingfraudtocheatbanks,financialinstitutio ns,andgeneralpublic7 POSSIBLE AREAS WHERE FRAUDS CAN BE COMMITTED IN CORPORATE SECTORS misappropriationofcashbyfudgingaccounts; raisinghugeamountoftermloanfrombanksandf inancialinstitutionsbymeansofinflatingth eprojectcostbyoverinvoicingtheplant&mach ineryandcomponentspurchasedforsettingupt heprojectandthendivertingofinflatedamoun tfornonbusinessuse; ; Falsificationofannualaccountsofthecompan iestoshowinflatedturnoveraswellasinflate dprofitsandinthiswaydeclaringgoodworking resultstostakeholdersaswellasbanksinorde rtomisleadthemforattractingmoreinvestmen tsfrompublicandcreditfacilitiesfrombanks ; Accountsarealsofalsifiedtoconcealtrueres ultsofoperations,orfinancialpositionofth ecompanywithaviewtopreventtimelydetectio nofcorporatefrauds.

3 Floatingofmanycompanies/firmsonpaperwith outanysignificantbusinessandusingvarious bankaccountsopenedinthenamesofthesecompa niestomisappropriatefundsdivertedtothemf romthecreditfacilityavailedfrombanksaswe llasinvestmentsreceivedfrompublic; Generallyemployeesofthemaincompany(indul gingintofraudulentactivities)areshownasd irectors/partnersofsuchcompanies/firms(u sedfordivertingthefundsreceivedfrompubli candbanks)andtheydonotknowanyoftheaffair softhesecompanies/firmsexceptsigningofth echequesissuedbythesecompanies/firms; Cheating in foreign exchange transaction by showing fictitious exports; Misappropriation of the funds provided by banks on discounting of export bills issued in the name of foreign buyers under disguise.

4 11 SYMPTOMS OF fraud Delayed submission of returns information etc.; Delayed remittances into Bank; Delay or non preparation of Bank reconciliation statements; Lifestyle of promoters/directors and key employees ; Continued internal control lapses and not following norms of corporate governance12 SYMPTOMS OF fraud ( Contd.)INTERNAL INDICATORS Delay in finalisation of accounts; Frequent changes in Accounting Policies; Continuing Losses; Over drawl of loans or advances; Higher cost per unit of production; High amount of losses or wastage shown in books Vs Norms; High investment in group companies Profit not supported by increased cash availability13 MODUS-OPERANDI Loans & Advances FakeCACertificates/FinancialStatements BogusInvoices/quotations/bills Fraudulentremovalofstockscharged Inflatedvaluationsofsecurities Forgedpropertydocuments Fake/Wrongsearchreports Diversionoffundsthroughbogus/sisterconce rnsMODUS-OPERANDI ( ) Deposits/Miscellaneous areas Un-authorized loans against deposits/NRI deposits ATM Frauds by stealing PINs/interception of cards Encashment of stolen/forged financial instruments through fictitious accounts Misuse of other s passwords for misappropriationof funds15 MODUS-OPERANDI ( )

5 Import / export Business Fake LCs/Confirmation not obtained by the banker Fake export orders for obtaining Packing Credit Forged shipping documents16 WHY DO FRAUDS OCCURG rossnegligence:non-compliancewithestabli shedprudentproceduresandpractices/timete stedsafe-guards Excessivetrustoncustomers/clients Willingcomplicity:Willfulviolationofsyst ems&proceduresbybankstaff Failureofinternalcontrolmechanism Delaysinre-conciliationofinter-branchacc ounts Laxityincustodyofsecuritystationery Non-complianceofcomputersecuritypolicies Accesstobank srecordstooutsidersMETHODOLOGY TO DETECT fraud Alltherelevantdocumentsandbankaccountsof acompanysuspectedtobeinvolvedinfraudulen tactivitiesaretobecollectedfromthecompan ydirectly Thesedocumentsareexaminedtotraceouttheut ilizationofvariousfundsofthecompanycolle ctedfromthepublic,banksandfinancialinsti tutionsandtoexaminewhetherthathasbeendon easperthedeclaredobjectivesofthecompany, TO DETECT fraud (Contd.)

6 Aftertheseexaminations, TO DETECT fraud (Contd.) fraudulentactivitiesofacompanycanalsobet racedbycollectinginformationfromdiverses ourcessuchascapitalmarket,statementsofba nkaccountsofthecompany,itsrelatedbusines sconcerns,promoters,directorsandemployee softhecompanyobtainedfrombanks, ,Customs&CentralExcise,DirectorGeneralof RevenueIntelligence(DGRI) TO DETECT fraud (Contd.) ,employees, INVOLVED IN fraud Investigation Fraudinvestigationmainlyinvolvesforensic auditingofaccountsanddocuments, Sometimesforensicexaminationofdocumentsi salsorequiredtobedonetoverifythesignatur e, INVOLVED IN fraud Investigation Findingsofdocumentsarecorroboratedbyoral examinationofpersonsinvolvedinpreparatio nofthedocumentsandrunningtheaffairsofthe company.

7 Basedonthesedocumentary&oralevidenceaswe llasexpertopnionproceedingsareinitiatedi nCourtoflaw/competentauthorities23 Forensic AUDITING Forensicauditingisatechniquetolegallydet erminewhetheraccountingtransactionsarein consonancewithvariousaccounting, ,auditingandinvestigativeskills. Indoingso,theveilofcorporateentityispier cedtoestablishtheintentionsofperson(s)be hindsuchtransaction(s). ,thereisanincreasinguseofauditingskillst opreventfraudbyidentifyingandrectifyings ituationswhichcouldleadtofraudsbeingperp etrated( ).Itmightbeuseful,therefore,todiscussfor ensicauditingasbeingeither Reactive or Proactiveforensicauditing StatutoryAudit RegulatoryCompliance DiagnosticTool Investigationofallegations26 ReactiveForensicAuditing-toinvestigateca sesofsuspectedfraudsoastoproveordisprove thesuspicions,andifthesuspicionsareprove n,toidentifythepersonsinvolved.

8 Workingrelationswiththeinvestigatingandp rosecutingagencies authorisationandcontroloftheauditinvesti gation documentationofrelevantinformationandsaf eguardingallprimerecordspertainingtothec ase27 rulesofevidencegoverningadmissibility/au thenticationofrecords confidentiality evaluationoftheevidencetoassesswhetherth ecaseissustainable legaladvicewhereappropriate INVOLVED IN Forensic AUDITING Detailed examination of financial statements and books of accounts. Examination of related party transactions and Inter-corporate Deposits as disclosed in the financial statements Auditing of off Balance sheet OF FINANCIAL STATEMENTS AND BOOKS OF ACCOUNTSE xamination of :- TRADING ACCOUNT MANUFACTURING ACCOUNT PROFIT & LOSS ACCOUNT BALANCE SHEET DIRECTORS /AUDITOR S REPORTS COMPARATIVE ANALYSIS OF FINANCIAL STATEMENTS COST AUDIT30 IndiaforensicConsultancyServicesSoftSolu tionstofraudproblem FoundedbyMayurJoshiin2005,IndiaforensicC onsultancyServices(ICS)isadedicatedprovi derofforensicaccountingandfraudinvestiga tionsolutionsinIndia.

9 ICSprovidesarangeofconsultingservicesinc ludingtrainingandeducationinboththeverti cals. wontheGlobalawardfor OutstandingPerformance sets us apart? We,atICShave Thought-leadership,deepdomainexpertisean d highlyrespectedamongstthepeer-communityi nthe fieldofforensicaccountingandfraudinvesti gations Developedoriginalanduniqueintellectualpr operty inthisfield AwardwinnersattheIIMA inbusinessplanning competition Havetherightblendoftechnologyandaccounti ng professionals Ownersofindustry smostexhaustiveresource FraudTodayAboveasclaimedbyIndiaForensics 32 Web Presence ICS Webportal is anexhaustive resource on the frauds in India Ranked #1 by Google,Yahoo and MSN for searchterms Forensic Accounting in India and BPO Black Cards Forensics Research on ATM andCredit Card Frauds Combating the peril of Money Laundering Thebook explaining the Indian scenario of MoneyLaundering Occupational Frauds and Money Laundering published by Snow-white publishers34 List last updated.

10 6 January Control are IT / computer Forensic investigators based in the whole or part of this list is licensed under the terms of theCreative Commons Attribution Non-Commercial to this page will be announced on our Twitter feed Disk tools and data capture Email analysis General tools File and data analysis Mac OS tools Mobile devices File viewers Internet analysis Registry analysis Application analysis Abandonware Copyright 2013 Forensic Control Limited. Registered office: 27 Old Gloucester Street, London, WC1N 3AX. Web design byBrandspankin' Investigation into corporate fraudsSteps in conducting the theory of the case, sources of information, documents and data, key persons, the evidence, violation of AN UPHILL TASK Toestablishmens-reaonthepartofofficialsi sdifficult Casescomplexinnature,documentsbased,lack ofprofessionalcompetenceamongIOs Establishingtrailoffundsdifficult Offendersaremostlyrichpeople,takeadvanta geofsystemicloopholes Investigationspreadovertomanystates.