Suspicious Minds & Frauds
Risk of fraud is lurking on every business. A recent survey suggested that fraud is increasing at the rate of 15 percent per year. Turn on the television or read the newspapers, it is common to find a story relating to fraud or financial manipulation. Frauds stories involving insurance, medical, securities, government, payroll, banking, telecommunication or credit card are just to name a few. These frauds involve but are not limited to inflated sales or profits, over stating expenses, employee or management misappropriations, related party transactions and security manipulations. Our story is no different.
It was late in night when Prabhakar called Deven. He wanted to know if Deven had any serious suspicion during the last audit at Axel, an advertising firm and a crucial client of Prabhakar & Co. Deven wondered why Prabhakar would have called up so late enquiring about an audit which had closed six months back. Prabhakar wanted to know if there were any suspicious circumstances like long outstanding in debtors' ageing statement or alteration of invoices etc. Deven soon sensed a seriousness and urgency in his voice. ''Is everything alright?'' asked Deven, an Audit Manager with Prabhakar & Co.
Prabhakar had a meeting with Mr. Raj Tilak, Chairman of the Audit Committee at Axel that evening for discussing a recently discovered fraud at Axel wherein the COO of the company was found to be involved. Prabhakar revealed to Deven that the audit committee chairman has held him negligent in failing to detect and report the suspicious circumstances.
Deven asked curiously why Prabhakar was asking about the debtors' ageing statement and alteration of invoices. Prabhakar told Deven that many invoices sent to a client company were understated compared to the copy of those invoices which were used to account for the revenue in the books of Axel. Prabhakar disclosed to Deven that there was a conspiracy between the COO and one of the Account Payable Staff of the client company. This staff of the client company had provided the COO with a fudged balance confirming statement to cover up the mischief. The COO wanted to meet his annual sales target and was to reverse the scheme in the subsequent periods.
Deven immediately understood which client Prabhakar was talking about. He recalled asking the COO about the unrealized amount in the ageing statement. He also remembered the COO assuring him of recovery of the said amount as he himself was after the client company for its recovery. The COO had also showed him a letter from the company confirming the balance. Also, when he had located two invoices with the same number but having different amount, the COO had provided a vague explanation and suggested it to be a one of error.
Deven remembered how the Chief Internal Auditor of Axel had insisted him to remove the audit observation on long outstanding debtors from the report before the closing meeting. Deven had suspected the authenticity of the statement confirming the balance from the client company but the Chief Internal Auditor had told him that the third party evidence is always one of the most reliable evidences. He had told him that in his career of 25 years as an Internal Auditor he have never doubted the third party evidence and Deven still needs to learn how to use his skepticism appropriately.
Prabhakar told Deven that we have definitely missed on our duties. Deven just kept mum during the entire communication.
Internal Auditor should be reluctant to accuse anyone when a fraud is suspected and give the person the benefit of doubt until the facts and circumstances warrant otherwise. The auditor has a duty to review all situations that seem unusual. Be a skeptic even though you are criticized for being so. Only thing to keep in mind as an Internal Auditor is to focus on the audit strategy rather than abusing somebody when encountered with suspicious circumstances. Also, reporting suspicious circumstances is not enough as you have a duty to dispel your doubts by employing more procedures and documentation.
Do you think you have ever been in a position similar to that of Prabhakar or Deven or the Chief Internal Auditor of Axel?
It was late in night when Prabhakar called Deven. He wanted to know if Deven had any serious suspicion during the last audit at Axel, an advertising firm and a crucial client of Prabhakar & Co. Deven wondered why Prabhakar would have called up so late enquiring about an audit which had closed six months back. Prabhakar wanted to know if there were any suspicious circumstances like long outstanding in debtors' ageing statement or alteration of invoices etc. Deven soon sensed a seriousness and urgency in his voice. ''Is everything alright?'' asked Deven, an Audit Manager with Prabhakar & Co.
Prabhakar had a meeting with Mr. Raj Tilak, Chairman of the Audit Committee at Axel that evening for discussing a recently discovered fraud at Axel wherein the COO of the company was found to be involved. Prabhakar revealed to Deven that the audit committee chairman has held him negligent in failing to detect and report the suspicious circumstances.
Deven asked curiously why Prabhakar was asking about the debtors' ageing statement and alteration of invoices. Prabhakar told Deven that many invoices sent to a client company were understated compared to the copy of those invoices which were used to account for the revenue in the books of Axel. Prabhakar disclosed to Deven that there was a conspiracy between the COO and one of the Account Payable Staff of the client company. This staff of the client company had provided the COO with a fudged balance confirming statement to cover up the mischief. The COO wanted to meet his annual sales target and was to reverse the scheme in the subsequent periods.
Deven immediately understood which client Prabhakar was talking about. He recalled asking the COO about the unrealized amount in the ageing statement. He also remembered the COO assuring him of recovery of the said amount as he himself was after the client company for its recovery. The COO had also showed him a letter from the company confirming the balance. Also, when he had located two invoices with the same number but having different amount, the COO had provided a vague explanation and suggested it to be a one of error.
Deven remembered how the Chief Internal Auditor of Axel had insisted him to remove the audit observation on long outstanding debtors from the report before the closing meeting. Deven had suspected the authenticity of the statement confirming the balance from the client company but the Chief Internal Auditor had told him that the third party evidence is always one of the most reliable evidences. He had told him that in his career of 25 years as an Internal Auditor he have never doubted the third party evidence and Deven still needs to learn how to use his skepticism appropriately.
Prabhakar told Deven that we have definitely missed on our duties. Deven just kept mum during the entire communication.
Internal Auditor should be reluctant to accuse anyone when a fraud is suspected and give the person the benefit of doubt until the facts and circumstances warrant otherwise. The auditor has a duty to review all situations that seem unusual. Be a skeptic even though you are criticized for being so. Only thing to keep in mind as an Internal Auditor is to focus on the audit strategy rather than abusing somebody when encountered with suspicious circumstances. Also, reporting suspicious circumstances is not enough as you have a duty to dispel your doubts by employing more procedures and documentation.
Do you think you have ever been in a position similar to that of Prabhakar or Deven or the Chief Internal Auditor of Axel?
If your answer is No, enjoy the video herein below.
Labels: Fraud Stories, Internal Audit
posted by Narayan Mantri at
9:20 PM
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