Forensic Audit Presentation Including Case Studies 21122022

FORENSIC AUDIT
- AN INTRODUCTION
& CASE STUDIES
Presented by
CA. Rakesh Kaushik
Guest Faculty, IIBF, Mumbai
Email: rmkaushik@gmail.com
Cell: +91 9820151005
INDIAN INSTITUTE OF BANKING & FINANCE

Forensic
Forensic Audit
MEANS
Provides an
Process of investigation
Conducted to
Suitable for examination prosecute a methodology and
courts of and party for accounting analysis for
justice or evaluation fraud,
for public of financial embezzlement
Forming the
discussion information or other basis for
financial Producing as
and debate of an admissible discussion,
enterprise claims debate and
evidence in ultimately
Court dispute
resolution

WHY FORENSIC AUDIT?
Failure of traditional audit to unearth financial irregularities
Increasing Cross Border Deals and growing trade complexities
Corporate Frauds & the resultant increase in NPAs
Need for compliance & transparency
Management of risks
Regulators/Shareholders/Management concern for fraud detection

THE FRAUD TRIANGLE
FRAMEWORK
• TO EXPLAIN THE REASONING Expensive Lifestyle
BEHIND A WORKPLACE FRAUD Dissatisfaction with the Job
• HELPS IN IDENTIFYING Career Disappointment
POTENTIAL FRAUDS
Layoff/Redundancy
Management/Third Party Pressure
Inadequate Internal Controls

External/Internal Collaboration
Management Override
Corrupt Business Practices Lack of Awareness
Low Temptation Threshold
Self-denial of Consequences

THE FRAUD DIAMOND
AN EXPANDED
VERSION OF THE
FRAUD TRIANGLE

USE OF FORENSIC AUDITING
The services rendered by the forensic
auditors are in great demand in the
following areas:
• Fraud detection where employees commit Fraud.
• Criminal Investigation: Matters relating to financial
implications the services of the forensic accountants
are availed of.
• Cases relating to professional negligence.
• Arbitration Service.
• Settlement of Insurance Claims.
• Dispute Settlements.
WHO NEEDS FORENSIC AUDIT?
BANKS
INSURANCE COMPANIES
CORPORATE/NON-CORPORATE BUSINESS/INDUSTRIAL HOUSES
GOVERNMENT OFFICES/PSUs/AUTONOMOUS BODIES

• GOVERNMENT DEPARTMENTS/PSUs
• REVENUE AUTHORITIES-CENTRAL EXCISE/INCOME TAX/GST
• POLICE/EOW/CBI/DRI/ED
• SEBI
• BSE/NSE/MSE
COURTS

FRAUD CASES: BANK GROUP WISE (₹ Crs.)
Bank Group/ 2019-20 2020-21 2021-22
Institution No. of Frauds Amount InvolvedNo. of Frauds Amount InvolvedNo. of Frauds Amount Involved
4,410 1,48,224 2,901 81,901 3,078 40,282
Public Sector Banks
(50.7) (79.9) (39.4) (59.2) (33.8) (66.7)
3,065 34,211 3,710 46,335 5,334 17,588
Private Sector Banks
(35.2) (18.5) (50.4) (33.5) (58.6) (29.1)
1,026 972 520 3,280 494 1,206
Foreign Banks
(11.8) (0.5) (7.1) (2.4) (5.5) (2)
15 2,048 24 6,663 10 1,305
Financial Institutions
(0.2) (1.1) (0.3) (4.9) (0.1) (2.2)
147 11 114 30 155 30
Small Finance Banks
(1.7) - (1.6) - (1.7) -
38 2 88 2 30 1
Payments Banks
(0.4) - (1.2) - (0.3) -
2 - 2 - 2 2
Local Area Banks
- - - - - -
8,703 1,85,468 7,359 1,38,211 9,103 60,414
TOTAL (100) (100) (100) (100) (100) (100)
-: Nil/negligible.
Note: 1. Figures in parentheses represent the percentage share of the total. 2. The above data is in respect of frauds of ₹1 lakh and above
reported during the period. 3. The figures reported by banks & FIs are subject to change based on revisions filed by them. 4. Frauds reported
in a year could have occurred several years prior to the year of reporting. 5. Amounts involved reported do not reflect the amount of loss
incurred. Depending on recoveries, the loss incurred gets reduced. Further, the entire amount involved is not necessarily diverted.
Source: RBI Supervisory Returns.
MASTER DIRECTION ON FRAUDS
Early Warnings Red Flagged Account(RFA)
RBI Framework for
Signals(EWS) • Where a suspicion of fraudulent activity is
dealing with loan thrown up by the presence of one or more
• An illustrative list of
frauds Early Warning signals
Early Warning Signals
• FMG to take a call within one month and
• Created in May or signs of wrongdoings stipulate further measures within six months
2015. in case of sole lending.
• Threshold for EWS & RFA –Exposure of Rs. 500
Million irrespective of the lending
arrangement
Central Fraud Registry Forensic Audit Staff Accountability

•A web-based and • In case of Sole lending: • The exercise is to be completed within
searchable database • Investigations to be completed six months after the loan is declared as
set up based on the within six months. fraud.
Fraud Monitoring • In case of MBAs: • Wherever felt necessary or warranted,
Returns. • Audit to be completed within three the role of sanctioning official(s) may
• All accounts beyond months from the JLF Meeting. also be covered under this exercise.
Rs.500 million classified • The entire exercise to be completed • The Board / ACB/ SCBF may initiate the
as RFA or ‘Frauds’ must is six months from the date when process of fixing staff accountability in
also be reported on the the first member bank reported the cases involving senior executives.
CRILC data platform account as RFA or Fraud on the • Both the criminal and domestic enquiry
together with the dates CRILC platform. should be conducted simultaneously.
on which the accounts
were classified as such.

FRAUDS CLASSIFICATIONS (BASED MAINLY ON IPC
PROVISIONS):
• Misappropriation and criminal breach of trust.
• Fraudulent encashment through forged instruments,
manipulation of books of account or through fictitious
accounts and conversion of property.
• Unauthorised credit facilities extended for reward or for
illegal gratification.
• Cash shortages(Including negligence).
• Cheating and forgery.
• Fraudulent transactions involving foreign exchange(Including
irregularities / violation of regulations)
• Any other type of fraud not coming under the specific heads
as above.
REQUIREMENTS SOLE LENDER CONSORTIUM
EWS evaluation Fraud Monitoring Group On individual bank level (‘Reporting Bank’)
Reporting bank to request a joint lender

Timeline for RFA Within a month from EWS
meeting which is to be held within 15 days of
Classification identification
request by the reporting bank
Account to be categorised as fraud if consensus

Forensic reviews to help a bank
by joint lenders. Else, if 60% of lenders agree,
Classification determine whether the account is
a Forensic review to be commissioned and to
fraudulent or not
be completed in 3 months
Remedial and
Within 6 months from reporting of an account as, RFA
Investigations
Reporting to Special Committee of
RBI reporting and complaint to CBI on behalf of
the Board for monitoring and
Reporting all banks in consortium
follow ups of Fraud (SCBF) and
reporting to RBI

EARLY WARNING SIGNALS
APPLICABLE GUIDELINES
• RBI
• EASE
• BANK
PERIODICITY OF ALERT
• Daily
• Monthly
• Quarterly
• Annual
SOURCE OF EWS ALERTS
• CBS
• Branch
• Controlling Office Inspection Report
• External Sources/Audit Report
• Stock Audit
• Credit Compliance Audit
• Legal Audit
EARLY WARNING SIGNALS-BALANCE SHEET
1. Delayed receipts. 10. Large increase in reserves.
2. Slowdown in receivable 11. Concentration in non-current
collection period. assets, other than fixed assets.
3. Deterioration in customer’s 12. High concentration of assets in
cash position. intangibles.
4. Absolute/Relative Sharp 13. Disproportionate increases in
increase of Account current debt.
Receivables. 14. Substantial increases in long-
5. Slow inventory turnover. term debt.
6. Decline in current assets as 15. Low equity vis-à-vis debt.
percentage of total assets. 16. Significant changes in balance
7. Deterioration of working sheet structure.
capital position. 17. Presence of debt due to/due
8. Marked changes in trading from Executives/Shareholders.
assets mix. 18. Change in accounts.
9. Rapidly changing
concentrations in fixed assets.
EARLY WARNING SIGNALS-INCOME STATEMENT
1. Declining sales.
2. Rapidly expanding sales.
3. Major gap between gross and net sales.
4. Rising cost percentages/narrowing margins.
5. Rising sales and falling profits.
6. Rising sales and bad-debt losses.
7. Disproportionate increases in overheads vis-à-vis sales.
8. Rising levels of total assets relative to sales or profit.
9. Operating losses.
EARLY WARNING SIGNALS-RECEIVABLES AGEING
1. Increase in the average age of receivables.
2. Changes in credit policies.
3. Extended terms.
4. Replacement of accounts receivables with notes
receivable.
5. Concentration of sales.
6. Compromise of accounts receivable.
7. Concentration of seriously past due accounts.
8. Receivables from affiliated companies.

EARLY MANAGEMENT WARNING SIGNALS
1. Change in behaviour or personal habits of key people.
2. Changes in attitude towards bank or banker, especially
seeming lack of cooperation.
3. Recurrence of problems presumed to have been solved.
4. Failure to perform personal obligations.
5. Change in management, ownership, or key personnel.
6. Illness or death of key personnel.
7. Inability to meet commitments on schedule.
8. Neglect or discontinuance of profitable standard lines of
business.
9. Inability to plan.
10. Poor financial reporting and controls.
EARLY MANAGEMENT WARNING SIGNALS
11. Fragmented functions.
12. Labour problems.
13. Venturing into acquisitions, new business, new geographic area, or
new product line.
14. Desire and insistence to take business gambles and undue risk.
15. Unrealistic pricing of goods and services.
16. Delay in reacting to declining markets or economic conditions.
17. Lack of visible management succession.
18. One-man operations showing growth patterns that strain owner’s
capacity to manage and control.
19. Change in business, economy, or industry.
EARLY OPERATIONS WARNING SIGNALS
1. Change in the nature of company’s business.
2. Poor financial records and operating controls.
3. Inefficient layout of plants and equipment.
4. Poor use of people.
5. Loss of key product lines, franchises, distribution right.
6. Loss of one or more financially sound customer.
7. Substantial jump in the size of single order.
8. Speculative inventory purchases that are out of line with normal
purchasing practices.
9. Poor maintenance of plant and equipment.
10. Deferred replacement of plant and equipment.
11. Large inventories or inappropriate mix of inventories.
EARLY BANKING WARNING SIGNALS
1. Declining bank balances.
2. Poor financial planning for fixed assets requirement or working
capital requirement.
3. Heavy reliance on short-term debts.
4. Marked changes in timing of seasonal loan request.
5. Loans where purpose is ‘working capital’.
6. Calls from existing suppliers requesting information to evaluate
request for special terms or expanded credit information.
7. Calls from new suppliers requesting information to open new
credit lines.
8. Appearance of other lenders in financial picture, especially
collateral lenders.
THE FLAGS
Red Flags
• A set of circumstances that are unusual/abnormal.
• Point towards something extraordinary happening needing further
investigation.
• 43 Early warning Signals included in RBI Master Directions
Examples of Red Flags
• Frequent change of Auditors
• Use of different Audit Firms
• Absence of segregation of duties
• Sudden losses
• Missing/Altered Documents
• Disorganised ways
• Flamboyant lifestyle
THE FLAGS
Green Flags
• A set of circumstances that are too good to be
true
• Most unlikely happenings
Examples of Green Flags
• Doubling of Revenues/Margins despite
• Recession in the industry
• Falling exports
• Continuous over-achievement of targets/
budgets
EARLY WARNING SIGNALS
& RED FLAGGED ACCOUNTS
Red Flagged Account (RFA)
• A Loan Account where a suspicion of fraudulent
activity is thrown up by the presence of one or
more Early Warning Signals (EWS).
• These signals should immediately put the bank on
alert regarding a weakness or wrong doing which
may ultimately turn out to be fraudulent.
• A bank cannot afford to ignore such EWS but must
instead use them as a trigger to launch a detailed
investigation into a RFA.
DIVERSION AND SIPHONING OF FUNDS
Diversion of funds
• Utilisation of short-term working capital funds for long-term
purposes
• Deploying borrowed funds for non-operational
purposes/activities
• Use of borrowed funds for creation of non-
productive/personal assets
• Transferring funds to Related parties (Subsidiaries/Group
companies) or other corporates in any manner
• Unpermitted routing of funds through any bank other than the
Lender Bank/Consortium members
• Investment in equity/debt of other companies without
approval
• Unaccounted Shortfall in deployment of funds vis-à-vis the
amounts disbursed/drawn
DIVERSION AND SIPHONING OF FUNDS
Siphoning Instances of
of funds siphoning
Utilisation of borrowed
funds for purposes un- Are based on
related to the operations objective facts and
of the borrower, to the
detriment of the circumstances of
financial health of the the case
entity or of the lender
Should not be
Intentional, decided on the
deliberate and basis of isolated
calculated wilful transactions
default /incidents
END-USE OF FUNDS
End-use • Obtaining CA’s certification

• Due diligence on the part
can be of lenders
ensured • Strengthen Bank’s internal
controls/credit risk
by management system

ILLUSTRATIVE MEASURES FOR MONITORING AND ENSURING END-USE OF FUNDS
Meaningful scrutiny of quarterly progress reports/operating statements/

balance sheets of the borrowers
Regular inspection of borrowers’ assets charged to the lenders as

security
Periodical scrutiny of borrowers’ books of accounts and the no-lien

accounts maintained with other banks
Periodical visits to the assisted units
System of periodical stock audit, in case of working capital finance
Periodical comprehensive management audit of the ‘Credit’ function of

the lenders

FORENSIC AUDIT TOOLS & TECHNIQUES
TOOLS
• MS-EXCEL
• AUDIT SOFTWARE
• 3-D VISION
• BENEISH MODEL – M SCORE
• BENFORD LAW
TECHNIQUES
• COMPUTER ASSISTED AUDITING TECHNIQUES
• ANALYTICAL SYMPTOMS
• RATIO ANALYSIS
FORENSIC AUDIT TOOLS
• Tests and Excel Functions and

Features for data analytics such as
MS- • VLOOKUP/HLOOKUP
• IF
Excel • AND
• OR
• PIVOT TABLES

•IDEA
Audit
Software •ACL
•SoftCAAT
3 D VISION – A MULTI DIMENSIONAL APPROACH
Chance
Non detection
Technology
based Tip/Hotline
receipt
AUDIT FOR Discovery

FRAUD Computerised Sampling
DETECTION (Traditional)
Methods Financial
Statement
Analysis
Bad Guy Lists
Technology People
based Focussed
Behavioural
Analysis
Re-
Engineered
(New ) Data Mining Software
Methods Inductive
Analysis
Digital Analysis
Transaction (Benford’s Law)
Focussed
Deductive
Strategic Fraud Detection
Analysis

The Beneish Model
• A mathematical model that uses financial ratios and
eight variables to identify whether a company has
manipulated its earnings.
• The variables are constructed from the data in the
company's Financial Statements creates an M-Score to
describe the degree to which the earnings have been
manipulated.
• M-Score >-2.22 signals that the company is likely to be a
manipulator.
• Statistically proven to have 76% accuracy.
• Model adopted by Income Tax Department for CASS
selection.
The eight • DSRI - Days' Sales in Receivable

Index
variables • GMI - Gross Margin Index
used for • AQI - Asset Quality Index
• SGI - Sales Growth Index
computing • DEPI - Depreciation Index
Beneish • SGAI - Sales and General &
Administrative Expenses Index
model M- • LVGI - Leverage Index
Score: • TATA - Total Accruals to Total Assets

BENFORD LAW
• Also called Newcomb-Benford's law
• Law of anomalous numbers, and first-digit law,
is an observation about the frequency
distribution of leading digits in many real-life sets
of numerical data.
• A statistical tool which can also be used for fraud
detection.
• Accepted as evidence in US at the federal, state,
and local levels.
• Statistical tool which can be applied to normal
audits also to automate samples
FORENSIC AUDIT TECHNIQUES
COMPUTER ASSISTED
ANALYTICAL SYMPTOMS RATIO ANALYSIS
AUDITING TOOLS (CAATS)
Testing details of Poor quality

transactions and balances The ratio of the highest
value to the lowest value
Decreasing purchase from (max/min)
Locate inconsistencies or other vendors
significant fluctuations,
Increasing purchase from
Testing general as well as specific vendors The ratio of the highest
application control of value to the second highest
computer systems. Increasing price value (max/max2)
Sampling programs to extract
data for audit testing Large order quantities
The ratio of the current year
Redoing calculations to the previous year.
performed by accounting Ghost supplies.
systems.

LIMITATIONS OF FORENSIC AUDIT
Cooperation issues
Complexity of transactions/processes
Data volumes
IS Audit/Cyber Forensic/Cloud Computing
Frequent Technological changes
Admissibility of digital evidence
Cross border transactions
Involvement of multiple banks/corporates
Privacy issues

FORENSIC AUDIT CASE STUDY 1
 The Borrower, ABC Private Limited (ABCPL), has a Cotton
Ginning Plant and also trades in Agro products.
 Limits sanctioned by X Bank are
AMOUNT(RS. Crore) NATURE REMARKS
21.00 CC-For WC Fully utilised

15.00 Packing Credit Not utilised
17.25 Foreign Documentary/Usance Bills Purchase
Not utilised
Limit
30.00 Foreign Bills purchase Limit under Usance LC Not utilised
25.00 Forward Contracts for hedging the exchange Not utilised
 risk for genuine trade transactions
1.00 Term Loan Repaid

 ABCPL has been entering into Forward Contracts since
FY 2013-14 and kept on using the Cash Credit Account
for settlement of these contracts. In FY 2017-18,
ABCPL suffered a huge loss of Rs.10.84 cr (Rs.10.35
cr- Sauda Settlement Expenses & Rs.0.49 cr as
Commodity Speculation Expenses). Overall loss
booked for FY 2018-19 was Rs.23.13 cr.
 A number of transactions between ABCPL and its
Related Entities mostly for unsecured loans and
purchases were noticed.
 Significant & very large amounts of withdrawals were
allowed by the bank without any concrete
justification for it.
 Booking of huge loss in FY 2017-18 resulted in the
beginning of downfall of ABCPL.
 Operations were closed down from 01st April, 2018.
 When the Branch Manager came to know about the
operations being suspended and contacted the
directors, they informed the branch about the
closure of its operations. Further, they said that they
don’t have any money nor any stock/receivables to
repay loans of the bank as whatever they had was
already utilised to pay off its creditors.
 However, the Forensic Auditor observed that despite
knowing the above facts, the borrower withdrew
further Rs.1 crore on 4 occasions during April, 2018.
 The Stock Audit Report in January-2018 stated that Sundry
Creditors were not considered for calculating the Drawing
Power which would have impacted the DP considerably.
This could have alarmed the bank and the exposure could
have been reduced.
 In FY 2017-18 ABCPL suffered heavy loss in speculation
activities but repaid loans of approximately Rs.37 cr to its
related parties.
 The Bank took Symbolic Possession of the properties by
issuing notice dated in October, 2018. The borrower
replied the notice by mentioning that it had neither
availed any loan facility from bank nor had defaulted in
repayment thereof. Further, the borrower accused the
bank saying that it had suffered huge losses due to wrong
doings of the bank and the said losses were much more
than what the bank’s demand and hence there was no
debt due to be repaid.
 Mr. Arun, Director of a newly formed Private Limited
Company-Steelam Private Limited(SPL) approached Honest
Bank in May 2013 with a request for Term Loan and Working
Capital Finance for acquiring a sick Steel Rolling Mill -
Ispatam Private Limited(IPL) which had been financed by
Clever Bank.
 SPL has two directors namely Mr. Arun and his wife Ms.
Aruna.
 Mr. Arun had earlier approached Super Bank, which is much
bigger in size than Honest Bank, in 2012 for finance. Super
Bank, however, rejected the loan application on the basis
that the Bank’s Management was not in the favour of
increasing exposure to steel industry.
FORENSIC AUDIT – CASE STUDY 2
 The Branch Manager, while discussing the proposal
with Mr. Arun was told by Mr. Arun that he had
entered into an MoU with IPL for acquiring the Steel
Mill and the attached land at a cost of Rs. 12 Crore
and had already paid about Rs. 1.50 Crore to IPL.
 Mr. Arun, a Diploma Holder in Mechanical Engineering,
has two 5-10 year old other businesses and has
finance arrangements with other Banks for Rs. 50
Lakh and Rs. 1 Crore.
 The Steel Rolling Mill was located in a rural area
about 65 KM from the Branch.
 Since the Branch Manager of Honest Bank was under
pressure to increase business and the location had limited
business potential because of population size and the place
not being a business hub, he decided to examine the
proposal.
 A visit to the Steel Mill showed that the Mill had a large
agricultural land parcel attached to it which was available
as collateral security.
 Mr. Arun’s father, a businessman and landowner was also
ready to offer guarantee. Additional Collateral in the form
of residential and personal property were available.
 The Branch Manager called for a detailed proposal with
Projections, which were prepared by a CA firm.
 CIBIL Score of borrowers and guarantors and Credit Reports of
Sister Concerns were obtained, which showed defaults as
under:
▪ Presence of a Tradeline with worst status in the past 6 months - Mr. Arun
(Score 746)
▪ Too many Tradelines 91+ Days Delinquent in the past. – Mr. Arun’s Father
(Score 581)
 The visits to sister concerns were also conducted.
 The PUC clearance in the name of IPL was available till 31st
March, 2012.
 The amount of loan required was Rs. 10 crore for Plant and
machinery including repairs and replacement and Rs. 5 Crore
for working capital. Quotations for repairs and replacement
work obtained from a Kolkata based Supplier were also
enclosed. Valuations of Land and Mill were also obtained.
 The proposal was forwarded to the Regional Office of
Honest Bank and additional information required by
them by way of queries relating to sister concerns were
also answered.
 The fact that the proposal was rejected by Super Bank
and that the proposal has been received through a CA
(Name Mentioned) related to the Chief Regional
Manager of the Bank(Name mentioned) was also stated
in the proposal note.
 The Regional Office conveyed its sanction on 27th May
2013, i.e. within 2 days after their queries were
replied.
 The terms and conditions included
✓ Disbursal of working capital after start of operations
✓ Moratorium period for principal repayment 12
months with full interest funding
✓ Legal Clearances
✓ Registration of Charge
✓ The reference of the quotation received from the
Kolkata Supplier in the approval for term loan
✓ Obtaining of external credit rating by 31st March,
2014

 The Margin Requirements stipulated were as under:
Asset Margin %
Land, building and new machinery 25%
Registration Expenses 28%
Second Hand Machinery 35%
Stocks and Book Debts 25%

 The documentation and transfer process took
some time and as the disbursal of term loan
started on 10th October,2013.
 The Term Loan was disbursed by transfer to a CC
Account, from which the borrower was allowed
to issue cheques and transfers. The disbursal of
term loan continued till 27th April,2014.
 Theworking capital limits were released from
the second week of May, 2014 and by second
week of September,2014 the entire limit was
drawn.
 No deficiencies were observed during the
inspections by various officials including the Branch
Manager, Regional Manager and the Inspector from
Central Office of the bank till 2nd October, 2014.
 On 29th October, 2014 the unit was found not
operating because of disconnection of power due to
non-payment of dues. Deficiency in stocks was also
observed.
 The unit was transferred to watch category and as
the follow-up did not yield the desired results, a
suit for recovery was filed on 19th May, 2015.
The Head Office of the Honest Bank decided to conduct
forensic audit to ascertain
 The Current financial status of SPL and its Group
Companies
 The position of inventory & receivables
 Any diversion of funds within the group or outside the
group
 The money trail
 Financial discipline of the Group Companies
 Consistent adoption of prudential accounting policies by
SPL
FINDINGS OF THE FORENSIC AUDITOR
 The Accounts for the year 2011-12 filed by
Ispatam(IPL) with ROC did not show any
payables to Mr. Arun/Steelam(SPL).
 Valuations of Factory Building and
machinery were much higher than their
book value and appeared to be highly
exaggerated.
 Limitssanctioned to SPL were more than
double of the facility enjoyed by IPL.
 Term loan was disbursed not through Pay
Orders issued to the parties directly but
by credit to the CC Account.
 The CC Limit was irregularly used for
payment of holiday period interest of Rs.
10 Lakh as it exceeded the drawing
power and appeared to be a deliberate
attempt to show the Term Loan as a
performing asset.
 Out of the total MoU amount of Rs. 12 crore, Rs. 7
Crore was paid to Clever Bank, Rs. 1 Crore was
paid to IPL from the Term Loan Account. The
balance amount of Rs. 4 Crore was paid in cash as
evidenced by copies of receipts.
 An undated statement of machinery installed
amounting to Rs. 1.60 Crore after takeover
bearing CA’s stamp was available with the
Projections submitted with the proposal.
 Cash Advances to Contractors were made as
evidenced by receipts available in the file.
 There was no other evidence available for
borrower’s margin.
 Invoices of Suppliers/Contractors who made the
Rolling Mill functional were not available.
 Cheques of Rs. 47 lakh were issued to parties
dealing in Real estate.
 Transfer of Rs. 21 lakh were made to the related
parties
 CC Account was used for making payment of Rs.
54 Lakh to Machinery Suppliers.
 The Kolkata supplier, whose quotation also
figured in the sanction was the exclusive
business partner for the machinery mentioned
in the quote which was replaced with a quote
from a local supplier without any approval.
The local supplier was however, paid 1.5 times
of the original quote approved by the Bank.
 The Cash Credit Account showed 5 credits
totaling Rs. 3.99 Lakh of which Rs. 0.99 Lakh
was in cash.
 Total cash withdrawals amounted to
Rs. 30 Lakh.
 Details/Vouchers of Transfers
(Debit/Credit) were not available with
the Branch.
A stock statement dated 30th
September, 2014 showing stocks of Rs.
5.60 Crore was available in the file.
 An unsigned list of outstanding dues of
Rs. 1.86 Crore was available in the file.
 The physical verification by a CA in
January, 2015 showed a drastic reduction
in stocks.
 External rating of the borrower to be
obtained by 31st March, 2014 as per
Sanction terms had not been obtained.
 Clearance of Pollution Board was not on
record.
 Central Excise, PAN, TAN, VAT, PT, PF &
ESI Registrations of SPL were not on
record.
 Letter from Borrower about his inability
to issue invoices because of delay in
receiving Central Excise Registration was
on record.
 Visitto Unit showed that the Security
deployed by the bank was absent.
 The godown did not have any stocks.
 The Registers lying in the Office were
in the name of IPL. Included an
Attendance Register of January, 2016.
 The Factory did not have any labour
related notices.
 The condition of Plant & Machinery was bad.
 Theopen land attached to the factory was
uncultivated and unirrigated.
 The Rolling Mill was located at a secluded
site without any boundary wall.
 Orderregister showed delivery of material
and execution of orders on different dates.
 Inward Register showed receipt of raw
material in 2015.
 SPLwas conducting its operations in cash
during the period the mill was operational
and has defrauded the bank by not routing
the sales proceeds through the CC Account
and siphoning the sales proceeds of the
goods manufactured/stocks purchased.
 There was no record of any bank official
pointing out any deficiencies to SPL or
asking the Company to provide the
requisite details. Their inaction facilitated
the fraud. INDIAN INSTITUTE OF BANKING & FINANCE
 The forecasts on the basis of which the limits
were sanctioned bore the stamp of the CA. This
is a violation of clause 3 of part-I of the Second
Schedule of the Chartered Accountants Act
1949, where a member in practice cannot
permit his/her name or the name of his/her
firm to be used in connection with an estimate
of earnings contingent upon future transaction
in a manner, which may lead to the belief that
he/she vouches for the accuracy of the
forecast. This fact was overlooked by both the
CA and the Bank.
THANK YOU
&
HAVE A NICE DAY

Forensic Audit Presentation Including Case Studies 21122022

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Forensic Audit Presentation Including Case Studies 21122022

Uploaded by

Copyright:

Available Formats

FORENSIC AUDIT

INDIAN INSTITUTE OF BANKING & FINANCE

INDIAN INSTITUTE OF BANKING & FINANCE

Increasing Cross Border Deals and growing trade complexities

Corporate Frauds & the resultant increase in NPAs

Need for compliance & transparency

Regulators/Shareholders/Management concern for fraud detection

INDIAN INSTITUTE OF BANKING & FINANCE

Inadequate Internal Controls

INDIAN INSTITUTE OF BANKING & FINANCE

INDIAN INSTITUTE OF BANKING & FINANCE

CORPORATE/NON-CORPORATE BUSINESS/INDUSTRIAL HOUSES

GOVERNMENT OFFICES/PSUs/AUTONOMOUS BODIES

INDIAN INSTITUTE OF BANKING & FINANCE

Central Fraud Registry Forensic Audit Staff Accountability

INDIAN INSTITUTE OF BANKING & FINANCE

Reporting bank to request a joint lender

Account to be categorised as fraud if consensus

INDIAN INSTITUTE OF BANKING & FINANCE

INDIAN INSTITUTE OF BANKING & FINANCE

End-use • Obtaining CA’s certification

INDIAN INSTITUTE OF BANKING & FINANCE

Meaningful scrutiny of quarterly progress reports/operating statements/

Regular inspection of borrowers’ assets charged to the lenders as

Periodical scrutiny of borrowers’ books of accounts and the no-lien

Periodical visits to the assisted units

System of periodical stock audit, in case of working capital finance

Periodical comprehensive management audit of the ‘Credit’ function of

INDIAN INSTITUTE OF BANKING & FINANCE

• Tests and Excel Functions and

INDIAN INSTITUTE OF BANKING & FINANCE

AUDIT FOR Discovery

INDIAN INSTITUTE OF BANKING & FINANCE

The eight • DSRI - Days' Sales in Receivable

INDIAN INSTITUTE OF BANKING & FINANCE

Testing details of Poor quality

INDIAN INSTITUTE OF BANKING & FINANCE

IS Audit/Cyber Forensic/Cloud Computing

Frequent Technological changes

Admissibility of digital evidence

Cross border transactions

Involvement of multiple banks/corporates

INDIAN INSTITUTE OF BANKING & FINANCE

21.00 CC-For WC Fully utilised

INDIAN INSTITUTE OF BANKING & FINANCE

INDIAN INSTITUTE OF BANKING & FINANCE

Land, building and new machinery 25%

Registration Expenses 28%

Second Hand Machinery 35%

Stocks and Book Debts 25%

INDIAN INSTITUTE OF BANKING & FINANCE

INDIAN INSTITUTE OF BANKING & FINANCE

You might also like