Budget Books

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More

WHAT IS FRAUD:  In simple terms fraud is a mistake with a reason.  To explain more  Fraud is an  activity by a person who does his duty in a wrong way or refrains from doing his duty   for  some  favors i.e.  financial, tangible, or anything else which is not due to him or them  in the normal course.


In simple words fraud is an intentional abnormal activity for undue gains. Or


Fraud as the name suggests refers to the intentional misrepresentation by employees or other persons related to business, it can be both for monetary or non monetary gains.





As a human being everybody has some immediate goal. For example for a hungry person global worming has nothing to do, he needs food as his first priority. Either he can steal it or do something to  make it available.  Given a free will he will just eat and go. If there is a person sitting there he may force and eat or work and it.  Assuming that there is no law, based on his personal power he will force and eat. That is the jungle rule.


Today we all live in some or other society and we want to live happily. However  the jungle rule mentality of the people are not gone. It is there deep inside us. It is forced to sleep under the fear of, god, society, law and order.  It wakes up when ever the fear elements are  reduced or zero.  With modernization the human being has understood that  same jungle rule can be played even now with the polish of  knowledge. But as always it remains shot lived since somewhere or other it will be disclosed by another human having the same style and same mentality.   


It is as if,   it is the only thing known to the maximum of the man kind and all those people do it with the same intention, i.e. to gain something.   Of course that is the reason they do it. 


Please go though the study done and  success achieved in a particular company. The company had put a public phone  at the staff common room with STD facility for the employees to use it , where the bills were very high for this extra phone 



What the company did

Result  for the action

Reason for the result


Just telephone

Huge bills

The employees made calls lot of call from here even during the normal working hours for chatting and other purposes.


A telephone  and a register. A board is displayed requesting the employees  record the number called. The intention of the company was to cross check the register with the bills received from VSNL.

The telephone bill amount fell down by more than 10%.


Some people registered their calls and some people turnoff  by seeing the board.  Some people registered the other numbers.


Overally the register never tallied with the bill even for a month in the whole three month period.

People who were little conscious about the lot of personal calls they were making through these calls, preferred to refrain from making huge number of calls and made even lesser and recorded it.


Some people made calls but did not record it felling that who is there to see.


Some people made calls but mentioned a different number.


After six months  A board is displayed requesting the employees  record the persons name , number called and the pupose as official or personal. The intention of the company was to contol this telephone bill without disconnecting the service to the employees.

The telephone bill amount fell down by more than 25%.


Some people registered their calls and some people turnoff  by seeing the board.  Some people registered the other numbers.


Overally the register again  never tallied with the bill even for a month in the whole three month period.

People considered  the back ground of the register. They thought they may be questioned based on their names and number of calls made. So the fear kept them away from the telephone.


People  who were conscious about the rules made only a very few personal calls , only when it is required and can be explained. Outside calls for chatting stopped since they had fear that some body may question them.


Some people made calls but did not record it felling that who is there to see.




After three months the company appointed a security guard to sit near the telephone.

The tel.bill  fell down by more than 40% and everybody had to record after he makes a call. 


However the problem of bill tally and  number tally was not sorted out.

Some People who were making calls but not recording kept off from making any calls unless otherwise it is necessary and can be answered.


Some people still wrote the number but a wrong number.


After seeing this for three months the company  made the possessor of the phone responsible for ensuring that the register tallies with the bills. Any difference will be deducted from his salary.

The overall bill fell down by more than 50%. Actually the security guard never wanted to take risk hence he decided to write the number first, dial the number and handed over the phone to the employee.  The register tallied with the bills received and for other differences the company decided to talk with the telephone company, to avoid using its line for bogus purpose.

Accountability and its monitoring by clear rules achieved the purpose.


The same  was used to monitor the senior management in an Indian company and  it helped the company to recover most of the STD personal calls made by the senior officials , there by bringing the telephone bills up to 50% down.  Recovery amounting to more than the salary amount was seen in some cases. Further in some cases even the employees were asked to leave for not giving a proper reason to the computerized telephone statements for their desk telephone.  In short all these people were doing smaller level frauds for years  and the company accepted it saying that everybody does the same, hence it is common.


 Some times fraud could be happening just in front of our eyes and we just get used to it as a normal practice.  All that is required is to ask,  WHY AND WHERE IS IT WRITTEN , then  may be in the process of finding the written document the whole normal practice will change and you will drive your point home. 


The point is no level of management is honest and clean if they are not monitored. In other words in most of the cases the  fear element  keeps the person away from doing a fraud or misusage of the employers assets and position.  



HOW PEOPLE ARE CONVINCED TO DO FRAUD:  The truth is everybody can be bought at the right price and for the right reason and at the right time. Every body has a need for something or other.  Even the sacred saints have been convinced to earn money by defrauding people in the name of religion.



The point I am driving home is ,  everybody  has some need and he wants to fulfill that in the normal, legal, and peaceful way,   since he is scared of the  society-defamation, law and order for not following the rules, the inner voice i.e.  the almighty,  if he believes.    


Normally people are convinced that they donot have all these fears in some particular situation or location  hence they agree. May it be in the name of religion, for the sake of a community, for sake of the country, for money, or for anything else.



HOW IS FRAUD DONE: There are various trigger points for fraud:


1.ACCIDENTAL UNINTENTIONAL:   To err is  human. If you work then you will definitely  do some mistakes .  This is a normal procedure for human beings.  If the same is noted and rectified with or without declaring the same then the mistake becomes an error and a learning point. 


If the error  is cought by another person and brought to  the table, than again it will depend whether the person commiting the mistake has gained anything due to this mistake and if yes, then  whether  the immediate employers or any other person in this planet has incurred any loss instantly or remotely.  If both  are confimed as positive, then it can be termed as fraud irrespective of the persons intention since it will be very difficult for him to prove otherwise. In such a cases it becomes very hard for a person to explain and prove that  it was not fraud and he is honest.


But if  unintentional mistake committed by one person is not cought by any other person and  if the person commiting the errors learns to use the same mistake for making money or other favours , then  the classification changes and the same error becomes a fraud.


2. PLANNED FRAUD:  Planned fraud is again divided in to two catergories


2.1. A single person planning and executing the whole fraud this can be controlled to some what extent , by efficient internal controls where every transaction goes through multiple levels and authorities. However due to saving on employees cost we become very much susceptible to such fraud.




2.2. A GROUP OF PEOPLE: This category is famous for even killing all the internal controls. Where an outsider only can do something may be a private investigator. But all the organizations cannot really afford to put some undercover agent in the working floor due to the cost factor. Evethough it is seen that some companies do this, where the promoters interest is very high.  Further these type of frauds never comes  out unless otherwise an outsider or perpetrators themselves disclose the same. Proper Record keeping and  monitoring of employees by some trustworthy outside agency can help to some extent.  Whether done or not the employment letter should get their legal permission just  to make them aware of the fact that this is being regularly done by the employer.   



2.3. Forced Fraud:  Some good people also get involved with the fraudsters innocently and then of course get punished too.  Blackmailed people are such instances. They committed  a innocent or illegal  act and got caught by these famous fraudsters and then get used by them.  Fear is one of the most driving agent, since some people get involved for the sake of  saving their job, family, friends etc. Usually these people are the most weakest links in the whole chain and often disclose the whole chain of fraudulent activities




HOW TO PREVENT OR CHECK FRAUD: Fraud in any form affects somebody or other, instantly or remotely and is one of the biggest problems that is faced by the mankind.  It is, as if  the only thing known to the maximum number of people in some form or other and all those people do it with the same intention, i.e. to gain something.  Ofcouse that is the reason they do it.  The only way to refrain them from doing this is The Element of Fear .  Fear can be of any type, but the fraudsters should know that  they will be caught irrespective of their position and power.



Normally we try to prevent fraud by  implementing internal control systems in our business and our surrounding, but everthing is breakable since it is operated through human beings, and most peoples  ethics are sold or bought  at the right price. Internal controls to work efficiently needs to be updated regularly based on the new developments for which again it should be monitored on a continuous basis.  There is no one formula which may suit all business,  since the fraud detection techniques also need a continuous update.  However some are listed :



1. Evaluation of all internal control: There should be regular evaluation of all internal controls which are specifically prone to fraud risk. A responsible person should be nominated to keep and eye on the controls where it is easy for someone to commit a fraud. Area where cash handling is involved are particularly prone to frauds.


2. Check on business assets: A good business man is one who keeps a control on his assets and liabilities. It is necessary to keep an inventory of all business assets at regular intervals,  so that no misappropriation like theft, pilferage etc can take place. Regular stock take and physical verification of the assets will deter employees from theft.


3. Keep check on the code of ethics or conduct of your employees: Businessmen should keep a check on their employees conduct and from time to time they should keep a note of their behaviors especially if they are related to financial transactions area. The best practice is definitely training and setting examples. Employees involved in accounts payable functions or purchasing functions and any employee who submits expense reports are the most susceptible to fraud. Training these individuals, as well as all employees, on company policies, procedures and code of conduct is imperative. Accountability plays a large role in deterrence. When employees realize the company will take a hard stance on fraudsters, they will think twice about committing an  abonormal act i.e fraud.


4. Check on illegal acts: Every act of an organization matters, a single illegal act can affect the business and may destroy its reputation and goodwill in the market. Therefore it is imperative for the owners to be sure that no illegal acts are taking place in their organization. Especially in wide spread business houses it should be ensured that the responsibility is fixed on the chief-in-charge for the place,  to ensure that no violation of the local statute is being done at his place.


5. Auditors recommendations: Both statutory as well as internal auditors are third party person who are independent from your business and hence do not have any vested interest in the business, hence any finding by them should be taken very seriously as these are professional people who  have in depth knowledge of their subject and can add substantial value to your business. However this is applicable when management  other than top management is committing the fraud.


6. Review of audit committee: Audit committee is one key source which outlines the major issues of your business. Management should seriously take the recommendations and reviews made by the audit committee.


7. Maintain adequate business procedures for handling complains: most of the times frauds are brought to the notice by employees who do not want to appear in public. So it is necessary that there should be some mechanism in the organization for the employees to anonymously report any complains or information that they may have. A complain box or hotline can effectively serve this purpose.


8. Now a days there are so many software companies who have designed products that perform fraud tests on real-time, daily transactions.  They can also conduct tests on companys last one or two years data just by attaching the same.



AUDITORS ROLE IN COMPANYS FRAUDS:  This can be classified in to two different categories:


A. FRAUDS COMMITTED BY EMPLOYEES:  Normally a statutory  auditor is appointed as per the government rules in all Ltd companies.  The common publics understanding is that  if it is audited then it is  free from errors i.e  error includes intentional errors and unintentional error.  However  as per  the CA institute and Companies Act  the auditor is not  meant to be a blood hound and supposed to be only a watch dog.  Ofcourse there are valid reasons for this assumption. This gives a clear escape route to the auditors to turn their back on the frauds unearthed latter on.


As per Indian law a auditor cannot be held responsible  for most of the fraudulent activities. Since as per statute the auditor does an audit based on books and accounts and if he can prove that he followed the standard auditing guidelines and had nothing to doubt the records provided , in that particular scenario then,  he is free from his liability. 


All auditors reports and certificates are   based on books and records only.


When ever a fraud comes out  mostly, unearthed by somebody other than the auditors,  everybody say what the auditors were doing, without even knowing that they have got a big shield to cover themselves. Most of the times the auditors are not equipped with equipment and qualified people to detect fraud which are perpetrated  very deeply or in very chaos manner, or outside the company and very outside the books and accounts.  Any introduction of layer of audit and re-audit only will increase the cost and  induce the  fraudsters to do a deep level planning. 





As per law the auditor is employed in Annual General Meeting by all the share holders. However the reality is totally different. The auditor is only appointed by the Promoters or the highest  shareholder or the top management who represents the earlier two,  in the company. This is  because  99% of the small share holders never make it to the AGM. Ofcourse there are some companies who plan in advance to ensure that no share holder really takes part in the AGM, by  adopting different strategies.


 Psychologically the auditor understand that if he is not cooperating fully with the promoters then mostly he will be out from his auditors post either this year itself or next year. Hopefully when ever there is a misrepresentation of the true results,  99% chance is,  the auditor himself is involved in the fraud for fat fees , other work and continuous audit business.  We are not discussing about the public sector here, that is a even different story.  In the current scenario the government and the ICAI only can help the common investors by introducing more stringent rules and introducing a mechanism to represent the small share holders in the Board too. This ofcourse we will discuss in some different article.



HOW TO LOOK FOR SYMTOMS OF FRAUD : This is a general articles  based on the writers own experience and combines lot of tips and tricks taken from different sources.  Mail me some notes if you have any idea or hypothesis of how a fraud can be committed or can be cought, If you want than we will publish the same with your name you can also request to keep the name anonymous.  



Normally fraud is found by those people who have in-depth knowledge of the  internal control system governing a specific field of work  and  the personnel who are operating in the company and have some earlier introduction and familiarity with the people in general.  You cannot just go to a company for the first time without  knowing anything about that and the people working in that company and discover a fraud.  Normally auditors are praised and respected when they detect fraud and it also send a red signal for all those not caught so far. Hence it is necessary that you do your home work before deciding to  catch somebody.



When you go for an  audit or review  look for the following signs of fraud: 


If you observe any of the following items are occurring in your company, please intimate your senior to do a in depth study or  do a special audit yourself if you can,but do not alert the fraudsters in advance.


1.  Bank account statements and related registers, Stale Items in Reconciliations


In bank reconciliations, deposits or checks not included in the reconciliation could be indicative of theft. Look for the cheque receipt register  and dispatch register. Check when a cheque is received and when it is deposited. Look for  the cheque dispatch register and ensure that non-of the addresses are any employees home address or mail box number.  In case of  Missing deposits could mean the perpetrator absconded with the funds;  and the company has not intimated the same till date to the auditor, Look for the list of cheques made but not sent to the payee or written as hand delivery, ensure that no hand delivery is entertained in the company. Missing checks  from the register could indicate one made out to a bogus payee.  Verify whether the company is receiving blank cheques from customers  without dates, if yes, look for the controls and when it is recorded in the cheque receipt register.  These are the main  targets of fraudulent activity.



2. Review of  Complaints against the company or any individual:


Review the complaints against the company by anybody and everybody. Frequently tips or complaints will be received which indicate that a fraudulent action is going on. Complaints have been known to be some of the best sources of fraud and should be taken seriously. Although most of the times it could be with a wrong motive, however it is better to  have a detailed knowledge than feel sorry later on.


3. Unusual Behavior of any person :


The employee whom you knew earlier  and who is showing a very unpredictable behavior now is often stressed , try to find out whether any illegal activity is the reason.  The fraudster will often take very less or nil leaves. Will work very late always without assigning the work to another employee even if he knows that he is overloaded.  Since other employee carrying out his job may discover the truth. Other symptoms may be,  changes in behavior such as increased drinking, smoking, defensiveness, and unusual irritability and suspiciousness.


4. Excessive Cancellation of Sales invoices after dispatch:

Cancelled  sales slips could mean that the sale was rung up, the payment diverted to the use of  some other person involved, and the sales slip subsequently voided to cover the theft. Ofcourse there are internal control to stop this in various companies, never the less review that the same is effective in ensuring the repossession of the materials


5. Missing Documents

Documents which are unable to be located can be a red flag for fraud. Although it is expected that some documents will be misplaced, the auditor should look for explanations as to why the documents are missing, and what steps were taken to locate the requested items. All too often, the auditors will select an alternate item or allow the auditee to select an alternate without determining whether or not a problem exists.


6. Excessive Credit Notes:

Credit notes is similar to  Cancelled sales or part of the sales proceeds. This technique can be used to cover the theft of cash.  This could be used to adjust bank balance and cash balance.  Always check the internal control procedure  for generation and disposal of the credit notes.



7. Common Names and Addresses for Refunds:


Sales employees frequently make bogus refunds to customers for merchandise. The address shown for the refund is then made to the employee's address, or to the address of a friend or co-worker.



8. Increasing Reconciling Items

Stolen deposits, or bogus checks written, are frequently not removed, or covered, from the reconciliation. Hence, over a period of time, the reconciling items tend to increase.



9.  Post Office Boxes as Shipping Addresses


In instances where merchandise is shipped to a post office box, this may indicate that an employee is shipping to a bogus purchaser or himself.  The same is also true when cheques are sent to mail box.



10. Adjustments to Receivables or Payables


In cases where customer payments are misappropriated, adjustments to receivables can be made to cover the shortage. Where payables are adjusted, the perpetrator can use a phony billing scheme to convert cash to his or her own use.  Always ensure that the customer acknowledges not only the balance at the year end, but also all his transactions with the company for the whole year. In case the customer says that 10 transactions donot pertain to him, than it will  show that the company has definitely made some more adjustments to tally the closing balance. 


11. Excess Purchases


Excess purchases can be used to cover fraud in two ways:

Fictitious payees are used to convert funds


Excessive purchases may indicate a possible payoff of purchasing agent;


Also check for , vendor address that is the same as an employee address, duplicate invoice numbers and multiple changes in vendor identity fields. 


12. Duplicate Payments


Duplicate payments are sometimes converted to the use of an employee. The employee may notice the duplicate payment, then he or she may prepare a phony endorsement of the check. Do a verification of chques issued but not realized and  ask for the reason, may be there is a double booking or a payment and since the supplier is not aware of this transaction hence he is not collecting, he has his own fears.


13. Ghost Employees


Ghost employee schemes are frequently uncovered when an auditor, fraud examiner, or other individual distributes paychecks to employees. Missing or otherwise unaccounted for employees could indicate the existence of a ghost employee scheme. In case of cash payment of wages please ensure that one months payment is done physically in front of you.  This will throw open a big picture of common problems  happening during the payment session and the kind of  documentation and control which are not maintained by the company.



14. Employee Expense Accounts


Employees frequently conceal fraud in their individual expense account reimbursements. These reimbursements should be scrutinized for reasonableness and trends, especially in the area of cash transactions on the expense account. Look for  the standard rules set by the company. Specifically cross check those cases where the employee claims  almost the full amount of his eligibility every time. Check for the kind of expenses shown in their reimbursement sheets on holidays. E.g. on a govt holiday whether lot of conveyance expenses are claimed as visit to clients places.



15. Inventory Shortages


Normal shrinkage over a period of time can be computed through historical analysis. Excessive shrinkage could explain a host of fraudulent activity, from embezzlement to theft of inventory.  Always ensure for a complete stock reconciliation in all companies.


16. Review Scrap Materials generation and disposal records:  The control over scrap is very important in a manufacturing set up.  In fact  a drop in the yield will result in more scrap generation which may be due to following reasons:


A real drop without intention;


Intentional Planned drop in yield is done for


 Material gain. This is normally combined with 1. no proper records for daily scrap  generation  and   2. less recording of production in the main production register.  This will help the fraudster in  sending these materials out of the company alongwith other valid materials to be sold outside.

For MIS panipulation :  The above technique also used for manipulating the MIS to the top management. 

For reselling the good raw materials as scrap :  Scrap is a favorite target of embezzlers because it is usually subject to less scrutiny than regular inventory.



17. Write-off of Accounts Receivable



Comparing the write-off of receivables by customers may lead to information indicating that there may be an  already misappropriated payment instance  in the past which may be the reason for a difference and closer of business with the debtor.

Published by

Category Audit   Report

4 Likes   53 Shares   15510 Views


Related Articles


Popular Articles

IIM Indor
caclubindia books

CCI Articles

submit article