KINDS OF EMBEZZLEMENT-ARTHASHASTRA,AUDIT AND TAX
Fraud, embezzlement, concealment of material facts, misappropriation, the list seem endless when the auditor is involved in the examination of financial statements.
Chanakya who lived in India, is considered to be Indian’s excellent leadership guru, economist, and a political science teacher who authored the treatise, Arthashastra. He summaries the following 40 types of embezzlement in the eighth chapter, Book 2 of Arthashastra titled Detection of Embezzlement by Government Audits. Even though the chapter deals with propriety aspects, it can be seen that it can be related to other organizations too.
In my humble effort, I am trying to make a connection with the types of embezzlements mentioned by the great pundit with our present day auditing.
The various types of embezzlements are:
what is realized earlier is entered later on
what is realized later is entered earlier
what ought to be realized is not realized
what is hard to realize is shown as realized
what is collected is shown as not collected
what has not been collected is shown as collected
what is collected in part is entered as collected in full
what is collected in full is entered as collected in part
what is collected is of one sort, while what is entered is of another sort
what is realized from one source is shown as realized from another
what is payable is not paid
what is not payable is paid
not paid in time
paid untimely
The above items can be traced on an analysis of teeming and lading errors while auditing the statements.
Items such as
small gifts made large gifts
large gifts made small gifts
what is gifted is of one sort while what is entered is of another
the real donee is one while the person entered as donee is another;
what has been taken into is removed while what has not been credited to it is shown as credited
can be pointed out on a detailed examination of books of accounts, purchase policies of the company ,related parties, and the advantages received by the officials while authorizing the deals.
Embezzlements such as
materials that are not paid for are entered, while those that are paid for are not entered
an aggregate is scattered in pieces
scattered items are converted into an aggregate
commodities of greater value are bartered for those of small value
what is of smaller value is bartered for one of greater value
price of commodities enhanced
price of commodities lowered
can be discovered while examining the cut off procedures, inventories, sales, purchases, inventory valuation procedures, and principles etc.
The next four types viz;
number of of nights increased
number of nights decreased
the year not in harmony with its months
the month not in harmony with its days
can be found out by examining the daily wage sheets, daily time keeping records, records of output produced etc.
Certain inconsistencies like
inconsistency in the transactions carried on with personal supervision
can be found out on an analysis of governance of the organization and internal check procedures
misrepresentation of the source of income
can be well remembered with the example of Satyam scam
inconsistency in giving charities
by verifying proper authority of giving donations, its limits, procedures
lack of congruence in representing the work turned out
by evaluating the production records
inconsistency in dealing with fixed items
through periodical verification and valuation of fixed assets, application of AS-28 etc adopted by the entity.
The remaining items like
misrepresentation of test marks or the standard of fineness
misrepresentation of prices of commodities
making use of false weight and measures
deception in counting articles
making use of false cubic measures
can be exposed by checking the purchases and sales, excise duty related factors and other taxation matters.
Chanakya points out that under the above circumstances, the persons concerned such as the person in charge of the payments of the government treasury, the person who authorized the transaction, the receiver, the payer, the person who caused the payment, the servants of the officer shall each be separately examined.
To quote Otto von Bismarck who said,
“With a gentleman I am always a gentleman and a half, and with a fraud I try to be a fraud and a half.”
Similarly, an auditor should also exercise his judgment, skill, and reason while examining the financial statements to obtain the best results.
Source: Arthashastra by Chanakya and its translations.
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