‘Internal Audits – Case Studies’
November, 2014
♣
Parveen Kumar (Partner)
ASA & Associates LLP chartered accountants
www.asa.in
1
Some Numbers...
Estimated loss from Fraud - 5% of a company’s annual revenue
Potential projected global fraud loss > $3.5 trillion
87% of occupational fraudsters - never been charged or convicted
of a fraud-related offense
84% never been punished or terminated by an employer
44% of Fraud Cases detected by means of 'tips & chance’
Median loss from frauds committed by:
1. Owner/executives - $573,000,
2. Managers - $180,000 and by employees -$60,000
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[Source: ACFE, 2012 Report to the Nation]
Some Accounting Stories…
Bank of Credit and Commerce International (BCCI) was founded in Karachi, in 1972 and
registered in Luxembourg, London. It was a major international bank with 30,000 employees and
had operations in 78 countries. It was the seventh largest private bank up to 1991 until it was
closed
Allegations:
•
One of the largest scandals with $ 20-billion-plus-heist.
• More than $13 billion funds were unaccounted.
• Other allegations include bribery, support of terrorism, money laundering, smuggling,
sale of nuclear technologies etc.
Enron Corporation was founded in Houston, Texas in 1985. Was one of the world’s leading
electricity, natural gas, pulp, paper and communications company (22,000 employees). This
most Innovative Company lost its fame in 2001 with its accounting fraud.
ALLEGATIONS:
The debts of the company were hidden and profits were inflated by more than $1 billion. It
offered bribes to foreign governments to win contracts abroad.
WorldCom was the United States’ second largest long distance phone company
that was founded in the year 1983 as LDDS. After 19 years of establishments i.e.
in 2002 the company’s accounting scandal came into exposure.
ALLEGATIONS:
Underreporting interconnection expenses by capitalizing on the balance sheet
and $3.8 billion is overstated as capital expenses rather than operating
expenses.
Tyco international
was a global manufacturing company founded in 1960. Its
operational headquarters is in New Jersey. With 118,000 employees it is composed of
security services, safety products, fire protection services, flow control, electrical and metal
products.
Allegations:
CEO Dennis Kozlowski and former CFO Mark H. Swartz were accused of the theft of $600 million from
the company in 2002.
Kanebo Limited was a textiles and cosmetics group giant in Japan. It was originally
established in 1887. It has 13,580 employees. In 2003 a major accounting fraud was revealed
which was considered as the largest fraud in Japan.
Allegations:
Inflated profits by $2 billion over a five-year period.
Parmalat was founded in 1961 in Italy. It is a multinational Italian dairy and food corporation
with more than 15,000 employees. This leading company collapsed in 2003 with an accounting
scandal of $ 20 billion which is considered as one of the biggest bankruptcy.
Allegations:
Company’s total debt was more than double on the balance sheet. Forgery and
bankruptcy are some other allegations
AIG
was founded in 1919 in Shanghai, China by Cornelius Vander Starr, it went to public in
1969. It is a major American Insurance Corporation based in New York City with 116,000
employees.
Allegations:
The company maintained lucrative payoff agreements, soliciting rigged bids
for insurance contracts and inflated financial position by $2.7 billion in
2005.
Satyam Computer
was founded in 1987 in Hyderabad, India to offer information
technology services. The company has a network in 67 countries with 53,000 employees. Very
recently i.e. on 7th January, 2009 the accounting scandal came into exposure.
Allegations:
Inflated cash and bank balances of more than $1.5 billion (INR 7,000 crore), overstated
debtors’ position of $100 million and understated liability.
Good Morning……!!!!
India works on a multi-regulator model
Reserve Bank (RBI)
MCA
State Registrar
Of Chit Funds
National
Housing IRDA
Bank
RBI regulates deposit
taking activity
NBFCs
HFC
…FC
AAA.C
..C
XX co.
SEBI
XXX
LC
YY
Infrastructure
XXX
Nidhi
ZZZZ
Chit Fund C.
CCCC SBC
General
Insurance
MF
ABC
Cost
Standards
Tax
Standards
IFRS
Regulators –
RBI, SEBI,
IRDA….
AS
To Help User
Take Decisions
Ind
AS
Company
Law
Financial Statements
Case Studies
LISTED COMPANY
Income Tax
to SCH XIV
Increased
Profits of
1 Billion+
AS-6
AS-1
Proper
Disclosures
AS-5
Your View………???????
Purpose
Dep Rate
Changed
from past
II CASE II
Teaming and Leading.....One of MOST popular tricks..!!!
II CASE II
Bank Interest …… IT Fraud
II CASE II
OPPORTUNITIES WELCOME….
II CASE II
Cost Saving…..Travel Expenses
II PURPOSE II
•
•
•
•
•
Internal Auditing?
“Eyes and Ears”
“Policeman”
“Watchdog”
“Consultant”
“Catalyst”
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II EXPECTATIONS II
II EXPECTATIONS II
II EXPECTIONS II
Corporate
Management
Team
II CASE II
Planning and Approach…….
Audit Plan
Develop Checklists
Opening Meeting with Client
Gather Evidence/Documents
Record Results (Draft report)
Discussion with Client
Final Report Submission
Approach (Complete Cycle)
Approach -2 (Use of COSO framework)
Entity objectives can be viewed in the context of four categories:
1.
2.
3.
4.
Strategic
Operations
Reporting
Compliance
Approach -3 (Risk Analysis Audit Approach)
Sample Chart
Internal Audit – Controls Review Team
Summary of Controls and Gaps identified under SOX - Tracking Sheet
Area
Critical
Activities
Open
Closed by Closed by Closure
Gaps in user in JAS' user in ON' accepted
Jun' 06
06
06
by IA
Category of Risk
High
Medium
Closure not Closure being Gaps due for Gaps closed in
Gaps
accepted by tested by IA / IT closure in Dec' 06 - Due for closure IA
Security
Dec' 06
IA testing
Mar' 06
Low
Revenue and Accounts
Receivables
Fixed Assets
Travel
Payroll
Accounts Payable
Financial Closing
26
3
2
5
1
22
4
2
6
1
1
24
11
4
15
5
1
18
13
5
18
3
11
2
2
0
3
3
1
1
5
7
3
2
1
6
0
0
6
3
1
2
3
3
3
2
1
1
24
65
19
3
2
29
1
1
1
6
2
4
4
14
1
14
1
3
3
2
3
Regulatory Compliance
62
Treasury
IT Controls
2
10
25
1
5
1
IT Application Controls (AP
and GL)
18
Totals
245
1
40
2
12
8
50
3
5
Sample-Internal Audit Checklist
Yes No Comment
I Quality Control
1. Does the Unit-Paints participate in external QA programmes?
2. Are they adequate for the range of tests performed?
3. Are the results of external QA programmes: circulated?
reviewed?
actioned appropriately?
4. Are records maintained for external QA programmes?
5. Are internal QC procedures adequate and appropriate for the range of tests
performed?
6. Are internal QC procedures documented?
7. Are records maintained for internal QC programmes?
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Sample- Process Flow-chart
Approach -4 (Use of Collaborative Approach)
Usage of SME (Subject Matter Experts)
II CHALLENGES II
Data
Tone
at
the
top
Goal
Report
Priority
Time
We
Know
THANK YOU
+919810101790
(parveen.kumar@asa.in)
www.asa.in
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